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USDA's Farm Service Agency can assist farmers with their financial plan

WILLMAR -- Spring planting may be several months away, but farmers are already making preparations for the 2012 growing season. Part of those preparations may include putting together a financial plan with a lender.

Farming today is much like operating a business in town. Profit margins are small; large sums of money are often invested in machinery, facilities and labor; competition is fierce; and effective management of assets and capital can be critical to the success or failure of the farming operation.

Many farmers today may borrow $100,000 to $500,000 or more to cover their annual short-term crop and livestock expenses.

Input costs for farmers have risen dramatically in recent years, much of which is directly or indirectly the result of the increased cost of energy. And because of those higher input costs, farmers may need additional capital to cover their annual operating expenses.

Farmers who are unable to obtain adequate private or commercial credit for farming purposes should remember that local Farm Service Agency offices offer several lending programs that may assist farmers with their financing needs. In addition, the agency will provide free supervised credit counseling for farmers that qualify for financing.

Local Farm Service Agency offices have funds for direct or guaranteed operating loans. The agency also reserves funds that are specifically devoted to beginning farmers, minorities and women.

The interest rates on loans are typically lower than commercial rates. However, the agency does not intend to take business away from private and commercial lenders. Therefore, Farm Service Agency offices will only provide financing to farmers who are unable to obtain private or commercial credit, including loans with commercial lenders that are guaranteed by the agency.

Direct farm operating loans may be used to buy items needed to operate a farm. Those items may include livestock, livestock feed, seed, fuel, chemicals, fertilizer, insurance and other operating expenses.

Direct operating loans can also be used to buy machinery, equipment, breeding livestock, pay for minor building improvements, or to refinance existing debts.

The interest rate on direct loans is a fixed rate that reflects the rate in effect at the time of loan approval or loan closing, whichever is lower. During the month of February, the direct operating loan interest rate is 1.375 percent.

The direct operating loan limit is $300,000. Repayment terms will vary according to loan purposes and the availability of loan security.

Annual operating loans have a one-year term, with up to a seven-year term for breeding livestock and equipment loans.

To qualify for a direct loan, the applicant must have sufficient ability to repay the loan, while also pledging enough collateral to fully secure the loan.

In addition to direct loans, the Farm Service Agency offers several guaranteed loan programs. With a guaranteed loan, the agency can guarantee up to 90 percent of a loan issued by a commercial lender. However, all loans must meet specific eligibility criteria to qualify for the guaranteed loan program.

Latest farm household income data released by USDA

The latest data provided by the U.S. Department of Agriculture's Economic Research Service indicate that median total farm household income was $54,162 in 2010, up 3.7 percent from 2009 and 0.8 percent above the 5-year average for 2006-10.

In comparison, mean or average farm household income was $84,440 in 2010, up 9.4 percent from 2009. However, the rather significant difference between the median and mean income levels can be explained by understanding the way that the two statistical comparisons were derived.

Median income is defined as the income level at which half of all households have lower incomes, and half have higher incomes. Because households with exceptionally high or low income affect median income less than mean income, the median value is considered a more accurate reflection of the tendencies in the farm household population.

The latest report on farm household income again confirms the importance of off-farm income. The median farm operator household consistently incurs a net loss from farming activities, which means that most farm operator households rely on off-farm income to support them.

Of the total off-farm income earned by farm operator households, the majority comes from wages and salaries, followed by income from social security, and nonfarm businesses.

The report also highlights the impact that farm size has, not only on farm household income, but also on the household's reliance on off-farm income sources.

In 2010, 60 percent of family farms had gross sales of less than $10,000. These very small farms had negative average farm incomes, typically receiving all of their household income from off-farm sources. They received more than $75,000 of income from off-farm sources in 2010, which is generally more than family farm households operating larger farms received.

Family farms with gross sales of $10,000 to $249,999 represented 30 percent of the family farms in 2010. Though still considered to be small farms, the households operating these farms earned, on average, positive returns from their operations and earned less from off-farm sources compared to households operating the very smallest farms. The household income of farms within this gross sales category averaged $78,716 in 2010.

Only 10 percent of family farms in 2010 were considered commercial farms with gross sales of $250,000 or more. While receiving less in off-farm income than small farms, commercial family farms earned significantly more on the farms they operated. As a result, they had average household incomes of $185,098 in 2010, more than twice that of smaller farms.

Wes Nelson is executive director of the USDA Farm Service Agency in Kandiyohi County.