TITLE V

CREDIT

**SUMMARY OF CREDIT TITLE REFORM**

***Recommendations In Brief***

Improve farm bill financial credit policies for farm borrowers,
particularly beginning and socially disadvantaged producers.

***Problem***

The average age of farmers continues to climb, creating questions about
whether the next generation of producers is equipped to replace the wave
of aging farmers as they retire. Barriers to entering production
agriculture are high, which is especially burdensome for beginning and
socially disadvantaged farmers who have limited financial assets. For
example, in 2002, the value of land and buildings averaged \$595,000 per
principal operator 35-years-old and younger. Access to adequate loan
funds can help to level the playing field for these farmers. Loans
authorized through the farm bill credit title can play a unique role in
supporting first-time farm buyers.

Finally, certain legislative requirements of farm loan programs have not
been updated in decades. With the changing dynamics of today's
production agriculture, these policies require updating. For example,
the two direct loan limits of \$200,000 are too rigid and outdated, not
having been updated since the 1970s and 80s. Much has changed in over
two decades -- land prices are higher, equipment is larger and more
expensive, and fuel, fertilizer, and other input costs are higher -- yet
the limits have remained stagnant.

These issues were discussed nationwide during the USDA Farm Bill Forums.
For example, Ed from Ohio stated, "The challenges facing new farmers is
nearly impossible to overcome...Come up with something innovative that
will allow my kids to reach their dream of farming.\" And Andy, from
Idaho, spoke from personal experience, \"as a young farmer I used the
FSA Guaranteed Loan Program. I recently was able to purchase my first
piece of ground with the help of it. However, I\'m up to the ceiling,
and if I want to expand like I need to, to stay economically viable, I
think it would help to raise the ceiling."

***Recommended Solution***

The Administration is recommending changes to Title V -- entitled
"Credit." Following is a list of the major components of the package.

1.  Double the statutory target for the percentage of USDA direct
    operating loans that will be prioritized to assist beginning and
    socially disadvantaged farmers. Prioritize 100 percent of direct
    farm ownership loans to first meet the needs of beginning and
    socially disadvantaged farmers. Overhaul the federal repooling
    procedures to ensure that these targets are reserved only for
    beginning and socially disadvantaged farmers to the maximum extent
    possible. (For further information, see the proposal entitled "Loans
    Targeted to Beginning and Socially Disadvantaged Farmers" on pages
    108 -- 109.)

2.  Enhance the existing Beginning Farmer and Rancher Downpayment Loan
    Program to increase the opportunities for the next generation of
    production agriculturalists. Reduce the four percent interest rate
    to two percent. Defer the first annual payment for one year.
    Eliminate the \$250,000 cap on the value of property that may be
    acquired. Decrease the minimum producer contribution from 10 percent
    of the property purchase price to five percent and add socially
    disadvantaged farmers and ranchers as eligible applicants. (For
    further information, see the proposal entitled "Beginning Farmer And
    Rancher Downpayment Loan Program" on pages 110 -- 111.)

3.  Increase the existing limits of \$200,000 for direct ownership (FO)
    loans and \$200,000 for direct operating loans (OL) to a maximum of
    \$500,000 indebtedness for any combination of the two loan types.
    (For further information, see the proposal entitled "FSA Direct Loan
    Limits" on pages 112 -- 113.)

**LOANS TARGETED TO BEGINNING AND SOCIALLY DISADVANTAGED FARMERS**

***Recommendation in Brief***

Double the statutory target for the percentage of USDA direct operating
loans (OL) that will be prioritized to assist beginning farmers and
socially disadvantaged (SDA) farmers. Prioritize 100 percent of direct
farm ownership (FO) loans to first meet the needs of beginning and SDA
farmers. Overhaul the federal repooling procedures to ensure that these
targets are reserved only for beginning and SDA farmers to the maximum
extent possible.

***Problem***

The barriers to entering production agriculture are high. With an
increasingly aging farm population, these barriers threaten our next
generation of agriculturalists. Access to adequate loan funds is a
significant barrier to entry for beginning and SDA farmers. These
farmers frequently have limited financial means, or have a limited track
record in business operations. As a result, commercial loans can be
difficult to obtain for beginning and SDA farmers. During USDA Farm Bill
Forums, young producers and commercial lenders alike addressed the issue
of equity. Brad in Wisconsin said, "The biggest challenge I face as a
banker when we address young farmers is lack of equity as it relates to
the amount of capital investment it takes you to get into agriculture."

***Recommended Solution***

The Administration recommends doubling the statutory target for direct
OL funds for beginning and SDA farmers from 35 percent to 70 percent.
Additionally, we propose increasing the direct FO target for beginning
and SDA farmers from 70 to 100 percent. Increasing the target levels
would provide additional assurance that beginning and SDA farmers have
financing options to purchase farmland and then operate those farms.

Under current law, thirty days before the end of the fiscal year, any
unused beginning and SDA direct loan funds are repooled from the States.
Section 5315 of the 2002 farm bill required that repooled SDA operating
loans must first be re-distributed to those states that have unmet SDA
operating loan need. The Administration proposes to expand this
repooling method to all other USDA SDA loan programs -- direct FO,
guaranteed FO, and guaranteed OL. Additionally, we propose a similar
repooling regime for all types of USDA beginning farmer loan programs --
direct OL and FO as well as guaranteed OL and FO.

Under the new policy, unutilized targeted loan funds would be repooled
from the states on the established lifting date and re-distributed in
the following order --

1.  Unmet SDA or beginning farmer need in other states within type of
    loan (i.e. repooled SDA direct FO funds used only to address SDA
    direct FO unmet needs within other states)

2.  Unmet SDA or beginning farmer need in other states within category
    of loan (i.e. repooled SDA direct FO funds used only to address
    unmet need for any type of SDA loan within other states -- direct OL
    as well as guaranteed FO or OL)

3.  Unmet SDA or beginning farmer need in other states between the two
    categories (i.e. repooled SDA loan funds could be used to meet unmet
    beginning farmer loan needs and vice versa)

4.  Unmet general need within the state of origin

5.  Unmet general need nationwide

This new repooling strategy will require additional time for USDA to
administer; thus we recommend the target lifting date for these loans be
changed from September 1st to August 15th.

***Background***

USDA loan funds are appropriated by Congress each year. The amount
appropriated in some years does not allow USDA to fund all the loan
applications received. Beginning farmers often have more difficulty
obtaining financing because they cannot meet commercial lender financial
requirements. A relatively small number of beginning farmers are
entering production agriculture, and they often experience financial
difficulties attempting to get established.

Existing beginning farmer funding targets for USDA loans are specified
by law as follows:

  --------------- ------------- ------------ --------------- -------------
  Program         Funds         Proposed New Current Date    Proposed New
                  Targeted      Target       Target Lifted   Date Target
                                                             Lifted

  direct FO       70 percent    100 percent  September 1     August 15

  direct OL       35 percent    70 percent   September 1     August 15

  guaranteed OL   40 percent    40 percent   April 1         April 1
  (regular)                                                  

  guaranteed OL   15 percent    15 percent   March 1         March 1
  (interest                                                  
  assistance)                                                

  guaranteed FO   25 percent    25 percent   April 1         April 1
  --------------- ------------- ------------ --------------- -------------

**BEGINNING FARMER AND RANCHER DOWNPAYMENT LOAN PROGRAM**

***Recommendation in Brief***

Enhance the existing Beginning Farmer and Rancher Downpayment Loan
Program to increase the opportunities for the next generation of
production agriculturalists to succeed.

***Problem***

In 2002, farms with over \$10,000 in annual sales and that were operated
by individuals under 35 years of age accounted for less than 7 percent
of all farms, as compared to 19 percent in 1982. Meanwhile, the share of
farms with over \$10,000 in sales operated by farmers over 65 increased
from 14 to 25 percent. The sharp decline in young farmers has raised
concerns that an insufficient pool of new entrants will be available to
replace a large and growing pool of retiring farmers.

The cyclical and highly variable nature of farm income creates major
challenges for highly leveraged first-time farm buyers. Even when such
producers make diligent use of available risk management tools, they
experience significant difficulty servicing high levels of debt. This
debt service burden often consumes needed operating capital, and results
in poor performance or failure.

The existing "Beginning Farmers and Ranchers Downpayment Loan Program"
was designed to help mitigate this situation. However, several statutory
requirements have limited its use among some beginning agriculturalists.
Concerns expressed during USDA Farm Bill Forums included the interest
rate being too high, the term being too short, the initial out-of-pocket
investment of the beginning producer being too high, and the maximum
loan value cap being too low to start a commercially viable farm. For
example, the current maximum property value of \$250,000 would only
allow a beginning farmer to purchase 105 acres of cropland on average
(i.e. average cropland value of \$2390 per acre times 105 acres equals
approximately \$250,000). This situation often relegates beginning
farmers into an untenable position -- forced to purchase the cheapest,
most marginal land or attempt to make a living on a less than
commercially-viable-sized farm.

In addition, socially disadvantaged (SDA) citizens face many of the same
barriers to entry as beginning farmers and ranchers, yet federal
programs designed to provide assistance are not always effective.

***Recommended Solution***

The Administration proposes enhancing the existing Beginning Farmers and
Ranchers Downpayment Loan Program in several ways.

1.  Change the four percent interest rate to two percent.

2.  Defer initiation of first annual payment for one year (i.e. Current
    law requires repayment in 15 equal installments starting on year
    one; this proposal would defer the first installment to year two
    allowing the loan to be repaid in 16 years, instead of 15.)

3.  Eliminate the \$250,000 cap on the value of property that may be
    acquired by a beginning farmer wishing to obtain a downpayment loan.
    Replace it with a maximum downpayment loan amount of \$200,000. This
    proposal at a minimum doubles the potential beginning farmer or
    rancher's buying power. (Current law allows a downpayment loan of no
    more than 40 percent of the \$250,000 property value cap, which
    equates to a downpayment loan of no more than \$100,000.)

4.  Decrease the minimum beginning farmer or rancher contribution from
    10 percent of the property purchase price to five percent.

5.  Add socially disadvantaged (SDA) farmers and ranchers as eligible
    applicants for this program.

***Background***

Many have raised questions about the adequacy of the future workforce to
farm the nation's agricultural lands. There is concern about the fact
that there are fewer young, new farm entrants than there are older
retiring farmers. Establishing succeeding generations of farmers is an
on-going concern. Potential new farmers often face significant barriers
to entry. An enhanced federal downpayment program would allow beginning
farmers more flexibility to cope with income volatility and increase the
likelihood of establishing new successful farm businesses.

Section 310E of the Consolidated Farm and Rural Development Act (CONACT)
authorizes the "Beginning Farmers and Ranchers Downpayment Loan
Program." This program allows beginning farmers and ranchers to borrow
up to 40 percent of the lower of the purchase price or appraisal value.
Interest rates are statutorily set at four percent for a maximum loan
period of fifteen years. Under the program, the beginning farmer or
rancher must contribute a downpayment of at least ten percent of the
farm or ranch purchase price. Additionally, the maximum value of the
property to be acquired cannot exceed \$250,000. Socially disadvantaged
farmers are currently not eligible for the program unless they meet the
beginning farmer and rancher criteria.

**FSA DIRECT LOAN LIMITS**

***Recommendation in Brief***

Increase the existing limits of \$200,000 for direct farm ownership (FO)
loans and \$200,000 for direct operating loans (OL) to a maximum of
\$500,000 indebtedness for any combination of the two loan types.

***Problem***

The maximum amount an individual may receive in FSA Farm Loan Programs
is specifically prescribed in the Consolidated Farm and Rural
Development Act (CONACT). The maximum direct loan amounts specified in
the CONACT have not kept pace with increases in the cost of farm land
and production inputs. The CONACT direct operating loan limits were last
increased in 1984 when the limit went from \$100,000 to its current
\$200,000 limit. Direct FO loan limits were increased from \$100,000 to
\$200,000 in 1978. These loan levels have become insufficient to meet
the credit needs of medium-sized family farmers.

During the USDA Farm Bill Forums, producers from across the country
commented on the limiting effects of decades old loan limits. Mike from
Ohio said, "The current limits of \$200,000 for farm loans and \$200,000
for operating loans were set over 20 years ago. Production costs and
real estate values have greatly increased over the past 20 years...we
think the loan limit should be increased."

***Recommended Solution***

Increase the existing limits of \$200,000 for direct FO and \$200,000
for direct operating loans to a maximum of \$500,000 for any combination
of the two loan types. The higher, combined limit will allow a better
matching of loan type, amount, and purpose to an individual applicant's
credit needs. It will also improve access to capital, and therefore the
competitiveness, of beginning farmers and other FSA loan applicants.

A similar action taken in 1998, to establish a combined total limit for
guaranteed loans, has been effective.

***Background***

Since the last increase in the direct FO limit, farmland values have
increased significantly. The current loan limit in the direct FO program
places many FSA farm loan applicants at a disadvantage when competing
with other potential buyers for farmland. FSA applicants
characteristically have limited equity and lower net incomes, which
prevent them from securing commercial loans.

Input costs for production agriculture and the price of machinery have
risen dramatically since the last increase in the direct operating loan
limit in 1984. These higher outlays equate to elevated levels of capital
investment needed to initiate and sustain a family farming operation.
Access to financial capital for beginning farmers is limited by the
level of risk and return compared to other lending opportunities for
rural banks. The present direct OL limit does not meet the credit needs
of an increasing number of farm families and inhibits their efforts to
operate and improve the competitiveness of their farm operations.