Case Study: Finding the Right Financing for a Young and Beginning Farmer

Austin Johnson was born to be a farmer. Growing up on a diversified crop and livestock operation, he has always loved riding in machinery and helping turn cattle loose into new paddocks full of fresh grass. His parents cannot recall a single time Austin complained when having to venture into the frigid winter weather to help open a frozen watering station as the cold winds whipped around him.

It has been Austin’s life-long goal to take over and continue his family’s legacy as a fifth-generation farmer. He has prepared himself well by attending college and earning an agribusiness management degree. He followed the advice of his professors and participated in multiple internships during his time away from the farm. This experience opened a door for Austin to work at a seed dealership in a town near his family home while he waits for his chance to return.

An Opportunity Arises

Situated next to Austin’s family farm is his uncle Troy. Austin’s dad and his older brother Troy have farmed separately for much of their lives but have shared equipment on occasion. Troy never married and has no children.

One day Austin’s phone started to ring. It was Troy calling.

“Austin, I know you’re looking to farm,” said his uncle. “My body is telling me it’s time to step away. I’d like to give you first chance at my land.”

A thrill of excitement jolted through Austin. “Thank you, Troy!” Austin enthusiastically said. “What did you have in mind?”

“Well, based on recent land sales I think I could get $5,000 per acre if I put it on the market,” said Troy. “I’d like to get at least $3,500 per acre if you are interested in buying it today. I would also be open to renting it to you, but I plan to have it sold in the next five years.”

Austin thanked his uncle again and told him he’d think it over. After the initial excitement passed, his mind started to consider his situation. “How am I going to make this financially work,” he thought?

Looking for Direction

Even with a discount, Austin is looking at a large purchase. Troy owns 200 acres with roughly half being

better suited for pasture. At $3,500 an acre, Austin would need to lean heavily on financing.

At a family meeting, his parents state they want him to take over someday, but they plan to continue farming for another 10 years. This offer would also require Austin to maintain an off-the-farm job for the foreseeable future. However, the opportunity to buy land next to their farm may only occur once in a generation. If Austin rents or purchases his uncle’s land, he plans to run cattle on the pastureland while planting the rest in row crops.

The Johnson’s are long-time Farm Credit customers, and decide they need to consult with a lender to consider options and position Austin for success.

Options for Austin

Written by: Wyatt Wardner, VP Loan Officer

What a great opportunity for Austin to start pursuing his dream of farming. It can be very intimidating on what to do or how to get started. It is important to bring in a trusted advisor that can lead you in the right direction or provide an alternative perspective on different options. AgCountry wants to be your trusted advisor and help the next generation of farmers succeed.

For Austin, there are many moving pieces and considerations to keep in mind as he considers the opportunity. First, we need to start with a business plan and set goals. In creating a business plan, it is very important to make sure everyone included in your plan is on board and knows what the goals are. The short term goal for Austin is to take over his Uncle Troy’s operation and the long-term goal is to have Austin take over his parents’ farm. It can be easy to put on the blinders for long-term goals to make the short-term goals work, but it is important to keep everything in consideration when making an investment like this.

There are many paths Austin can take to reach these goals, but what is most feasible to set him up for long-term success? Austin has a goal of taking over Troy’s farm, but Troy also has a goal to have it sold in the next five years and that needs to be considered as well. It might make sense to rent the land for a few years and then purchase it in five years. It could also make sense to purchase it all right now. Or he could rent part of the land and buy the rest right now. Having a good, well communicated plan with his Uncle Troy can set both up for accomplishing their goals.

Another thing to consider is that Austin’s parents will be farming for another 10 years but eventually want Austin to take over the farm. Is there a way for Austin to start transitioning into their farm over the next few years? This could allow time for Austin to get established while allowing his parents to efficiently exit the operation. This also could help Austin in the short term take over Troy’s operation.

For example, say the best option was to rent the 100 acres of pasture ground and purchase the 100 acres of cropland. Austin could collaborate with his parents and put cattle on the 100 acres of pasture and then purchase the 100 acres of cropland for $350,000 ($3,500 per acre x 100 acres). AgCountry could partner with the Farm Service Agency (FSA) using their Beginning Farmer Down Payment program. This program offers flexible terms with lower rates and only a 5% down payment requirement. AgCountry would lend 50% of the purchase, or $175,000, over 30 years at current rates. FSA would lend 45% of the purchase, or $157,500, over 20 years at their current rate. Austin would then put 5% down, or $17,500. This program allows for 95% financing, which is very beneficial to beginning farmers. Along with setting up the real estate loan, Austin could open an operating loan to help manage cash flow throughout the year and potentially secure a term loan to purchase cattle or equipment if it fits into the business plan and cash flow.

This is one example of the many options AgCountry can provide to young or beginning farmers looking to get their start in agriculture. No two operations or situations are the same. AgCountry is agile when working with young and beginning farmers to understand their goals, operations, and credit needs.