According to the U.S. Department of Agriculture (“USDA”) Economic Research Service (“ERS”), the total amount of farm debt in 2025 was $578.8 billion dollars. Moreover, the USDA ERS forecasts the total amount of farm debt to reach $605.1 billion dollars by the end of 2026. As farm bankruptcies, input costs, and diesel prices continue to rise, it is important to understand the financial options available to farmers.
Agricultural producers may need to borrow money to finance their operations. Farmers face volatile weather conditions, disease outbreaks, fluctuating market prices, and high input costs, leading to significant costs of production. Therefore, it is customary for farmers to borrow funds and incur large debts to maintain their operations.
Although agricultural lending provides a mechanism of support, producers may find themselves between a rock and a hard place when loan payments are due. The path from an initial loan default to potential resolution, foreclosure, or bankruptcy can change depending on the lender, type of loan, and the borrower’s financial situation. Farmers and ranchers commonly obtain loans through the Farm Credit System (“FCS”) or the federal Farm Service Agency (“FSA”). This series will explore the different stops along the path of loan delinquency and highlight the potential off-ramps for FCS or FSA borrowers to resolve their debt while maintaining their farming operation.
The following article is the first in a new series detailing the different financial options available to farmers facing a loan default and will introduce the basics of agricultural lending with an overview of distressed loan servicing. It is important that agricultural borrowers understand the lending support options available to make informed decisions.
Agricultural Lending Basics
Due to the capital-intensive nature of agricultural production, producers have access to several loan sources including commercial banks, insurance companies, equipment manufacturers, seed companies, storage facilities, Farmer Mac, cooperatives, processors, FCS, and the federal FSA. A producer that borrows money from a lending institution is often called a borrower or debtor because the producer has a duty to pay back the money borrowed from the bank. The lending institution, bank, or credit association that provides the loan to the borrower is called the lender or creditor.
A loan agreement is a written agreement between the lender and the borrower detailing the terms and conditions of the loan. The loan agreement describes how much the loan is for what security is promised by the borrower, and what happens if the loan is not paid back. A written loan agreement is also known as a binding instrument because it creates binding legal obligations between the lender and the borrower. Other types of binding instruments include promissory notes, mortgages, security agreements, personal guarantees, and installment contracts. These documents, signed by the lender and the borrower, create an obligation in the borrower to pay back the loan and provide for a remedy if they fail to do so.
When a lender agrees to enter into a loan agreement with the borrower, the borrower is expected to put up something of value as security. Collateral is an item, property, or security interest of value that is given by the borrower to the lender to “secure” the loan agreement. Essentially, if the borrower fails to pay the loan back or violates the provisions of the loan agreement, then the lender has the ability to sell the collateral to pay off the debt.
The type of loan needed by a borrower will depend on their farming operation and financial needs. A production loan is a short-term loan used to fund specific commodity production. In contrast, capital loans or operating loans are loans issued to finance machinery, equipment, supplies, or goods needed to operate the farm. To learn more about the difference between production loans and operating loans, check out NALC’s article, “Show Me the Money: A Primer on Agricultural Lending.”
Sources of Government-Backed Agricultural Lending
Farm Credit System
The Farm Credit System (“FCS”) was originally created by Congress in 1916 to provide reliable and affordable credit to rural areas and agriculture. FCS is a commercial, for-profit source of lending with a statutory requirement to provide financing for U.S agriculture.
FCS is the largest agricultural lender and consists of a nationwide network of cooperative, borrower-owned, banks and institutions. FCS is not a government agency but rather a government sponsored enterprise. According to the Congressional Research Service, a government sponsored enterprise (“GSE”) “is a federally chartered, nongovernment entity with certain benefits (such as tax exemption, implicit federal guarantees, or risk management tools) that overcome barriers to private markets in achieving a stated goal.”
FCS is regulated by the federal Farm Credit Administration (“FCA”) and funded by the sale of bonds through capital markets. FCS also raises funds by requiring borrowers to buy stock to become cooperative members, and retaining profits not dispersed as patronage to members of the cooperative. The Federal Farm Credit Banks Funding Corporation coordinates funding efforts which are then allocated to fifty-five individual credit associations by four banks. The four regional banks are AgFirst FCB, AgriBank FCB, Farm Credit Bank of Texas, and CoBank ACB. The credit associations can be categorized as Agricultural Credit Associations (“ACAs”), Federal Land Credit Associations (“FLCAs”), and Production Credit Associations (“PCAs”). Next, each credit association uses those funds to make loans to eligible borrowers. To learn more about the FCS, click here.
FCS may extend credit to farmers, ranchers, producers, or harvesters for agricultural or aquatic purposes, rural residents for rural housing financing, and individuals supplying farm-related services to farmers and ranchers. 12 U.S.C. § 2019. Borrowers must meet certain eligibility requirements to obtain a loan from FCS. Along with becoming a stockholder of the cooperative, borrowers must be:
- “bona fide farmers, ranchers, or producers or harvesters of aquatic products;
- persons furnishing to farmers and ranchers farm-related services directly related to their on-farm operating needs; or
- owners of rural homes.” 12 U.S.C. § 2017.
Borrowers that live in rural areas are eligible for rural housing financing. Rural areas are defined as a city with less than 2,500 inhabitants. 12 U.S.C. § 2019 (b)(3). Additionally, borrowers must meet creditworthiness criteria.
Farm Credit regulations define “bona fide farmer or rancher” as a “person owning agricultural land or engaged in the production of agricultural products, including aquatic products under controlled conditions.” 12 C.F.R. § 613.3000(a)(1). Ultimately, Farm Credit ACAs “may provide financing to a bona fide farmer or rancher, or producer or harvester of aquatic products for any agricultural purpose and for other credit needs.” 12 C.F.R. § 613.3000(b). Direct lender associations are responsible for servicing the loans they make. Loan terms and conditions are set forth in a written document between the borrower and the lender like a loan agreement.
FCS offers loans to farmers, ranchers, agribusiness owners, rural infrastructure providers, and rural homebuyers. These loans include rural home loans, processing or marketing operating loans, and loans for farm-related service businesses. 12 C.F.R. § 613.3000-6.13.3030. The scope of the loans offered by Farm Credit associations depend on whether the borrower is a full-time farmer, part-time farmer, or operates another business other than farming. 12 C.F.R. § 613.3005.
Farm Service Agency
The USDA Farm Service Agency (“FSA”) is another source of agricultural lending. As a federal agency, FSA administers the federal farm loan programs which are created to aid farmers that are unable to obtain a commercial loan from traditional lenders. FSA is considered the “lender of last resort” with the goal of financially supporting farmers until they are eligible to receive a loan from a commercial lender. According to FSA, a total of $6,744,549,194 was spent on farm loan programs in 2025.
Generally, FSA is authorized under the Consolidated Farm and Rural Development Act to issue real estate loans and operating loans to operators of “family farms” that are “unable to obtain sufficient credit elsewhere.” 7 U.S.C. § 1941(a)(1); § 1922(a)(1). A family farm is a “business operation that produces agricultural commodities” that are “for sale in sufficient quantities so that it is recognized as a farm rather than a rural residence,” and where the borrower makes the majority of the day-to-day decisions and the borrower provides a substantial amount of labor to operate the farm. 7 C.F.R. § 761.2(b).
However, FSA offers direct and guaranteed loans that include farm ownership loans, operating loans, emergency loans, microloans, youth loans, Native American Tribal loans, and conservation loans. FSA also provides targeted loans for socially disadvantaged farmers. 7 U.S.C. § 2003. A socially disadvantaged farmer is defined as “a farmer or rancher who is a member of a socially disadvantaged group” which “means a group whose members have been subjected to racial, ethnic, or gender prejudice because of their identity as members of a group without regard to their individual qualities.” 7 U.S.C. § 2003(e)(1). Additionally, FSA is required to reserve loan funds for qualified beginning farmers and ranchers. 7 U.S.C. § 1994(b)(2). Therefore, FSA also operates as the “lender of first opportunity” for these types of borrowers.
An FSA direct loan is a loan that is financed and serviced by the agency. 7 C.F.R. § 761.2(b). A guaranteed loan is funded and serviced by an outside lender, like a commercial bank or FCS that FSA has provided a loan guarantee as part of an agreement. 7 C.F.R. § 761.2(b). A lender’s agreement is executed between the FSA and the outside lender describing the accompanying loan responsibilities with the loan guarantee. 7 C.F.R. § 761.2(b). However, a loan agreement is a “contract between the borrower and the lender that contains certain lender and borrower agreements, conditions, limitations, and responsibilities for credit extension and acceptance.” 7 C.F.R. § 761.2(b). The terms of the loan, borrower eligibility requirements, and types of loans available to borrowers are set by statute.
Loans issued by FSA, either direct or guaranteed, are serviced by the lender. Loan servicing provides distressed borrowers with resources and restructuring options if faced with a loan delinquency in an effort to avoid foreclosure. 7 C.F.R. § 761.2(b). FSA is statutorily required to assist distressed borrowers facing loan delinquency due to reasons out of their control through loan modification. 7 U.S.C. § 2001. FSA must provide loan servicing to such borrowers in order to avoid a financial loss to the agency and to ensure the farmer can continue farming. 7 U.S.C. § 2001.
What Happens if You Default on an FCS or FSA Agricultural Loan?
Despite the array of financing options designed to assist farm borrowers, many producers may face a situation where they are financially unable to make their loan payments. A borrower’s repayment options may be dictated by their lender and the type of loan.
Defaulting on a loan may take on different forms depending on the borrower’s lender, the governing loan agreement, and the collateral or security provided. FCS considers whether the loan agreement is “distressed” to determine the next steps in loan servicing. FSA defines a “delinquent borrower” as someone “who has failed to make all schedule payments by the due date.” 7 C.F.R. § 761.2(b). The second article in this series will explore loan delinquency, and what constitutes borrower default depending on the loan instrument and lender.
Once a borrower has defaulted on their loan payments or entered into distressed status, steps can be taken to restructure the debt. Borrowers of FCS are entitled to “Borrower Rights” regarding loan servicing. Importantly, these rights include a distress loan servicing program dedicated to restructuring the borrower’s debt and creating a plan to resolve debt. FSA borrowers that meet certain eligibility requirements and have defaulted on their loan obligations may also create a restructuring plan, if feasible. This restructuring could include rescheduling, consolidation, reamortization, deferral, or write down. The third article in this series will discuss the various debt restructuring options and loan servicing options for distressed borrowers.
If a restructuring plan is not feasible or insufficient, borrowers may wish to pursue other avenues of debt forgiveness or appeal adverse credit decisions. FCS, through FCA’s “Borrower Rights” regulations, gives the borrower the right to appeal a denial or reduction of a loan or restructuring request to the Credit Review Committee. FSA provides borrowers with the right to appeal adverse decisions made by the agency to the National Appeals Division (“NAD”) and then to the court system. FSA also offers debt forgiveness options that include a write down of the debt, release of liability, loan cancellation, and other tools to reduce the borrower’s debt owed to the agency. Additionally, FSA primary loan servicing provides options for eligible borrowers to be considered for a conservation contract, disaster set-aside, loan buyout at current market value, or the homestead protection program. The fourth article in this series will highlight the appeal procedures of FCS and FSA, and options for debt forgiveness.
If the borrower and the lender are unable to agree upon a restructuring approach, the borrower has the right to request the dispute be resolved through mediation. Mediation is an Alternative Dispute Resolution (“ADR”) tool to avoid litigation where parties to a dispute are coached to a resolution by a neutral, third-party mediator. An FCS borrower has the right to seek mediation during a distressed loan servicing but prior to the issuance of a final decision by the Credit Review Committee. The qualified lender is required to participate and may not predicate loan servicing on a waiver of the borrower’s mediation rights. 7 U.S.C. § 5101; § 5103. If an FSA borrower is unable to come up with a feasible restructuring plan but still meets the primary loan servicing eligibility requirements, they may request participation in a state certified mediation program (if applicable) or a voluntary meeting of the creditors. 7 C.F.R. § 766.114. The fifth article in this series will explore mediation as a tool for farmers to resolve loan restructuring disputes.
The final step in the loan default process is foreclosure of the borrower’s collateral or security. This process is especially concerning if the producer has pledged their farm, equipment, or livestock as collateral. Depending on the lender, the borrower may have a few last-ditch options to avoid foreclosure or an involuntary liquidation which includes buy-out, voluntary liquidation, voluntary conveyance of real property or chattel to the agency, distressed borrower set-aside, and leasing to buy. The sixth article in this series will take a deeper dive into foreclosure procedures, pitfalls, and ways to avoid it.
At any point throughout a farmer’s debt distress, they may need to file for bankruptcy to reorganize their debts. Chapter 12 of the Bankruptcy Code provides options for reorganization of debt to help lift farm borrowers out of indebtedness. 11 U.S.C. §§ 1201. FSA has specific loan servicing requirements for borrowers in bankruptcy depending on the stage of reorganization. The final article in this series will take a look at bankruptcy as a way for borrowers to reorganize their debt and maintain their farming operation. For more information, click here to read NALC article, “Bankruptcy on the Farm: A Look at the Chapter 12 Option.”
Conclusion
In general, agricultural producers have many dedicated sources of lending based on their eligibility and operational needs. However, due to the volatile nature of farming, borrowers may default on their loan for reasons outside their control. Borrowers need to be aware of the financial options available to them that serve to resolve their indebtedness to prevent foreclosure of the family farm. In other words, lending literacy is vital to ensure farmers can keep farming through turbulent times.
Upcoming Articles and Other Resources
The next article in this blog series will discuss loan defaults under FCS and FSA, and what constitutes a distressed borrower.
The NALC, in partnership with the National Association of State Departments of Agriculture, recently announced the launch of the “Data on Economic and Bankruptcy Trends in Agriculture” or “DEBT” project. This resource provides a more comprehensive view of agricultural bankruptcy filings by identifying agricultural filings under both Chapter 11 and Chapter 12. To view the data and learn more about the DEBT project, click here.
For more National Agricultural Law Center resources on finance and credit, click here.
For more National Agricultural Law Center resources on bankruptcy, click here.
For more National Agricultural Law Center resources on secured transactions, click here.