When we bought our farm almost 14 years ago, both my husband and I had “real” jobs. By “real,” I mean the jobs produced actual paychecks, with W-2s and all the usual reporting and withholdings. It was in that first year on the farm that we applied for a revolving line of credit, based on the equity we had in the house and the income from our “real” jobs. No problem, said the bank. We could use it for home improvement projects, farm equipment, fencing—you name it, we had a nice cushion to spend from, and could pay it down as we were able. Over the ten years we had that line of credit, we maxed it out at least a few times, always diligently paying it down in between expenses with our farm’s cash flow. It worked out great and we never missed a payment.
The line of credit was limited to ten years, however, and eventually ended. When we went to our bank to apply for a new loan, we were told we would not qualify. Our “real” jobs were a distant memory, along with any classic sense of “proof of income.” It was then that we realized farm income and assets are treated very differently by different types of lending institutions. The bank that had served us so well all those years didn’t know what to do with a Schedule F (the form farmers use for filing their federal income taxes) or how to assess the value of the usual agricultural assets—equipment, animals, and land.
Granted, a home equity line of credit was a nice way to finance our early years on the farm. But what we needed was an actual business loan from a lender experienced with agriculture—someone comfortable and set up to deal with the very risky business of farming. Who knew?
Financing the farm can be tricky. Land, buildings, equipment, animals, seed…they all cost a lot of money! But as the old saying goes, “you’ve got to spend money to make money.” The farmer can’t harvest a crop without first buying the seed. The seed then has to be planted, the ground broken, fertilized, weeded (all requiring specialized equipment or hiring someone with the proper equipment)…and the paycheck will not come until the crop is harvested and sold. In order to bridge that timespan, the farmer must either rely upon her savings or borrow money. She also must weigh current commodity prices against all these expenses (including interest on any loans) PLUS the likelihood of the unknown: Drought, flooding, hail, pest damage, even the very real chance that prices for her crop will plummet before harvest. If you didn’t think farmers needed math or algebra to do their job, think again!
Ultimately, we were able to get a few types of financing that have helped us tremendously. We have a revolving line of credit and two short-term equipment loans—one for a baler and mower, the other for a piece of cheese making equipment. We also were awarded two grants, one from USDA Rural Development and the other from New York State. Both require we that we have “skin in the game,” meaning we put in our fair share (one-third to one-half of the value of the grants).
A Novel Approach
We have also happily stumbled upon a rather novel approach to financing our farm: Community-Supported Agriculture (“CSA”). CSAs operate on the premise that consumers “buy in” to a local farm, pitching in to pay the expenses of running the farm and then, in return, receiving a portion of its bounty throughout the harvest. The model has been used in the US since at least the mid-1980s, but has certainly not gotten the same level of attention as farmers’ markets. There are literally dozens of farms in and around the Mohawk Valley that offer “shares” in their CSAs, with hundreds of customers receiving boxes full of veggies, fruits, eggs, meats, cheeses, even gelato on a weekly basis throughout the summer.
The average window for signing up for a CSA is December to April. This is a key period for many farmers, especially in the cold Northeast: These are typically low cash flow months. Our farm income (our only income) is fairly seasonal, while expenses are something we get to enjoy year-round. The CSA model helps us take some of the "high season" cash in-flows and stacks them in the spring when we are spending the most getting ready for the coming summer. In the past, we had to fall back on our farm's line of credit to get us through the lean times. Thanks to our CSA customers, we can keep that line of credit available for capital improvements or emergencies. By not using our line of credit to finance survival, we are able to leverage it for expansion or increasing our efficiency.
The CSA approach also has the added benefit of creating a much closer relationship between consumer and farmer. Some CSA farms encourage their members to help on the farm as they are able—picking peas or thinning carrots—creating great learning opportunities for young and old. Other farms share recipes or newsletters, keeping their customers up to date on all the goings-on at “their farm.” Of course, this model has its limitations. Dairy farmers, for example, cannot sell directly to the public unless they are licensed to so—an involved and oftentimes expensive process. It’s too bad, really. Farmers take such great pride in feeding thousands of people they’ll never meet!