The Basis for this Criterion
Before we get into how to meet the family farm requirements as an entity applicant, it can be helpful to understand FSA’s reasoning behind their rules. The FSA’s loan program focuses on the ‘family’ farm in an effort to support and sustain smaller-scale domestic agriculture. The ‘family’ farm rules discussed below were all designed with small and mid-size farms in mind. The FSA aims to provide financing to these types of farms rather than large farming operations with many investors who already have adequate funding sources.
It is increasingly common for small farms to be structured with one or several entities. This is true whether or not the owners of the entity are related. The FSA has been responsive to these changes in business practices and developed ways for entity applicants to meet the requirements for a ‘family’ farm. All of the requirements below were designed to restrict FSA financing to operations that are right-sized for FSA goals.
Several midwestern states have state laws intended to safeguard the ownership and control of farmland by family-scale operations. These laws, often called anti-corporate farming laws, restrict the ability of entities to form for the purposes of owning or leasing farmland. Farmers in these states who are forming an entity will need to consider state laws alongside FSA’s FO requirements, although that issue is not further discussed here.
How Does an Entity Become a Family Farm?
To comply with the ‘family’ farm requirement, the farm cannot be owned by folks who never set foot on the farm and don’t participate in farm labor. Owners with this kind of hands-off approach are typical for large corporate farms that have many owner-investors. The FSA wants assurance that the owners of farms purchased with FSA financing are owners and operators.
The line the FSA has drawn in the sand to ensure that this is the case is that at least 50% of the entity’s ownership must be held by the people who are operating the farm. An operator provides the labor, management, and capital to run the farm.
The FSA considers who provides the physical labor and management of a farm to determine whether it falls into their definition of a ‘family’ farm. Those members responsible for operating the farm, whose membership interests must reach at least 50% of the entity’s ownership (but can be greater), must make all strategic management decisions for the farm business. Furthermore, these owners must make the majority of the day-to-day operational decisions of the farm business. A substantial amount of the labor required to run the farm business must be provided by at least a majority of the owners.
Note that there can be members in the entity who don’t or cannot do the physical labor of the farm, but are still considered farm operators. The key deciding factor is whether the individuals are involved in the day-to-day operations of the farm and help guide strategic decisions. There is some leeway in the description of who is an operator to account for regional industry differences.
Full-time hired labor can only be used to supplement the owners’ labor. Reasonable amounts of temporary labor for seasonal peak workload periods or intermittent labor-intensive activities are acceptable. The FSA loan officer has discretion to make exceptions to this, especially for farm operations that produce high-value, labor-intensive crops such as specialty fruits and vegetables. Many decisions of the FSA loan officers are based on standard industry practices, so if the entity’s type of farming is labor intensive, likely the loan officer will not penalize the application for having a fair number of employees.
Determining whether an entity applicant fits the definition of a family farm is a balancing of many different factors. The loan officer has a fair amount of decision-making power for this aspect of the application. Do note that the reasoning of the loan officer as to whether or not the farm has met the definition of ‘family’ farm will be documented in the loan file. Ask for the reasoning if the application gets an unfavorable response.
What About Owners That Have Ownership in Separate Businesses?
Owners of the entity applicant cannot be involved in other farming operations that would not also qualify as a family farm. This does not disqualify any ownership in other businesses, but the nature of other businesses owned by entity members may impact the entity’s ability to apply for the FSA FO loan. If this might become an issue with your application, talk to the loan officer about the situation and determine what information they might need about the separately owned business.