Criterion #9: Demonstrate Farm Managerial Ability

Demonstrating Necessary Skills

Applicants must provide evidence to their FSA FO loan officer that they have the skills to manage the farm operation. FSA wants assurance that the farm business can repay the loan on schedule. In the case of individual applicants who aren’t applying as a group, those individuals have to demonstrate sufficient education, on-the-job training, or farming experience. If this experience satisfies the FSA loan officer that the person could reasonably be expected to run a successful business, then this criterion would be fulfilled.

This test is a little more complicated when considering an entity applicant. Generally, the rule is that the majority interest holders of the entity must have “participated in the business operations of a farm” for at least three out of the past ten years to satisfy this criterion. The majority interest holders of the entity applicant could be one or more people depending on how ownership of the entity is structured. For example, suppose Owner A holds 70% of the ownership interest, and Owners B, C, and D each have 10% ownership interest. In that case, Owner A must have participated in the business operations of the farm for at least three years. The managerial ability of Owners B, C, and D would not be a concern. By contrast, if four owners share equally in the ownership at 25% each, then at least two of those owners will have to provide evidence of their managerial experience. In the end, the majority (at least 50%) of the owners have to demonstrate that they have participated “in the business operation of a farm” for at least three of the last ten years.

Also, substitutions are available–essentially, parts of this general rule can be waived in some circumstances. Before we get to those substitutions, let’s clarify what it means to ‘participate in the business operations of a farm.’ All of the requirements discussed in the following few paragraphs require the level of participation described for the year’s entire production cycle. Managing a farm for just three months of the summer season will not count towards fulfilling this requirement (even if it’s three months of the summer for 3 out of the past ten seasons).

How Does a Farmer Demonstrate the Required “Participation in the Business Operation of a Farm”?

A farmer can demonstrate “participation in the business operations of a farm” for the required three years through ownership. The farmer can offer tax returns or FSA farm records showing that they owned a farm and, thus, participated in its business operations. Alternatively, the farmer could provide evidence that they were employed as a farm manager or farm management consultant for a farm. The farmer’s title at their previous place of work and job description, if available, will be important to fulfill this option.

In addition, a farmer can demonstrate that they have participated in farm business operations if they were raised on a farm or had a farm-related apprenticeship, internship, or similar educational experience for at least the required three years. If a farmer wants to use their apprenticeship or internship to comply with this requirement, they must have evidence that they had significant responsibility for day-to-day decisions. Examples of significant responsibilities include selection of seed varieties, weed control programs, input suppliers, or livestock feeding programs.

Some farmers may have participated in a business operation but were not an owner, not an employee, and also not part of an educational experience. In this case, FSA will look at other documentation that might be available to demonstrate this experience.

What Can be Substituted for “Participation in the Business Operations of a Farm”?

There are a few other ways by which a farmer can still demonstrate the necessary managerial ability. Up to two of the three required years of participation in the business operations of a farm can be substituted with one of the following experiences:

1. At least 16 credit hours of post-secondary education in an agricultural-related field;
2. Successful completion of a farm management curriculum offered by cooperative extension, community college, adult vocational agricultural program, non-profit organization, or land-grant college or university;
3. One year experience as a farm laborer with substantial management responsibility;
4. Successful completion of an internship, mentorship, or apprenticeship in day-to-day farm management;
5. Significant business management experience in a non-agricultural related field if the relevant individual’s responsibilities included personnel decisions, payroll, and inventory ordering;
6. An honorable discharge from the armed forces of the U.S;
7. Successful repayment of an FSA-financed youth loan; or
8. An established mentorship relationship that meets the criteria of the FSA for mentorship in farming or ranching.

A farmer with only one year of experience as an owner of a farm operation, as demonstrated by the farm business tax returns, but two years of significant business management experience in another field could satisfy the managerial ability requirement. Another example would be a veteran honorably discharged from any branch of the U.S. armed forces who grew up on a family farm. There are many options to fulfill the ‘participation in the business operation of a farm’ requirement.

In fact, there is one combination that waives the three-year requirement entirely. If the individual in question has one year of experience as a farm laborer with substantial management responsibility and has also developed a relationship with a farming mentor that the FSA has vetted, they may meet this obligation. Any counselor in the Service Corps of Retired Executives (SCORE) with farming and ranching experience would be approved. Otherwise, mentors must be approved by the FSA officer with whom the entity applicant is working.

When you get to Criteria # 11, the Family Farm Criteria, you’ll learn that the majority owners of the entity applying for the farm ownership loan must also participate in the day-to-day operations of the business obtaining financing. Therefore, the majority of owners who demonstrate managerial ability for Criteria # 9 must continue that management, bringing that experience into this new venture. In short, an entity applicant cannot have a “silent” owner who is added to the entity as an owner only to meet the managerial requirement but who does not intend to continue participating in the entity’s day-to-day operations.