CDFA Spotlight: Aggie Bonds

A growing number of states offer loan programs to assist beginning farmers and ranchers with eligible purchases of farmland, equipment, buildings, and livestock. As the average age of U.S. farmers increases, these financial tools are needed to encourage beginning farmers to start or take over agricultural businesses. One cost-effective way for states to help first-time farmers is through the creation of “Aggie Bond” programs. Aggie Bonds are established through a federal-state partnership that allows private lenders to receive federal and/or state tax-exempt interest on loans made to beginning farmers. This is a cost-effective way to pass savings on to farmers by offering loans with below market interest rates. Generally, local lenders issuing Aggie Bonds can offer eligible first-time farmers rates that on average are one to three percent lower than the commercial farm loan rate. The liability for Aggie Bonds rests entirely with the private lender; therefore, the state agency and federal government assume no liability for the loans. By partnering with the private sector, states can assist beginning farmers without tapping into funds or impacting debt limits.

The federal Aggie Bond Loan Program began in 1980 as a pilot program in Iowa, Georgia, and Alabama and steadily expanded to twenty-four states through the mid-1980s. Limitations to the bonds included in the 1986 tax bill led to a decrease in utilization. Aggie Bonds were permanently extended through the 1993 tax bill. In 1996, the eligibility requirements were modified to allow applicants to own up to 30 percent of the median size farm or ranch in their county (with a total value not to exceed $125,000). In addition, the 1996 changes allow beginning farmers to purchase farm property from relatives.

Aggie Bond programs are generally run by the state agriculture department or similar authority. Iowa is the largest user of Aggie Bonds, followed by Illinois. Eligible farmers must meet federal guidelines as well as any specific guidelines added by the state authority. For example, Aggie Bonds may not be used to finance working capital, inventory, production loans, or the purchase of feeder livestock. The beginning farmer must be the primary user of the loan, i.e. an active farmer. In addition, the total net worth of the applicant must be below an established threshold.

The following sixteen states have active Aggie Bonds programs (see the resource list below for the specific state authorities and links):

(1) Exempt agricultural bonds from the volume cap applicable to private activity bonds; (2) Permit a Federal guarantee of an agricultural bond under the Consolidated Farm and Rural Development Act without a loss of tax exemption;
(3) Increase the loan limit on agricultural bonds to $450,000 and index such limit amount for inflation after 2005; and
(4) Eliminate the dollar limitation in the definition of substantial farmland used for agricultural bonds.