Annual Report to Congress 

Regarding 

Term Limits on Direct Operating Loans 

as 

Required by 

Section 5104 of the Agricultural Act of 2014 

Prepared by USDA's Farm Service Agency 

Economic and Policy Analysis Staff 

September 2017 
Executive Summary 

September 2017 

Term limits, which impose a statutory maximum on the number of years a farmer may receive a 

Farm Service Agency (FSA) direct operating loan (DOL), do not appear to have had a major 

impact on FSA borrowers in the past two decades. Despite significant declines in farm income 

since 2012, farmers appear to be, for the most part, reliant on commercial credit sources and the 

increase in the number of farmers reaching their term limits is, so far, modest. Expectations of 

lower incomes and declining land values, however, may reduce commercial credit availability 

and increase reliance on FSA credit programs, resulting in more borrowers being affected by 

term limits in future years. Mid-size family farms and those in economically depressed regions 

appear to be the most vulnerable to term limits. 

FSA may obligate DOL funds to an eligible farmer in 6 calendar years before the term limit is 

reached. The years need not be consecutive, and multiple loans received during a year count only 

against one year of eligibility. The enforcement of term limits is waived for beginning farmers 

through their 1 oth year of farming. Waivers for two years are also provided on a case-by-case 

basis, provided that borrowers continue to meet all other eligibility criteria. Youth loans and 

microloans to beginning farmers and veterans are exempt and do not count against the limitation. 

Key findings are: 

• Only a small share of DOL borrowers reach their term limits in any given year--

Through calendar year-end 2016, a total of 3,805 DOL borrowers with an outstanding 

direct loan balance had reached the term limit. This represents an additional 639 

borrowers over the 3,166 borrowers with an outstanding balance who had reached the 

DOL term limit through December 31, 2015. A total of 7,427 current and past borrowers 

have reached their term limits since term limits were first implemented in 1993. While 

the number for 2016 is above the historical average, it only comprises 7 percent of total 

borrowers with an outstanding DOL loan balance at year-end. 

• Even though a borrower may have reached his or her term limit, many continue as 

an FSA borrower and benefit from other FSA loan provisions--

a Of the 7,427 borrowers that have reached term limits, 51 percent still had an 

outstanding direct loan balance at the end of 2016. 

o Further, DOL term limits do not affect eligibility for other loan types nor loan 

servicing provisions. For example, over 6 percent of all term-limited borrowers 

since 1993 received a direct farm operating (FO) or emergency (EM) loan after 

reaching their term limits. In addition, 18 percent of all term limited borrowers 

received guaranteed loans after reaching their term limits. Loan restructuring was 

received by over 16 percent of term-limited borrowers after they reached their 

term limits. 
• Reaching the term limit does not imply that a producer is being forced out of 

farming-Less than 8 percent of all borrowers who have reached their term limits 

received either a direct debt settlement or guaranteed loss claim. Another 5 percent were 

deceased. In fact, over 86 percent of all living term-limited borrowers were still active 

producers as indicated by their eligibility to vote in elections for the 2017 FSA County 

Committee. 

• There is no evidence that term-limited borrowers have been forced to down-size 

the.ir operations due to a lack of access to FSA credit--Those who remained in FSA's 

portfolio for up to 10 years after reaching their term limits had little change in farm sizes 

as reflected in annual sales adjusted for commodity price changes. The average FSA 

score for term-limited borrowers remaining in FSA's portfolio after reaching their term 

limits did not appear to deteriorate. 

• While it does not appear that lack of access to new DO Ls has had adverse impacts, 

term-limited borrowers remain financially vulnerable--Most DOL borrowers who 

reached their term limits since 2005 do not appear to be sufficiently creditworthy to meet 

most commercial lender underwriting standards. Because of limited working capital, high 

indebtedness, and low FICO scores, most would have difficulty obtaining commercial 

credit on favorable terms. Also, these borrowers are more susceptible to economic 

downturns or reductions in credit availability. 

• While term limits appear to affect only a small proportion of all DOL borrowers, 

some groups are likely to be more adversely affected-This is because term-limited 

borrowers tend to be concentrated among certain farm-size groups and regions. 

o Small and mid-size family farms, defined as those with $100,000 to $1 million in 

annual sales, were more likely to be term limited. This group represented less than 

half of all DOL borrowers, but approximately 75 percent of all term-limited 

borrowers. 

o Term-limited borrowers were more concentrated in the Northern Plains and Corn 

Belt. While about 26 percent of all borrowers live in these regions, they represent 

nearly one-third of all term-limited borrowers. 

o Also, some locations could be considered 'credit deserts' where FSA supplies a 

relatively larger share of credit and term limits could have a greater adverse 

impact. These locations include portions of Appalachia, Indian Country, the 

Southeast, and the Red River Valley of Minnesota/North Dakota. 
Introduction 

Term limits impose a statutory limit on the number of years that a farm borrower may receive 

loan funds through programs administered by the U.S. Department of Agriculture (USDA). 

Direct operating loans (DO Ls) were established under Section 311 ( c )(2) of the Consolidated 

Farm and Rural Development Act (Con Act) for qualified farmers. Term limits of 7 years were 

initially enacted for both direct and guaranteed farm ownership (FO) and OL programs by the 

Agricultural Credit Improvement Act of 1992. 1 Term limits have never applied to emergency 

loan (EM) borrowers. 

Subsequent legislation exempted all guaranteed loans from any term limits. DOL microloans 

made to veterans and beginning farmers are also exempt from term limits. Further, the limitation 

does not apply if the borrower's farm is subject to the jurisdiction of an Indian tribe. FSA can 

obligate, in certain circumstances, DOLs to borrowers beyond their term limit. For example, 

waivers are granted to qualified beginning farmers through their 10th year of farming. Nonbeginning farmers who have reached the term limit may receive a 2-year waiver, provided the 

operation is viable, the borrower has or will complete financial training, and commercial credit is 

unavailable. 

Section 5104 of the Agricultural Act of 2014 amended Section 311 of the Con Act to require an 

annual report on term limits for direct operating loans (see Appendix 1). As directed by the 

statute, this third annual study estimates the number and location of current and past direct 

borrowers who have reached their term limits, and their structural, demographic, and financial 

characteristics. Economic impacts on farm borrowers who have thus far reached term limits are 

also examined, as well as potential impacts on future borrowers. The study also addresses how 

expected farm economic conditions may affect the future demand and role of FSA direct loan 

programs. 

Term limits were enacted to ensure FSA's role as a temporary credit source. By limiting the 

total years of eligibility for DO Ls, borrowers are encouraged to pursue credit from commercial 

lenders. Some have concerns, however, about possible adverse impacts from term limits. 

Specifically, term limits could adversely affect the Government's ability to serve as a safety net 

to agricultural credit markets should large numbers of farmers become ineligible for assistance as 

a result of worsening farm financial conditions. 

Others indicate that term limits could adversely affect some groups and/or regions that may be 

more dependent on FSA credit. For example, FSA tends to be more important as a source of 

credit in regions where a relatively small number of farms discourages commercial lenders from 

providing agricultural credit. Further, FSA credit programs tend to be more important among 

groups considered socially disadvantaged and among mid-size family farms (see Hoppe and 

MacDonald for a discussion of the ERS Farm Typology classification of family farms). 

1 The regulations (7 CFR 764.252), which were implemented in 1993, state that an applicant is not eligible if the 

applicant has closed a DOL in 7 or more years. The net impact is that a borrower has 6 full years of eligibility before 

reaching the term limit. In this report, a borrower was considered to have reached term limits after receiving DOL 

loan funds in 6 calendar years. Upon receipt of one direct operating loan at any time during the 7th year, the 

borrower becomes ineligible for any further assistance. 

4 
The case for having term limits can also be made. One argument is that long-term dependence on 

FSA credit can lead to economic inefficiencies. But, since all qualified loan applicants must 

show a feasible business plan2, a borrower's long-term dependence on FSA credit does not 

necessarily imply economic inefficiencies. Borrowers unable to develop a feasible plan are 

ineligible for any new direct loans regardless of the years of eligibility they may have used. Also, 

there is no evidence that long-term borrowers are any more or less creditworthy than other FSA 

borrowers. 

Another concern contributing to term limits is that long-term borrowers might monopolize 

benefits at the expense of young and beginning farmers. Specifically, some have thought that 

favorable terms may encourage more established borrowers to pursue FSA credit even though 

they may qualify for commercial credit. However, there are already provisions requiring 

borrowers considered viable for commercial credit to refinance their direct loans with a 

commercial lender. Direct borrowers are expected to transition, or graduate, to private sources of 

credit over time (Section 345 of the Con Act; 7 CFR 765.101).3 

Farm Economic Outlook 

Both U.S. farm income and farmland values declined in 2016, increasing farm sector financial 

stress, especially for those receiving direct loans through FSA. Net farm income declined in 2016 

for the 3rd consecutive year and has dropped nearly 45 percent from its peak in 2013 (USDA, 

ERS). While crop prices declined, producers benefited from record yields for com and soybeans. 

Significant price declines also impacted the cow-calf sector in 2016 due to lower margins for 

feeder cattle. Margins for dairy farms remained tight, as milk prices remained near break-even 

levels. 

The farm economic outlook for 2017 is similar to 2016, with net cash farm income expected to 

remain unchanged to down slightly. As has been the case over the past 2 years, low commodity 

prices will continue to squeeze profit margins and cash flows, especially for direct borrowers 

who tend to be more highly leveraged. For cash grains, a combination of large production, large 

carryover stocks, and a strong dollar will combine to limit the potential for price increases. While 

net returns for poultry and dairy are expected to slightly improve in 2017, lower cattle prices will 

reduce overall livestock receipts. 

The reliance of borrowers on nonfarm income, combined with the expansion of micro loans, has 

increased FSA's vulnerability to changes in the general economy. 4 Microloans have increased 

FSA's presence in consumer-sensitive enterprises such as direct retail sales and fresh market 

2 A feasible plan is defined as a business plan projecting a positive margin after debt service and a positive overall 

cash flow. 3 The process for evaluating a borrower's potential for graduation to commercial credit is described in Section 4 of 

4-FLP Direct Loan Servicing 

(http://fsaintranet.sc.egov. usda.gov / dps/services/downloadhandler .ashx?fileid= 1 7989). 4 The microloan program was implemented in 2013 and provides for a more streamlined application process for 

borrowers with under $50,000 of FSA direct OL indebtedness. These loans are mostly made to small farms that rely 

more heavily on non-farm income. 

5 
vegetables and fruits. Many direct borrowers rely on income from nonfarm earnings to support 

household income, which tends to be lower in rural counties (Kusmin). 

U.S. farmland values, which buoyed farm balance sheets for several years, have remained stable 

since 2014 (USDA, NASS). But while remaining stable nationwide, many States have seen 

declines, especially in regions where crop production is prevalent. In Iowa, for example, surveys 

by Iowa State University indicate a 6-percent decline for 2016 compared to the prior year and an 

18-percent decline from 2013 to 2016 (Iowa State University). University of Nebraska-Lincoln 

(UNL) surveys showed a IO-percent decline in Nebraska for 2016 compared to the prior year and 

a 15-percent decline from 2013 to 2016 (UNL). Likewise, surveys by Purdue University 

indicated an 8-percent decline in Indiana farmland values from 2015 to 2016 (Dobbins and 

Cook). Similar r~sults have been found in surveys undertaken by the Chicago, St. Louis, 

Minneapolis, and Kansas City Federal Reserve Banks (Kansas City Federal Reserve Bank, 

Agricultural Finance Databook). 

For the immediate future, lenders' expectations will be tempered by concerns about higher 

interest rates, lower land values, low farm incomes, and uncertainty surrounding Government 

support for agricultural programs. In addition, prospects for economic growth in many rural 

counties is tempered, especially those more dependent on mineral extraction or manufacturing. 

Consequently, agricultural lenders can be expected to maintain a level of risk aversion that 

would contribute to greater demand for FSA credit programs. 

Status of Direct OL Program 

FSA administers direct and guaranteed loan programs through 2,124 service centers. Guaranteed 

loans are made and serviced by commercial lenders, but are federally guaranteed through FSA. 

Supplying only 2.6 percent of overall non-real estate farm debt in 2016, direct loans do not 

currently represent a major source of credit to agriculture (Figure 1)5

. However, this overlooks 

USDA' s safety-net role, as reflected in its high market shares during the 1980s farm financial 

crisis, when FSA's nonreal estate debt share peaked at 24.3 percent 

In addition, aggregate market share understates the importance of FSA credit to targeted groups, 

economically depressed regions, and small and mid-size family farms. In most circumstances, 

FSA is not the sole credit provider and works closely with commercial lenders in providing joint 

financing. This results in the share of farmers served being greater than the share of debt 

provided. In many areas of the Northeast, Appalachia, Southeast, and Mountain West, over 20 

percent of indebted farmers have turned to FSA for credit at least once since 2014 (Figure 2). 

Some of these regions, such as West Virginia, Indian Country, or New England, could be 

considered 'credit deserts.' 6 Also, these tend to be regions where small livestock farms are more 

common, illustrating FSA's importance to this producer group. Since 2005, beef producers have 

5 At the end of calendar year 2016, an additional 2.4 percent of farm nomeal estate debt was guaranteed through 

FSA, resulting in a total market share for FSA of 5.0 percent. 6 Credit deserts are geographic regions with very few lenders and/or areas where economic conditions create 

circumstances where commercial credit is difficult to obtain. See FSA Notice FLP-708 

(https://www.fsa.usda.gov/Internet/FSA Notice/flp 708.pdD for a discussion of FSA policies for lending in credit 

deserts. 

6 
consistently represented the largest category of DOL borrowers (Figure 3). FSA credit is also 

important among targeted groups, such as socially disadvantaged producers (SDAs) and 

beginning farmers who tend to operate smaller farms. 

Mid-size family farms, defined by USDA as farms with annual sales between $350,000 and 

$999,999, tend to be most dependent on FSA credit programs. At the end of 2015, nearly 17 

percent of indebted mid-size family farms had either a direct or guaranteed farm loan (Figure 4)7. 

Given loan size limits and limited loan funds, borrowers commonly use FSA credit in 

conjunction with other credit sources. In many cases, the use of FSA credit for a portion of an 

operation's total credit needs may reduce a borrower's overall risk to the extent that a 

commercial lender may be more willing to provide the balance of the needed credit. This is 

particularly true for many mid-size to large family farms and explains why market penetration 

for farms in this size category are larger than for aggregate market share. 

As expected, the combination of lower farmland values in many areas and tight profit margins 

are affecting commercial credit availability. Lenders in the Kansas City, Minneapolis, and St, 

Louis Federal Reserve Bank regions have indicated increasing demand for farm loans. Lenders 

in the Kansas City Federal Reserve district, which includes the highest concentration of farm 

banks, indicate less credit available in early 2017 than at any time since 2008 (Federal Reserve 

Bank of Kansas City, Ag Credit Survey). Recent surveys conducted by the Federal Reserve have 

found that agricultural banks across the country generally anticipate greater demand for renewals 

and increases in existing operating loans while loan repayments are expected lower (Federal 

Reserve Bank of Kansas City, Agricultural Finance Databook). In response to financial 

conditions, lenders are expected to maintain relatively high collateral requirements through 2017. 

With tighter profit margins, nonperforming asset measures increased since 2014. DOL default 

rates increased by nearly 2 percentage points, and commercial lender delinquency rates have 

been increasing as well (Figure 5). Delinquency rates for guaranteed OLs increased from 3 to 5 

percent from 2014 to 2016, while Farm Credit System and commercial bank delinquency rates 

increased slightly. In all lending categories except for guaranteed OLs, the percent of 

nonperforming loans remained below levels reached from 2009 through 2010. 

Impacts of Term Limits on FSA's Loan Portfolio 

Through calendar year-end 2016, a total of 3,805 DOL borrowers with an outstanding direct loan 

balance had reached the term limit (Table 1). This represents an additional 639 borrowers over 

the 3,166 borrowers with an outstanding balance who had reached the DOL term limit through 

December 31, 2015. 8 The number of borrowers reaching term limits since 2013 has been 

increasing and is above the historical average of 450 annually. Still, only 7 percent of active 

DOL borrowers were at the term limit at year-end 2016 (Figure 6). In addition there are 3,622 

individuals without any current outstanding DOL indebtedness who have reached their term 

7 This estimate was developed using USDA ARMS data, for which 2015 was the latest available data. 8 The number of borrowers reaching term limits is based on the total number of years DOL funds were received as 

of December 31, 2016. Beginning farmers who started farming after 2006 were excluded from the total of termlimited borrowers. 

7 
limit, resulting in a total of 7,427 current and former FSA borrowers that have reached the DOL 

term limit since term-limit implementation in 1993 (Table 1 ). 

There is little evidence that term limits adversely force borrowers out of farming. Even though 

some borrowers have reached the DOL term limit, many continue to benefit from other FSA loan 

provisions. On average, only about 7 percent of term-limited borrowers completely pay off their 

outstanding balance each year, which translates into a span of 15 years before current termlimited borrowers would be out of the FSA's loan portfolio. Of the 7,427 borrowers who had 

reached term limits since 1993, over half ( 52 percent, or 3,844 borrowers), still had an 

outstanding direct loan balance at year-end 2016. Term-limited borrowers are still eligible to 

receive direct FO and EM loans, which 9.5 percent ((447 + 257)/7,427) of term limited 

borrowers had received after reaching term limits (Table 1). Additionally, 18.3 percent 

(l,357/7,427) of term limited borrowers received guaranteed loans after reaching term limits. 

Since 2005, over 75 percent of term-limited borrowers have made payments as agreed. While 

this implies one-fourth have been delinquent at least once, most have avoided liquidation. Only 8 

percent ((460 + 103)/7,427) of term-limited borrowers received either a direct debt settlement or 

guaranteed loss claim after reaching their term limits. Reaching the term limit does not preclude 

a borrower from receiving loan servicing benefits, such as loan restructuring, which were 

received by over 16 percent (l,204/7,427) of all term-limited borrowers. 9 

Characteristics of Term Limited Borrowers 

While the number of term-limited borrowers continues to be relatively small, they have tended to 

be more concentrated among small- and mid-size family farms. These farms include those with 

annual sales of $100,000 to $1 million and where the operator either is fully employed by the 

farm business or considers farming as their primary occupation. While 37 percent of DOL 

borrowers receiving loans from 2012-2016 had less than $100,000 in sales, farms in this size 

class represented less than one-fourth of all term-limited borrowers with outstanding DOL 

indebtedness in 2016 (Figure 7). Those reaching term limits in 2016 averaged nearly $300,000 in 

annual gross revenue compared to $213,000 for all other direct loan borrowers (Table 2). 

Although about half of term-limited borrowers are no longer FSA borrowers, a high proportion 

are still active in farming. Nearly 87 percent (6,45917,427) of term-limited borrowers still living 

had an interest in a farm or ranch as indicated by eligibility to vote in 201 7 FSA county 

committee elections (Table 1 ). 10 About 5 percent of term-limited borrowers were deceased by 

2016, leaving an estimated 8 percent that are living but no longer farming. 

The geographic distribution of term-limited borrowers reflects overall program demand, with 

most direct borrowers located in the Plains States, Lake States, western Corn Belt, and 

9 Direct program borrowers who are 90 or more days in default and financially distressed are eligible to receive 

primary loan servicing under 7 CFR 766.101. Under this provision, an eligible borrower may receive loan 

consolidation, rescheduling, re-amortization, interest rate reduction, deferral, write-down, or any combination of 

these actions. A borrower qualifying for primary loan servicing is entitled to receive these restructuring provisions 

on any outstanding direct loan indebtedness. 

lO Eligible voters in FSA county committee elections include individuals of legal voting age who have an interest in 

a farming operation that participates or cooperates in any FSA program 

(.https://www.fsa.usda.gov/Intemet/FSA _File/ccoeligib _ l O.pdt) 

8 
Appalachia. Relative to overall demand, term-limited borrowers are most common in the 

Northern Plains and Com Belt regions. While these regions accounted for nearly 25 (13.81 + 

11.1) percent of all direct borrowers receiving loans since 1993, they accounted for nearly onethird (18.4 + 13.7 percent) of all borrowers that have reached term limits (Table 3). While there 

are some term-limited borrowers present in all states, clusters occur in southeast Nebraska, 

southwest Minnesota, eastern South Dakota, western Iowa, the high plains of Texas, and central 

Kentucky (Figure 8). Over one-third of all term-limited borrowers were located within 12 

Congressional districts (see Appendix 2). 

A large proportion ofDOL borrowers have used FSA as only a temporary source of credit. 

About half (50,201/102,915) of all farms receiving DOLs since 1993 have only received DOL 

funds for 1 year, while nearly 70 percent ((50,201 + 21,054)/102,915) had used DOLs for 2 or 

fewer years (Table 4). Over 50 percent ofDOL recipients had not borrowed from FSA since 

2006. Of all 102,915 borrowers receiving DO Ls since 1993 that were subject to term limits, only 

7 .2 percent (7,427 /102,915) had reached their term limits by the end of 2016. Some borrowers 

had used over 6 full years of eligibility, reflecting the ability of producers to receive one 

additional loan after 6 years and the issuance of waivers. 11 

A justification that has been used for term limits is to assure that there is ample loan funds to 

finance young and beginning farmers. However, this has effectively been achieved through 

targeting, or reserving, loan funds for beginning and SDA farmers. From 1994 through 2016, the 

share of non-youth DOL funds going to any targeted group increased from 33 to 80 percent. 

Over half (3,82917,427) of all term-limited borrowers received their final DOL as a member of a 

targeted group (Table 1 ). 

Financial Condition of All Borrowers Who Have Reached Term Limits 

Most DOL borrowers who reached their term limits since 2005 do not appear to be sufficiently 

creditworthy to meet most commercial lender underwriting standards. Only 14 percent of termlimited borrowers in 2016 had an FSA score of 1 when they reached the term limit (" 1" indicates 

potential for graduation to commercial lending), and the average FSA score is slightly above 2 

(Table 5). 12 FSA's Farm Business Plan data indicate that the average debt-to-asset ratios for 

term-limited borrowers exceeded 0.50 (Table 5). 13 In comparison, the aggregate debt-to-asset 

ratio for all U.S. farms was 14 percent in 2017 (USDA, ERS, Farm Balance Sheet). Farm 

Business Plan data also indicate that less than half had positive working capital at the time they 

reached their term limits. With average FICO scores near 700 (as is the case with many FSA 

11 In addition to a borrower being eligible for 1 additional DOL after 6 years, beginning farmers receive a waiver 

through their 10th year of farming. Also, a borrower may receive a one-time waiver of term limits for up to 2 years 

provided the borrower has completed borrower financial training and has a feasible plan. The borrower must also be 

unable to obtain credit from a commercial lender. 12 The FSA score is a borrower account classification used to determine a borrower's eligibility for graduation. The 

score is completed using the most current balance sheet and income/expense statements available. It is a weighted 

index of the current ratio, debt-to-asset ratio, return on assets, and term debt coverage ratio. The score can range 

from 1 to 4, with 1 being most creditworthy and 4 being the least creditworthy (see paragraph 252 of FSA Handbook 

1- FLP). 

13 The Farm Business Plan is a Web-based application used by FSA since 2005 to assist borrowers with obtaining 

loans and improving their farming business. A completed Farm Business Plan provides the business's financial 

condition, operating plans, and financial summaries. 

9 
borrowers), most would likely have difficulty obtaining commercial credit on the most favorable 

terms (Table 2). 

Though term-limited borrowers appeared to be financially stressed, their financial condition is 

slightly better than for other direct borrowers. In 2016, the debt-to-asset ratio of borrowers 

reaching their term-limits was 0.51 compared to 0.58 for other DOL borrowers (Table 6). The 

overall FSA score indicates that term-limited borrowers since 2007 had slightly better net 

income and term-debt-coverage ratios than other direct borrowers (Table 2). The financial 

characteristics of term-limited borrowers suggest that most would likely meet all other loan and 

feasibility criteria and would be eligible to receive additional DO Ls, if term limits were not in 

effect. Most show repayment ability and have net worth large enough to suggest the availability 

of unencumbered collateral. While many would meet FSA loan feasibility criteria, commercial 

lenders would likely be reluctant to provide credit given their financial weaknesses. 

Term-limited borrowers appeared to have more favorable financial status relative to other FSA 

DOL borrowers due to their larger size, and consequently, economies of scale. Term-limited 

borrowers tend to operate larger farms with larger asset bases and greater farm production than 

other direct borrowers. Since 2006, term-limited borrowers have averaged nearly $290,000 in 

gross revenue compared to less than $205,000 for other direct borrowers (Table 2). A farm 

borrower that meets FSA farm loan eligibility criteria and averages $290,000 in gross revenue 

would likely be considered a mid-size family farm, a size group which has been shown to be 

more vulnerable to economic downturns and more likely to participate in FSA credit programs 

(Dodson and Ahrendsen). 

Despite their financial shortcomings, there is little evidence to indicate that many term-limited 

borrowers were forced to downsize their operations. Those who remained in FSA's portfolio for 

up to 10 years after reaching their term limits had little change in farm sizes as reflected in gross 

revenue adjusted for commodity price changes (Table 5). The average FSA score for termlimited borrowers remaining in FSA's portfolio after reaching their term limits did not appear to 

deteriorate. For borrowers remaining in the portfolio after reaching the term limit, the average 

FSA score did not change. These data, however, do not provide any information on opportunities 

which term:-limited borrowers had to forego because they lacked access to credit. 

Characteristics of Active Borrowers by Remaining Years of DOL Eligibility 

Current DOL borrowers that used most of their years of DOL eligibility are most likely to be 

adversely impacted by term limit restrictions. There were nearly 6,000 borrowers with 

outstanding DOLs (3,805 + 2,121)-about 11 percent of current DOL borrowers-that had either 

reached their term limits or had only 1 more year of eligibility remaining as of December 31, 

2016 (Table 7). As was the case with all those reaching their term limits since 1993, active termlimited borrowers are geographically concentrated in a few states. About one-third are located in 

just five states: Nebraska (438 borrowers), Kentucky (403 borrowers), Texas (366 borrowers), 

Iowa (395 borrowers), and Wisconsin (314 borrowers). About one-fifth of DOL borrowers in 

several states had either reached the term limit or had one or fewer years of eligibility remaining 

(including Michigan, Minnesota, North Dakota, and South Carolina). 

Racial and ethnic minorities are slightly less common among term-limited borrowers than for the 

overall distribution of borrowers. While racial minorities comprised 12 percent of all borrowers, 

they comprise 15 percent of all those with 1 or O years of eligibility. Hispanics comprise 5 

10 
percent of all borrowers but less than 3 percent of those with one year or less of eligibility 

remaining (Table 8). With approximately 18 percent of all DOL borrowers but only 7 percent of 

those with one or fewer years of eligibility remaining, women are less likely to be facing term 

limits. 

Active borrowers ( as of 12/31/2016) facing term limits display a higher default rate than all 

active DOL borrowers. ("Default rate" is defined as loans of $1 or more being past due.) The 

default rate for active borrowers with O or 1 years of eligibility is 25 percent compared to 18.5 

percent for all active DOL borrowers (Table 9-see "Current or Loan Amount in Default" 

section). While their default rates were higher, their FSA scores indicate term-limited borrowers 

are slightly more financially sound. With over half of active DOL borrowers with O or 1 year of 

eligibility remaining having FSA scores greater than 2, their ability to obtain a commercial loan 

will likely be hampered (Table 9-see "FSA Classification Score" section). FSA classification 

scores of "commercial" (e.g., "l ") suggest that 13.6 percent of borrowers reaching or 

approaching term limits could obtain credit on their own merits. Another 31 percent have a 

classification score of "standard" ( e.g., 2) and could be candidates for guaranteed loans. 

Borrowers with greater DOL indebtedness are more likely to reach their term limits. Borrowers 

with less than $100,000 in outstanding DOL loans represent 62 percent of all borrowers, but only 

32 percent of those borrowers who have either reached the term limit or have only a year of 

eligibility remaining (Table 9-see "Total Indebtedness" section). In contrast, borrowers with at 

least $100,000 in indebtedness represent over two-thirds of borrowers either reaching or near 

their term limits. This outcome is consistent with historical trends indicating that mid-size 

family farming operations dependent on FSA credit are more likely to reach their term limits. 

Policy Options 

This study and the prior two annual studies of the impacts of term limits have not provided 

notable evidence that the term-limit provision is having an adverse impact on borrowers. While 

the number of borrowers affected has been increasing, term-limited borrowers represent only 7 

percent of total DOL borrowers. Over 90 percent of term-limited borrowers still living are still 

active in farming and those remaining in FSA's portfolio have not been forced to downsize. This 

has been a consequence of three factors: the high level of FSA targeting as required by statute; a 

focus on lending to smaller farms; and, until recently, the strength of the farm economy. 

The high share ofDOL funds that are targeted to beginning and SDA farmers have made term 

limits somewhat irrelevant. In recent years, most borrowers reaching term limits received their 

last loan while still a beginning farmer, a status for which they are unlikely to qualify in 

subsequent years. With the high level of targeting, the burden of term limits falls on those who 

are not ( or no longer) eligible for waivers or exemptions--e.g., non-beginning producers. The 

focus on lending to beginning farmers is reflected in high shares of loans going to smaller farms. 

Despite ongoing farm consolidation, over one-third of direct loan funds have gone to farms with 

less than $100,000 in sales, which tend to use FSA as a temporary credit source. Loan size limits, 

targeting, and increased microloan lending mean that this will probably continue to be the case. 

The relatively strong farm economic conditions which prevailed through 2013 enhanced farm 

financial conditions, thus enabling a greater share of operators to obtain commercial credit. A 

continuation of low commodity prices and decreasing farm asset values could change this 

scenario. This becomes relevant among small- and mid-size family farms which, because of tight 

11 
profit margins and smaller scale, are especially vulnerable to a prolonged economic downturn. 

While FSA direct loans represent a minor overall source of credit to these family farms, there are 

sub-groups which are more reliant on FSA credit and could be adversely impacted-particularly 

small- and mid-size family farms operated by younger (but not beginning) farmers and those in 

'credit deserts.' 

Consequently, it will be necessary to continue to monitor both the financial health of the farm 

sector and FSA's portfolio quality to determine if, at some point, broader relief from term-limit 

restrictions may be required. One option is for beginning farmers to be granted an exemption 

rather than a waiver. Under current law, a beginning farmer counts all years of eligibility used 

until the borrower is no longer a beginning farmer. If the distinction is changed from waiver to 

exemption, a beginning farmer's 6 full years of eligibility would not begin until after they are no 

longer a beginning farmer. An exemption would enable young farmers, who have not yet 

developed sufficient financial strength to withstand adversity, to access FSA credit during 

periods of low commodity prices. Another option would be to provide the Secretary the authority 

to declare term-limit moratoriums in the event of a declared disaster or a period of low 

commodity prices. 

List of References and Suggested Readings 

Agricultural Act of 2014. Public Law 113-79. U.S Government Printing Office. Page 128. 

Stat.649-1005. 

Agricultural Credit Improvement Act of 1992. Public Law 102-554. US. Statues at Large 106 

(1992): 4142-4162. 

Bosworth, B.P., A.S. Carron, and E.H. Rhyne. The Economics of Federal Credit Programs, 

Washington, D.C.: The Brookings Institute (1987). 

Collender, R. N. and S. R. Koenig. "The Role of Federal Credit Programs," in Financing 

Agriculture into the Twenty-first Century, Duncan, M. and Stam, J., editors, Westview Press, 

Boulder CO (1998), pp. 135-162. 

Congressional Research Service, Government and Finance Division. Federal Credit Reform: 

Implementation of the Changed Budgetary Treatment of Direct Loans and Loan Guarantees, 

Report RL30346, June 24, 2008. 

Consolidated Farm and Rural Development Act (Con Act). Public Law 87-128. U.S. Statutes at 

Large. 75 (1961): 294-313. 

Dobbins, Craig and Kim Cook. Indiana Farmland Values and Cash Rents Continue Downward 

Adjustments, Purdue Agricultural Economics Report, August 2016. 

(https://ag.purdue.edu/agecon/Documents/P AER%20AUG UST%202016.pdi). 

Dodson, C.B. and B.L. Ahrendsen. 2016. "Beginning Farm Credit and the Farm Service 

Agency's Role." Choices. Quarter 2. ( http://www.choicesmagazine.org/choicesmagazine/ submitted-articles/beginning-fann-credi t-and-the-farm-service-agencys-role ). 

12 
Executive Office of the President, Office of Management and Budget. Analytical Perspectives, 

Budget of the United States Government, Fiscal 2018 (May 2017). 

Federal Farm Credit Banks Funding Corporation, 2016 Annual Information Statement of the 

Farm Credit System, (March 1, 2017). 

(https://www.farmcreditfunding.com/ftcb live/serve/public/pressre/finin/report.pdf?assetld=327 

167), 

Federal Reserve Bank of Chicago, Agletter, Number 1976, May 2017. 

(https://www.chicagofed.org/publications/agletter/2015-20l9/may-2017). 

Federal Reserve Bank of Kansas City, Ag Credit Survey: 1st Quarter 2017. 

(https:llww11·. kansascitr[ed.orglresearch/indicatorsdatalagcreditsurvevlarticles/2017/5-10-

2017 /regional-farm-sector-stress-intensifies). 

Federal Reserve Bank of Kansas City, Agricultural Finance Databook, JS1 Quarter 2017. 

(https://www.kansascityfed.org/en/research/indicatorsdata/agfinancedatabook/articles/2017 /04-

? 1-2017 /ag-finance-dbk-04-21-2017). 

Federal Reserve Bank of St. Louis, Agricultural Finance Monitor, 1st Quarter 2017. 

(https://files.stlouisfed.org/files/htdocs/publications/ag-finance/2017-05-11/2017-firstq uarter. pdf ) . 

Hoppe, Robert A., and James M. MacDonald. Updating the ERS Farm Typology, EIB-110, U.S. 

Department of Agriculture, Economic Research Service, April 2013. 

Iowa State University, Ag Decision Maker, 2016 Farmland Value Survey, File C2-70, December 

2016. (http://www.extension.iastate.edu/agdm/who1efarm/pdf/c2-70.pdf). 

Kusmin, Lorin, Rural America at a Glance, 2016 Edition, EIB-162, U.S. Department of 

Agriculture, Economic Research Service, November 2016. 

Nwoha, J., et al. Farm Service Agency Direct Loan Program Effectiveness Study, Arkansas 

Agricultural Experiment Station Research Report No. 977, Division of Agriculture, University of 

Arkansas System, Fayetteville (December 2005). 

University of Nebraska-Lincoln, Cornhusker Economics, 2017 Trends in Nebraska Farmland 

Markets: Declining Agricultural Land Values and Rental Rates, March 15, 2016. 

(http://agecon.unl.edu/comhusker-economics/2017/2017-trends-nebraska-farmland-markets ). 

U.S. Department of Agriculture, Economic Research Service. Agricultural Resource 

Management Survey ( ARMS). (https: //www. ers. usda. gov/ data-products/ arms-farm-financial-andcrop-production-practi ces/ documentation/). 

U.S. Department of Agriculture, Farm Service Agency, Farm Business Plan Data (USDA 1-

FLP, Exhibit 15). 

U.S. Department of Agriculture, Farm Service Agency, KCMO FOCUS GROG DATA. 

U.S. Department of Agriculture, Farm Service Agency, KCMO FOCUS OBFN DATA. 

13 
U.S. Department of Agriculture, Farm Service Agency, KCMO FOCUS PLAS DATA. 

U.S. Department of Agriculture, Farm Service Agency, KCMO FOCUS R540 DATA. 

U.S. Department of Agriculture, National Agricultural Statistics Service, 2012 Census of 

Agriculture, Volume 1, Geographic Area Series, Part 51. AC-12-A-51, May 2014. 

U.S. Department of Agriculture. FSA Handbook: Farm Loan Program General Program 

Administration. 1-FLP, Farm Service Agency, Washington, D.C. (2014). 

U.S. Department of Agriculture, Farm Service Agency. Monthly Management Summary (various 

months), FSA National Office, Washington, D.C. 

U.S. Department of Agriculture, National Agricultural Statistics Service. Land Values and Cash 

Rents, 2014 Summary, Sp. (04), (August 2014). 

U.S. Department of Agriculture, Economic Research Service, Farm Resource Regions, AIB-760, 

September 2000. 

U.S. Department of Agriculture, Economic Research Service, Credit in Rural America, AER749, 1997. 

U.S. Department of Agriculture, Economic Research Service, 2017 Farm Sector Balance Sheet. 

https://data.ers.usda.gov/reports.aspx?ID= 17835). 

U.S. Department of Agriculture, Economic Research Service, 2017 Farm Sector Income. 

Forecast, (https://WVvw.ers.usda.gov/topics/farm-economy/farm-sector-income-finances/farmsector-income-forecast/). 

U.S. Department of Agriculture, Farm Service Agency, Economic and Policy Analysis 

Staff, Report to Congress: Evaluating the Relative Cost Effectiveness of the Farm Service 

Agency's Farm Loan Programs. August 2006. 

U.S. Department of Agriculture, National Agricultural Statistics Service (NASS). 2012 Census 

of Agriculture, United States Summary and State Data, Vol. I, Geographic Area Series, June 

2014. 

14 
Appendix 1--Text of Legislation from Section 5104 of the Agricultural Act of 2014 

15