USDA Offers Loans to Finance Diversified Ag Start-Ups

Phillip Jensen can vouch for the fact that relatively small USDA microloans can make a big difference to a fledging entrepreneur. On Prairie Whole Farm in western Iowa near the town of Ida Grove, Jensen checks on the growth of cash crops like tomatoes, eggplants, and peppers – all inside a 30×72-foot hoop house.

Soon these food crops will be transplanted to outdoor fields where customers of the Jensens' community supported agriculture (CSA) business will stop by to pick up their weekly goodies or arrange to have them delivered to their homes.

This $10,000 hooped structure, a kind of white opaque plastic greenhouse, is key to the operation and the result of a loan via the 3-year-old Farm Service Agency program that makes such loans (less than $50,000) for buildings, equipment, and even land for beginning farmers.

"To be able to finance something like this has helped us out a lot as far as cash flow," says Jensen. "It is a big deal."

Better still, the loan for the hoop house has been paid off. A second microloan has allowed Jensen and his wife, Missy, to purchase a used all-purpose tractor (a 1968 gas-powered John Deere 3020) used for tilling, spreading mulch, and grinding feed for hogs, among other jobs.

Hoop barns and heritage hogs

The Jensens moved back to the area in 2010 and began to use the farmstead of Missy's parents, including several old unused hog barns. In addition to growing produce, they now also raise a heritage breed of hogs known as Red Wattles. Most of the pigs are sold as feeders to other growers around the Midwest. Currently, the herd numbers about 200 and includes sows about to farrow, as well as feeders.

Employing at-risk teenage boys

Jensen, an ordained minister, says, "We started with no plan, but we soon found that we wanted to incorporate some urban ministry type of work in rural Iowa. What I wanted to do was incorporate a small-scale farm and ministry together."

The couple began employing at-risk teenage boys to work in their operation. After three years, the program transitioned to one where anyone interested could serve an apprenticeship at the farm – working and studying with the family.

The number of CSA customers of Prairie Whole Farm eventually increased to about 70 in 2015, but it is back down to 20 this year – by design. Servicing 70 customers, with deliveries up to an hour away, was taking its toll on Jensen at a time when the business for Red Wattles was growing.

Streamlining the process for small farm loans

The conventional model for agricultural lending "just doesn't fit a 5-acre CSA with 20 different crops," says Jim Radintz, the deputy administrator for farm loan programs at the Farm Service Agency. FSA officials determined they needed to streamline the process for these loans. It meant they didn't spend the same amount of time and effort vetting a $10,000 loan as one for $300,000.

"We had always made smaller loans," says Radintz. "The average loan was in the high-$50,000 range, but part of our charge is to finance smaller start-ups."

The microloan program began in January 2013 and, thus far, the portfolio is performing well – better than FSA's portfolio as a whole, according to Radintz. For the 2014 fiscal year ending September 30, 2015, the microloan program had made 6,600 loans worth $161 million. That works out to an average loan size of $20,000. The average FSA loan overall is about $65,000, with a maximum loan of $300,000.

The microloan program for operating costs and equipment included $1.2 billion in funding for the 2015 fiscal year that ends in September. Radintz expects they will lend close to the total allocated this year. The term of repayment for the microloans varies. Production loans for feed, fertilizer, and other annual inputs are generally paid off in a year. Financing for assets like farm equipment or even livestock can be up to seven years.

New this year

New in 2016 are microloans for up to $50,000 for the purchase of real estate. As of June, that program had lent about $1 billion of the $1.5 billion allocated. "With a cap of $50,000 per loan, it would take quite a few more loans to get anywhere near using that additional funding," says Radintz.

Previously, FSA lending programs had become over-subscribed, and there was demand that exceeded the funding available, according to Radintz.

"People would wait months for funds to become available," he says. "That discourages demand, and people didn't want to wait a year to get loan-funded."

Radintz concedes that the old bureaucracy and delays haunt the system.

"It takes a while for that perception to change, but we are seeing growth," he says.

"We are seeing an uptick in noncommodity enterprises," says Radintz. "Operations will be growing some specialty products like produce or organic crops or will be raising organic livestock. Producers are looking to open new doors to take advantage of that demand."

Staying small for the time being

Certainly that is the case for the Jensens' Prairie Whole Farm. As 6-year-old son, Brooks, pets Red Wattle pigs dozing in the sun, across the road at another farm sit two large conventional confinement hog facilities. Jensen can't begin to pretend he could afford the capital necessary to get into that intensive livestock business.

For the time being, he's content to maintain a quality CSA while building the business for Red Wattle feeder pigs. The ability to sell their pork – or chickens or eggs – direct to consumers remains a distant possibility. Perhaps it is a dream that could be financed with a microloan.

A brief rundown on microloans

The USDA's operating microloan program in its first three years provided more than 16,800 low-interest loans totaling more than $373 million. The majority of those loans, 70%, have gone to new farmers.

The direct farm operating loans can be used for fencing, tools, hoop houses, bees and bee equipment, milking and pasteurization equipment, as well as livestock, seed, fertilizer, utilities, and rent.

In 2016, USDA added a micro-loan program for farm ownership. These loans can be used for making a down payment on a farm or a down payment for a farm ownership loan, for building or repairing farm buildings, for Soil and Water Conservation Service projects, or for joint financing. At the time this article was written in summer 2016, the interest rate for a direct farm operating microloan was 2.375%, while the rate for a farm ownership microloan was 3.5%. The rate for a farm ownership joint financing loan was 2.5%, while a farm ownership down payment loan rate was 1.5%.