Nurturing Agricultural Businesses ESLC Conference, November 2014 Stephen McHenry, Executive Director

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1 Nurturing Agricultural Businesses ESLC Conference, November 2014 Stephen McHenry, Executive Director

2 Is an Ag Development Financial Intermediary Organization Serving All of Maryland With a focus on: - Farming - Forestry - Seafood - Aquaculture

3 Commercial Banks & Farm Credit System State Agencies (MDA, DNR, DBED, MCE, MEA, RMC) USDA (and other Federal Agencies) Rural regional development councils Local economic development offices Farm and commodity groups Rural industry associations MD Ag Land Preservation Foundation Foundations and local land trusts

4 Ag and resource-based industry is important to all of Maryland More than just economics: Every Marylander needs to have adequate food (and shelter, water, energy, etc.) most of which is provided from resources from rural areas. Average age of Maryland food and fiber producers is nearly 60 years old.

5 Half the State s land area is privately owned rural land (3 million acres +) Ag/RBI important to culture, heritage, tourism and quality of life. Resource-based industries underpin the economies of many rural counties. * Especially in Western Maryland and the Eastern Shore (one-third of economy).

6 Access to affordable credit and capital Information/referral/ business planning Availability & affordability of farmland Help for young/beginning/ diversifying farmers (and watermen)

7 Help for young, beginning, and diversifying farm operators is available from a number of sources including: Training, guidance, business counseling: University of Maryland Extension (UME) Future Harvest & SMADC Access to money (capital and credit): USDA - Farm Service Agency Farm Credit and MARBIDCO

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9 Collaborative grant project funded through USDA- NIFA Beginning Farmer and Rancher Program 3 year project with total funding of $676,000 Goal: Increase the number of successful beginning farmers and acreage farmed by them in Maryland, with an emphasis on practical training for beginning farmers, including new underserved, limited resource, socially disadvantaged, minority and ethnic as well as "explorer" farmers interested in learning to farm.

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11 Beginning farmers will be able to explore farming options, understand the components of a successful farm operation, and make decisions about what enterprises best fit their interest.

12 Beginning farmers will be able to further refine their farm interest, understand the requirements and strategies of different farm enterprises and begin developing plans for assessing resources needed to implement a farm plan.

13 Beginning farmers will acquire the skills necessary to develop specific farm production and business plans and obtain needed resources to begin a farm enterprise.

14 Beginning farmers will implement farm plans, start agricultural enterprises and continue as successful beginning farmers.

15 Web Resources Educational Workshops One on One Coaching Land Linking Farm Mentoring On Farm Apprenticeships

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17 Regulated Private Commercial Lenders: Community & Regional Banks Farm Credit Associations Banks and ACAs must meet fairly strict credit, capital and collateral underwriting standards Public Sector Econ. Development Lenders: USDA Farm Service Agency MARBIDCO County Revolving Loan Funds, etc. Underwriting standards help meet unmet needs

18 Created by U.S. Congress in 1916 to provide a dependable source of credit to agriculture MidAtlantic Farm Credit is 1 of 84 associations nationwide within the Farm Credit System Total System loan volume approaches $191 billion in loans to almost 500,000 member/ owners Nearly 1/3 of all U.S. agricultural credit needs are met by the Farm Credit System

19 Farm Credit Associations provide (as cooperatives): Real estate loans (land and improvements/facilities) Commercial loans (equipment, operating capital, etc.) Rural home mortgages (SMM and in-house) Financial services (crop insurance, appraisals, etc.) Specialize in young-beginning-small-minority loans New loan programs for New Generation farmers AgBiz Masters financial planning curriculum Active in advocacy for agriculture Start Right Program for Y/B/S/M Farmers

20 Diversified Portfolio (as of 12/31/13) Fruits & Vegetables 6% Livestock/ Animal 6% Nurseries/ Greenhouses 5% Equine 8% Dairy 9% Other 12% Landlords/ Lessors 10% Poultry 19% Cash Grain/ Crops 25%

21 The Farm Service Agency (FSA), is an agency within the United States Department of Agriculture (USDA). FSA s Farm Loan Programs (FLP) can provide credit to agricultural producers who are unable to obtain private, commercial credit. FSA places special emphasis on providing loans to beginning, minority and women farmers and ranchers.

22 If you are a farmer or rancher who is unable to obtain credit from another lender to start, purchase, sustain, or expand your family farm you may be able to get a loan through FSA s Farm Loan Programs. FSA has different types of loans depending on your current situation and what you need the loan for. FSA loan officers are available to answer your questions and to help with the application process.

23 Farm ownership, operating, and conservation loans are available under the Guaranteed Loan Program. Farm ownership, operating, emergency, and conservation loans are available under the Direct Loan Program. FSA offers two types of guarantees under the Land Contract Guarantee Program.

24 Farm Loan Programs Information Chart Type of Loan Maximum Loan Amount Rates and Terms Direct Farm Ownership $300,000 Term: Up to 40 years Interest rate: fixed** Direct Down Payment The lowest of the following: 45% of the farm or ranch purchase price 45% of the appraised value $500,000 Term: Up to 20 years Interest rate: fixed** Direct Operating $300,000 Term: 1 to 7 years Interest rate: fixed: ** Direct Emergency The lowest of the following: 100% of actual or physical losses $500,000 Term: 1 to 7 years (possibly up to 20 years) for non-real estate purposes Up to 40 years for physical losses on real estate Interest rate: fixed** Guaranteed Farm Ownership The maximum loan amount is adjusted annually for inflation* Term: Up to 40 years The interest rate is negotiated by you and your lender.

25 Farm Loan Programs Information Chart Continued Guaranteed Operating The maximum loan amount is adjusted annually for inflation* Term: 1 to 7 years The interest rate is negotiated by you and your lender. Guaranteed Conservation The maximum loan amount is adjusted annually for inflation* Term: Up to 20 years The interest rate is negotiated by you and your lender. Land Contract Guarantee A maximum purchase price of $500,000 on a new land contract Term: Contract payments must be amortized for a minimum of 20 years with equal payments during the term of the guarantee. The guarantee period is 10 years. Youth Loan $5,000 Term: 1 to 7 years Interest rate: fixed: ** * To determine the maximum loan limit for the current year, please check with your local FSA loan officer at or our website at ** Direct loan interest rates are adjusted monthly and are posted online at and at your local FSA office.

26 The Farm Service Agency (FSA) developed the Microloan (ML) program to better serve the unique financial operating needs of beginning, niche and the smallest of family farm operations. Examples might include: direct marketing to restaurants and grocery stores, organic production, community supported agriculture (CSA s) and farmers markets.

27 MARBIDCO Offers 8 Lending Programs today 5 of the loan programs are offered using MARBIDCO resources these loans require collateral security 3 other loan programs are for special purchases and involve a higher level of credit risk (unsecured lending) The workhorse program is the Maryland Resource- Based Industry Financing Fund Loan (MRBIFF) NOTE: All loans reviewed and approved by a loan review committee.

28 Offers low-interest (3.25% APR initially) loans for the purchase of land and capital equipment. Maximum Loan Amount - $200,000 ($400,000 for land purchase & $600,000 for a major project). Financial commitment: A commercial lender and/or a public instrumentality must have an equal commitment in the project. MARBIDCO will accept a junior lien position in most situations.

29 Complements the financial services offered by commercial lenders by helping to make rural business gap financing both available and affordable. Flexible loan terms to match and enhance commercial lender offerings.

30 Rural Business Equipment & Working Capital Loan Maryland Vineyard Planting Loan Fund Forestry Equipment and Working Capital Loan Fund Rural Business Energy Efficiency Improvement Loan Maryland Shellfish Aquaculture Financing Fund Maryland Remote Setting Aquaculture Financing Fund Agricultural Cooperatives Equity Investment Fund

31 Small grant incentive program offerings in 2015: Local Government Ag/RBI Project Cost Share Program Maryland Value Added Producer Grants (USDA Matching & Capital Assets Option?) NEW: Urban Ag Commercial Lending Incentive Grants (in municipalities)

32 Since 2007, MARBIDCO has made investments in 295 agricultural and rural businesses totaling over $25.5 million. Partnered with 16 banks and 4 local government revolving loan funds, with a leverage of $50+ million in bank financing (nearly a 3 to 1 ratio). Helped 140 young or beginning farmers. Helped to finance 104 farm value added processing projects.

33 Please visit us on the web

34 Introduction to Rural Business Lending

35 Commercial lending considerations: Underwriting business loans involves a more sophisticated review and analysis than consumer lending does. Small businesses, and especially new business ventures, are often higher risk enterprises for banks to lend to because of the higher probability of business failure. Again, the level of credit risk is reflected in the interest rates that lenders charge: Secured loans (for real estate and equipment purchases) the interest rate tends to be lower Unsecured loans (only small loans for operating expenses w/ established borrowers) rates higher?

36 Commercial Lending requires an analysis of The 5 Cs of Credit 1 - Character 2 Capacity 3 Capital 4 Collateral 5 - Conditions

37 A word about two lending philosophies Asset-Based Lending: A philosophy of asset-based lending uses a less sophisticated analysis of the 5 C s and focuses more on just the adequacy of the collateral being available in the event of a loan default [and as such would tend to use a lower loan-to-value ratio and charge a higher rate of interest for the credit] Cash Flow Lending: A philosophy of cash flow lending incorporates a more sophisticated analysis of the 5 C s with a particular emphasis on the pro forma cash flow analysis. The availability of collateral is still important [but one can expect to see somewhat higher LTV ratios and lower interest rates potentially]

38 So, what are the first things that a farm borrower needs to apply for a loan? A Written Business Plan: Including background on the existing business (if applicable) and the experience of the owner, as well as many details on how the business expects to operate going forward, what the market is that is going to be served and the product sales strategy. A Pro Forma Cash Flow Analysis: Which would include not only a historical look at the revenues and expenses of an existing business enterprise (if applicable), but a forward-looking analysis of all business revenues and expenses for the next 3 to 5 years (on a period-by-period basis).

39 Product has incremental value realized by the producer as a result of: Change in physical state Differentiated production or marketing Product segregation Economic benefit realized from the production of farm or ranch-based renewable energy.