Saving family farms by funding organic farmers
Organic producers' paperwork savvy and success rate drive the USDA's Farm Service Agency Loan Program to offer funds for what bankers consider "high-risk" ventures.

By Harriet Behar

Amish neighbors help build a farm shed/living space on One Sun Farm funded by the Farm Service Agency Loan Program.

July 13, 2006: Just as organic farming is becoming more recognized in the marketplace, various USDA agencies have not only accepted the practices but are responding with actual enthusiasm. The Farm Service Agency (FSA) Loan Program officers have worked successfully with farmers in many areas of the United States to provide financing for a wide variety of organic operations.

Joe Reuter of the Vernon County FSA loan office in southwestern Wisconsin has found organic producers to be “fantastic” candidates for this loan program, giving not only one loan but, many times, subsequent loans before the first loan has been paid off if the operation is on target with the business plan. Numerous loans have been given to organic egg, beef, dairy, food processing and vegetable operations with the relationship benefiting both Joe and the producers. Joe visits the farms periodically to make sure construction projects and other activities are on track and the local farmers' market almost every week to chat with and buy from the farmers.

While many farmers have off-farm jobs to support their on-farm enterprises, some have taken a different route. They've left their jobs and gotten low-interest fixed-rate loans from the FSA so they can put all their energy and time into making their farms a lucrative business.

“Everyone thought I was nuts to leave my 'good job',” says Erin Varney. But with the FSA loans the Varney's landed, neither Erin, her husband nor her brother-in-law need to split their time between on-farm and off-farm work.

“Everyone thought I was nuts to leave my 'good job',” stated Erin Varney of One Sun Farm. She could see that it would be many years of part-time work to develop the 5 acre produce farm and bakery that she, her husband Dave, brother-in-law Adam and farm intern Jillian wanted to make a viable business. All four work full-time on the farm now, using two loans totaling more than $150,000 for both capital improvements and operating costs.

Erin says their family life has also been greatly improved—she and Dave are home with their kids and don't have to divide attention between off-farm and on-farm work.

The Varneys attended a seminar a few years ago with the Land Stewardship Project (www.landstewardshipproject.org) in Minnesota where they learned how to write a realistic farm business plan. They also had experience with the documentation needed to be a certified organic operation, so when they walked into the FSA loan office and asked about financing, the amount of paperwork was not a surprise. Although Erin estimates their FSA file is more than 10 inches thick, FSA loan officers have found that organic farmers typically already have very good records, making the loan process go smoothly.

The Varneys own a total of 35 acres of land with approximately 5 tillable acres. They wanted to build an on-farm bakery where they could make pizzas using the vegetables they grow and meats from the hogs and cows they raise, and where they could sell jams, honey and maple syrup from their fruits, beehives and maple trees. The first loan they received in 2005 helped them consolidate their credit card debt that had accrued from running their produce operation and remodeling their home for the small bakery.

As more and more family-sized farms disappear from our landscape, the FSA has found organic production to be one of the few areas of growth and success.

Woodstoves are located in an insulated room adjoining the kitchen area of the bakery so they can gain the benefits of wood-fired baked products and still be able to work comfortably in the kitchen. The Varneys, using the One Sun Farm brand name, originally started making breads as well as pizzas but found the bread was too “temperamental” in the humid summers of Wisconsin. Pizzas were also a higher value product which could be frozen for storage pre-sale. Large insulated coolers could hold many frozen pizzas when they attend two local farmers’ markets each week and make their deliveries to both mainstream supermarkets and natural food coops. Cookies and other sweet treats are also baked on a weekly basis. While the farm and bakery operations are not certified organic, the pizza ingredients are all organically grown or raised, and having direct contact with their customers has allowed the Varneys to continue getting a premium without using the word “organic” on their products.

Adam works on pizzas in One Sun Farm's bakery. This value-added product is sold both on the farm, direct to customers at market and through local grocery stores.

After a year, the Varneys went back to Joe at the FSA loan office and said, “We have created a really good business, but are still constrained by our lack of infrastructure. Can we get another loan?” In 2006 they received their second loan, this time to remodel some of their home by putting on a second story as well as adding on retail space. This will help them recover some of the living space they lost when they turned part of the house into the bakery, and give them more on-farm marketing options. A new produce shed was being finished by an Amish crew the day I visited One Sun Farm, built to meet the specific needs of a small CSA with enough space to effectively dry the large plantings of garlic. FSA was also financing a small cabin with living space upstairs for farm partner Adam and intern Jillian, and tractor/farm equipment storage downstairs.

Erin found the FSA folks “very helpful” throughout the process. If they were stuck or were having trouble understanding what was needed, Joe was there to answer questions and make suggestions. FSA does not want to compete with private loan institutions so the Varneys needed to show they could not get private financing from at least three other institutions. FSA loans are typically 2 points under the local bank interest rates, and the Varneys make one annual payment on December 31st each year. The loans are amortized for 40 years and have no penalty for prepayment. Each county may have slightly different rules and availability of funds.

Beginning records

Three years of business records were required to illustrate the Varneys had the experience and track record to run a business and handle their expanded capabilities. Tax records, spreadsheets with assets and liabilities, income and debts from the past as well as projected income for the coming years based on increased income generated by the improvements made possible by the loans were submitted.

Erin stated that “no banks would touch them” since they had a pre-existing mortgage on their farm and very little free and clear collateral. Most banks do not like to fund what appear to be “start-up” operations, whereas the FSA is interested in aiding smaller farmers maintain and diversify their operations. The loan agency does watch the expenditures very closely and cuts checks to the Varneys based on receipts for farm expenses. Receipts must clearly detail purchases that meet the described items in the business plan.

The better producers can explain organic requirements to the loan officer, the better chance they have of receiving funding for items that may be different from traditional farm needs.

An 18-page “Producer’s Guide to FSA Loan Programs” is available from local county FSA offices. The various loan categories are clearly described and include capital improvements as well as operating loans for both new and experienced farmers. Eligibility, loan sizes, down-payment requirements for land purchases and emergency loans are all explained in this brochure. Two farms are highlighted as success stories—one of them is an organic orange orchard in California. For information on-line, go to www.fsa.usda.gov/pas.

Explaining organic rules

Organic producers may have a few extra challenges in obtaining loans since there are specific organic requirements that may not be understood by the FSA loan officers. One operation in Wisconsin was unable to convince the local FSA office to include the cost of a large predator fence for the mid-sized organic egg operation. However, once it was clearly explained to the FSA that organic poultry must have outside access in order to achieve the organic label and gain the organic premium in the marketplace, the funds were approved.

FSA agents look favorably on organic farming as a growing and successful option for farmily farmers and are, therefore, very keen on working with producers through loans and credit counseling.

While many FSA agents may not be familiar with organic regulations, they have heard of organic production and know there are rules that must be followed. The better producers can explain organic requirements and practices to the loan officer, the better chance they have of receiving funding for items that may be somewhat different from traditional farm needs.

While in the past FSA did not have a presence in the sustainable agriculture arena, they now attend many organic and sustainable agriculture conferences and are actively advertising their services. The FSA mission is to provide family farmers with loans to keep those farms viable. As more and more family-sized farms disappear from our landscape, the FSA has found organic production to be one of the few areas of growth and success. Many FSA loan officers view organic agriculture positively due to its proven track record of profitability. As “traditional” farms disappear, organic has become more important by default and FSA is seeking out organic producers to aid with loans and credit counseling. Expansion of produce farms to include livestock, purchase of land and equipment, support of Amish farms and other value-added businesses are all viewed favorably.

Producers looking for a loan must show they have the commitment, ingenuity, strength in their family unit and ambition to successfully complete their business plan. The FSA as lender takes a monetary risk with the producer and will assess both the viability of the plan as well as the applicant’s ability. Banks are also becoming more open to funding organic operations but the FSA loan program offers more “risky” operations the opportunity to find both funding and financial counseling when creating or improving their farm operation.

Harriet Behar is both an organic inspector and organic educator, working mostly in the Upper Midwest since the early 1990s. She and her husband also have a certified organic greenhouse, vegetable and herb farm in Gays Mills, Wisconsin.