1. GROUPS BEING SERVED BY FSA DIRECT FARM LOAN PROGRAMS
1.6 Summary
The Farm Service Agency’s Direct Farm Loan pro- grams are designed to provide credit to farm borrow- ers unable to obtain credit from conventional sources at reasonable rates and terms. By setting eligibility guidelines at levels that screen out corporate and hobby type farms, federal legislation attempts to channel FSA program funds for use by family farms. In addition, a portion of direct loan allocations are specifically reserved for socially disadvantaged and beginning farmer applicants.
By most measures, FSA targeting of family farms appears successful. A majority (78–92 percent) of new FSA Direct Loan assistance in FY 2000–2003 was received by small family farms where “small” refers to farms with less than $250,000 in sales. Loan lending caps and the FSA criteria for family farms are assumed to be the primary mechanisms that exclude larger, financially stressed borrowers. In general, FSA borrowers are in a weaker financial position than non-FSA borrower farms by virtue of much higher debt-to-asset ratios and lower current ratios. FSA borrowers have higher mean income than the non- FSA recipients, but the difference is not statistically significant. FSA recipients have significantly higher government payments, fixed expenses and liabilities relative to non-FSA recipients. The mean farm equi- ty of loan recipients is lower than that of the non- recipients and the difference between old recipients and non-recipients is statistically significant. Farm
assets are not statistically different between FSA recipients and non-FSA recipients.
The 50-state average penetration rates for all loans combined (OL, FO, and EM) is 3.66 percent where penetration is the percentage of unique borrowers originating a new loan during FY 2000–2003 as dis- tinct from the set of all eligible farmers. Penetration rates measured at the state level run from 0.44 per- cent to 21.48 percent with the bulk of the states hav- ing rates less than 8.00 percent. This level of penetra- tion may seem low at first glance. However, the ARMS data indicate that about five times as many farmers hold FSA loans in a given year compared with only those obtaining new loans. Thus a higher percentage (the initial percentage plus four times the initial percentage) of farmers are FSA loan recipients than are indicated by the penetration ratios. Given that FSA provides less than 4 percent of the agricul- tural credit in the United States and FSA credit tends to be targeted to smaller family farms, it should not be surprising that over 18 percent of indebted non- hobby farmers and beginning farmers use FSA loans. Given that these recipients are typically financially stressed, FSA activities are servicing appropriate clientele.
FSA targeting of SDA borrowers has almost surely resulted in this group as a whole obtaining more credit than they would otherwise likely have obtained from FSA without targeting. National penetration of all direct loans (OL, FO, and EM loans) into the fam- ily farm market is 3.66 percent while the same figure for the SDA market is 4.62 percent. Despite the seemingly low penetration figures, 13.66 percent of FSA OL and FO borrowers are SDAs. SDA borrowers represent 13.45 percent of the total OL borrowers and 17.85 percent of the total FO borrowers. Recall that 35 percent and 70 percent of OL and FO allocations are targeted to beginning farmers, thus restricting the allocations available to non-BF including those SDAs who also are not beginning farmers.
SDA farmers tend to be geographically concentrated in specific areas of the country. This pattern mani- fests itself in the maps illustrating the proportion of all loans made to SDA borrowers. Financially, farm- ers classified as FSA-eligible SDA farmers on the con- dition of race appear to be similar to non-SDA farm- ers but with significantly lower government pay- ments and debt-to-asset ratios. These differences could be explained by the fact that SDA race farmers tend to be concentrated regionally, whereas non-SDA farmers are distributed much more uniformly across the nation. Types of agriculture vary regionally, and certain types of agriculture may not qualify for as many government payments and may require more solvency than other types of agriculture. Farmers classified as FSA-eligible SDA borrowers on the con- dition of gender are substantially smaller in size than FSA-eligible non-SDA operators as indicated by the significantly lower gross cash income, and less gov- ernment payments, cash expenses, net income, farm assets, liabilities, and farm equity. However, they have higher solvency relative to non-SDA farmers. But, the differences in liquidity, repayment capacity, and financial efficiency between the two groups are not statistically significant.
FSA targeting of beginning farmers has resulted in this group receiving 42 percent of the OL loans, 39 percent of the OL principal, 68 percent of the FO loans, and 73 percent of the FO principal. This is consistent with legal mandates that require 35 per- cent of initial OL allocations and 70 percent of initial FO allocations to beginning farmers. Nationally, the penetration into the BF, OL, and FO markets com- bined is 3.16 percent while the corresponding figure for the overall family farm market is 3.37 percent. The difference in penetration is due to a great extent to the large number of eligible farms that are classi- fied as beginning farmers in the penetration denom- inator and to a lesser extent to the two different data sources used for the penetration numerators. In terms of percentage of FSA loans made to BFs, three quarters of the states in the lower 48 make more than
35 percent of their OL and FO loans to BF borrowers. The percentage of loans made to BFs is especially high in the FO market, with an average of 68 percent of all FO loans originated to beginning farmers. Forty-six of the 50 states made 50 percent or more of their FO loans to BF borrowers.
As a group, FSA-eligible BF farmers have significant- ly less gross cash income, government payments, cash expenses, net farm income, assets, liabilities, and equity than the average non-BF farm operator. There are no statistically significant differences in solvency, repayment capacity and financial efficiency between the two groups. Beginning farmers appear to have limited financial resources and therefore are likely to be rejected by providers of conventional credit. While the inability to obtain conventional credit is one criterion for receiving direct loans, credit worthi- ness is also required by the FSA. In general the BF farmers have little experience and have not proven their ability to repay loans, so it should not be sur- prising that penetration into this market would be lower without added mandates. But the numbers of loans made are controlled by the percentages of the allocations to these groups and the eligibility criteria used to qualify beginning farmers.
While ARMS provides a rich set of data, the sample size makes certain estimates problematic. The 2002 Census of Agriculture data are used to define FSA eli- gible populations more specifically, making it possi- ble to count relatively small populations like women and racial/ethnic categories more precisely. Our description of current FSA loan recipients’ financial characteristics is enhanced by using FSA Farm and Home Plan data but somewhat hindered by the incomplete nature of this dataset and the lack of cor- responding data for non-recipients. Hence reliance on ARMS data for estimating characteristics of non- recipients will continue so that effective comparisons can be made between recipients and non-recipients.
Within the scope of the analysis presented in this report, it appears FSA is serving its intended clientele. The effectiveness of FSA loan programs is further pursued in the following sections by investigating graduation rates and assessing whether default costs can be lowered. The borrowers receiving direct OL and FO loans are financially stressed on average com- pared with other farms that meet the general FSA cri- teria for loan eligibility. Thus the current FSA lend- ing patterns in terms of serving targeted borrowers are consistent with the goals of the direct farm loan program. Greater coverage could undoubtedly be achieved with increased allocations, but the issue of allocation levels is beyond the scope of this study.