Thursday, August 14, 2008

Buying a Farm is Like Buying a House

Okay, it isn't exactly like buying a house, but that is one of the ways that we looked at our farm purchase and it is probably the only way that we could make it possible. As most of you know we have made the jump to farming (I think we are still mid-jump) without any family land. Although we have been able to get our cattle herd together with my Dad's farm we won't be farming any of that land because on a consistent basis because of distance. So, if we are going to move towards full-time farming we knew we were going to need some sort of land base.

We realized that we had three basic options:
  1. Leave my job at the church and find a job near my Dad's so we could farm with him. That was an idea that we pursued for a while, but we really do feel called to this are for both our ministry and our farming.
  2. Buy a smaller acreage with an existing house and buildings. The reality is that if we did that we would be looking at 10 acres or less with 20 acres being the top possibility. While that would be enough for some operations we thought we would like more to begin with.
  3. Buy bare land and build as inexpensively as possible. Our idea with this one is that we will have a larger land base and then we can expand as money is available.
Of course we chose the third option and I think it was the best for us. But, as I mentioned the only way it was possible is because we considered or farm the same as a house. What I mean by this is that we knew that we would have to take out a mortgage no matter if we wanted to buy in town or in the country. What we would need to do is only buy within the limits of what we could expect to spend in town.

What that meant for us is that we would only buy something that my job would pay for, not something that would require farming income. That way when the farm took a little while to get going we would not be overly pinched. Yes, it meant some sacrifices and laying out a large down payment, but I think it is a practical way to get started ... which was our goal.

That is where the "buying a farm is like buying a house" analogy breaks down though. Because when you are buying a farm there is plenty of other infrastructure that needs to be put into place no matter how basic your operation is at the beginning and we have resolved to only pay cash for those things. If we started putting all of those farming expenses into a loan I think we would run into trouble.

Speaking of loans ... don't try to get some of those "beginning farmer" loans if you are a true beginning farmer. The ones we were pointed to all required three years of farm management experience or at least 50% of your income coming from the farm in the first year. But, the loan stuff is really a touch subject with me so I will just point you to my wife's blog because she has posted about the loan stuff in more detail (HERE ... HERE ... HERE ... HERE). The other day she also wrote down some of her thoughts on the money issue.


Rich said...

"...don't try to get some of those "beginning farmer" loans if you are a true beginning farmer..."

How deep did you look into the "Beginning Farmers and Ranchers Loans"? The 'at least 3 years but not more than 10 years' experience part is ridiculous, how can you have 3 years of valid experience operating a farm if you need the loan to start a farm? The other rules and regulations associated with this loan program seem just as contradictory, restrictive, and confusing.

But, after seeing a local TV news story a few years ago, about young farmers, I began to wonder if anybody was actually following the rules.

Supposedly, a 18 year old just out of High School had a burning desire to be a farmer and through the great programs available from our generous government was able to follow his dream. With the Beginning Farmers Loan Program, he was able to borrow the money to buy a quarter section of cropland in western Oklahoma.

Since he was an extremely ambitious individual and would also be attending college for the next 4 to 5 years, he planned to have the wheat planted by his father's and grandfather's large (as in thousands of acres) wheat growing operation. After the wheat pasture was established each fall, he was going to rent the wheat pasture to a stocker operation, followed by a grain harvest by custom wheat harvesters the following summer.

It was all just a happy coincidence that his extended family was also in the stocker cattle business and the custom harvesting business.

Keep in mind that this was an example put forward by the FSA to represent the "good works" being done by the Beginning Farmers Loan Program, in spite of the obvious flaws in the implementation.

Doing the job that the reporter should have done, I asked myself the following;

How does this qualify as a farm principally operated by the borrower?

How does an 18 year old gain three years of farm management experience?

Would the lease payments even come close to paying the loan payments on this land?

Wasn't this just a way for the father and grandfather to add to their land base with a reduced loan rate?

If this was the best example of the implementation of the Beginning Farmers Loan Program, what do the rest of the loan recipients look like?

On the other hand, if this type of "crooked" deal is commonplace and the rules aren't enforced as they are supposed to be, then it might be possible for an honest rule-abiding applicant to actually benefit from these types of loans to buy land.

One of the benefits that I recognize in the loan program is the opportunity for Applicants to buy FSA Inventory Farmland at appraised value, if "appraised value" is reasonable and/or significantly lower than normal, it is possible that this might be an affordable option to purchase land regardless of the loan conditions. This seemed to be the main reason the 18-year old had been able to purchase this cropland, it was probably a "bargain" because it was FSA Inventory Farmland and had a lower appraisal value than comparable privately held land, and as a Beginning Farmer Loan applicant, he had an option to purchase it before anyone else.

Yeoman said...

"The 'at least 3 years but not more than 10 years' experience part is ridiculous, how can you have 3 years of valid experience operating a farm if you need the loan to start a farm?"

Actually, in certain parts of the country that is, or was, fairly easy to fulfill. There's a lot of operators who have leased ground, or worked for family operations, or even other people's operations, who meet that criteria.

That element is designed to prevent immediate failure. At least in ranching country, I've seen quite a few examples of people with no ranching experience, who come into a bundle of money, buy a place, and fail nearly immediately.

My view on loans is a bit different. I have had them, and have always had them, while building up my heard. A person needs to be careful about loans, but in ranch country, it would be impossible to start a herd without loans for most people. And I've known at least one really large rancher who started off all on loans.

Part of that has to do with stocking requirements, I'd note. As a successful operation here will ultimately require more cattle than elsewhere, with land payments of one kind or another being a constant, it would be a very rare person who could get started without loans. This has been the case here for at least 70 years. I'm not saying that's good or bad, but it simply is. And done correctly, it is not as much of a burden as a person might think, as long as they have some steady source of income. It would be difficult if the agriculture operation was a start up, and a persons only source of income. But then you likely would not qualify for the loan.

Yeoman said...

"How does an 18 year old gain three years of farm management experience?"

Not many could, but in my wife's family, probably ever kid had owned cattle in their own name, and actually worked them, for that amount of time by the time they were 18.

I've separated this out because I've often wished that when I was 18 (or 17 actually, as that's the age I was when I graduated high school), I'd thought of taking all the money that college ultimately required and sunk it into cows. It would have been a hard start, but if I had, I'd be a full time stockman by now.

Oh well.

Rich said...

"...My view on loans is a bit different...A person needs to be careful about loans, but in ranch country, it would be impossible to start a herd without loans for most people..."

I see the need for loans for the beginning farmer/rancher, but I didn't like the way the system seemed to be abused in the story I recounted.

The 'being careful about loans' part is the important part, what is your definition of 'being careful' and 'done correctly'?

If the loan was structured correctly, I see little risk in borrowing money to buy something like bred heifers or bred cows (the calves should easily start to cover the borrowed amount), but the short-term stocker-type loans seem much more riskier to me.

Yeoman said...

Rich, I agree. I wouldn't get a loan for short term stockers.

Indeed, I've generally bought cattle, even though I often have loans, from cash made from calf sales. That's why my heard increases so slowly. If I can avoid a loan, I do.

The Beginning Farmer's Wife said...

I tried my best to get the beginning farmer loan. It's a great deal. We just couldn't qualify for the 3 years in any way, which was the only hang up. They are pretty lenient about their 3 years of management though.

You just have to be involved "somehow" in making management or financial decisions for an operation. We had a year under our belt since we were keeping cattle at Ethan's dad's, but there was no way we could count that as 3 years. It seems from talking with them, however, that if you were involved with farming with 4-H or FFA and making some type of decisions on your own while doing that, it would have counted.

Maybe I should have brought up when I raised chickens in 4-H. I kept really good records and even took them to fair. Didn't even think about it until now . . . Who knows. It might have counted. Oh well.

Rich said...

Can't you apply in the future for a beginning farmer loan during that 3 to 10 year period? Depending on how the beginning farmer loan and any existing loans are structured, it could be an advantage to move or combine existing loans into a more favorable beginning farmer loan in the future.

The Beginning Farmer's Wife said...

Great idea, and one I actually asked about. :) I was told that the beginning farmer loan can't be used to refinance an existing loan. It has to be a completely new, original loan.

So . . . if we wanted to sell our property, pay off the loan, and then buy a new property in 2 years we could use the beginning farmer loan for that one. But since we had to get started on our own without it and take out a loan from a different bank, we are no longer qualified for their loan on that property.

I completely understand that they have the 3 year period to keep many people from getting in dept to failure, but it sure makes it hard to truly be a beginning farmer. If it wasn't for the farm bureau rural loan program that we found right before giving up, I honestly don't know if we could have gotten this financed. (Well . . . we could have with ballooning loans, but we didn't want to go that route and wouldn't have.)

Here's the farm bureau link if you are interested:

The Beginning Farmer's Wife said...

p.s. We actually got the bare land/lot loan from farm bureau. Somehow we got a 30 year fixed, but I see they have it listed at 25 year fixed. Don't know if they changed it and we got in at the right time . . .?

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