You might be at risk for being denied a farm-program payment or, worse, forced to repay one you’ve already received. That’s a concern of my colleague Matthew Farrell, who is an expert on Farm Service Agency (FSA) programs. He is seeing an increased number of farmers treading on potential land mines through their participation in the Agriculture Risk Coverage and Price Loss Coverage programs.
Some background: FSA conducts end-of-year reviews to examine producers’ “actively engaged” qualifications for program payments. These reviews can be random or targeted. To be considered actively engaged, a payment recipient must contribute a significant amount of one or more of the following:
- capital, equipment and/or land
- labor and/or management
An operation can contribute capital, equipment and/or land on behalf of the members.
The problem is in the “capital” contribution requirement when capital is acquired from a bank operating note. As banks look to minimize credit risk in a tough market, they often seek to add collateral, additional guarantors or require cross-collateralization and/or cross-default provisions. This often includes land not in the operating entity itself but might be owned by individual members or a land holding company. FSA doesn’t allow a landowner to guarantee a loan with land that’s being farmed by the operation. It will look at this arrangement as shifting risk from the operating entity to the land entity.
Furthermore, FSA considers this capital “tainted” and does not accept it as a qualifying contribution to meet actively engaged status. When capital from the loan is considered “tainted,” then everything the capital is used for, including equipment and land payments, is thrown out. That’s often enough to disqualify a producer’s eligibility.
If this tainted capital is found through an end-of-year review, FSA might require the producer to pay back all payments with interest from the year in question. The payback and penalty could be a significant amount, especially in years when there’s no extra cash to spare.
This issue is affecting an increasing number of farm entities, so it’s worth taking the time to look more closely at FSA rules and how they might apply to your operation and debt structure. Through proper planning, you can avoid this land mine. Keep in mind, however, a solution will require the cooperation of your lender. Unfortunately, many lenders aren’t aware of the FSA rules on this issue and might push back. Be persistent, though, as FSA confirms it is becoming a problem.
Because every farm’s situation is unique and complex, I urge you not to try to handle this on your own. Reach out to FSA or to an expert such as Farrell, who has helped others through similar situations. That will help ensure you’re not unknowingly violating FSA requirements and setting yourself up for a financial hit, possibly years after the fact.
For more tips on working with your lender in 2019, visit bit.ly/loan-renewal