A Short Primer for Hemp Farmers Seeking FSA Loans

By William Sumner, Hemp Content Manager, New Frontier Data

The United States Department of Agriculture (USDA) has released its agency guidance for servicing direct and guaranteed loans on behalf of hemp producers.

Since passage of the 2018 Farm Bill to federally legalize hemp production for the first time since World War II, the USDA has been aiming to engage hemp cultivators with many of the federal programs routinely used by other agricultural producers.

Among the key provisions of the guidance:

Hemp Producers Must Be Licensed Before Applying for FSA Loans

Hemp producers must be licensed before applying for Farm Service Agency (FSA) loans. Should any hemp be grown with FSA-financed equipment or on FSA-financed lands, the cultivator will be considered as in nonmonetary default, and no losses will be covered by the FSA.

Hemp Producers Must Provide Purchase Contracts

For both direct and guaranteed loans, hemp producers must be able to prove having the financial resources to pay back the loans, e.g., by showing that they have purchase or cultivation contracts. A contract should include:

  • A termination clause based on “for-cause” criteria only;
  • Requirements that growers be notified of the specified reasons for the cancellation;
  • Assurances that the contract will generate enough income to develop a cash-flow budget and repay the loan; and
  • Affirmation that the purchaser has a reasonable and realistic prospect of repaying the loan.

If the hemp operator is properly licensed and can demonstrate having adequate cash flow without any hemp-related income, the loan request will be considered (though approval is not guaranteed).

Operators Must Submit a Farm Business Plan

Prospective lenders must submit a farm business plan (FBP) based on objective data, reflecting realistic performance assumptions for situations which may affect the operator’s net income, including:

  • The intended use of hemp being produced (such as seed, fiber, CBD, etc.);
  • Quality levels (if hemp is being produced for CBD);
  • Increased costs by region; and
  • Changes in unit numbers and weights.

Any operation that includes hemp as part of the producer’s business plan (regardless of whether the loan is directly related to hemp production) must be evaluated by the lender.

FSA Loans Do Not Cover the Cost of Hemp Disposal

FSA loans will not cover disposal costs for hemp plants which test over acceptable THC levels. That includes both direct loans and any lender’s advance meant to cover the cost as part of any guaranteed loan loss claim. If a borrower has their hemp crop destroyed for testing hot (i.e., over the THC ceiling), the FSA may treat the destruction similarly to diseased or insect-damaged crops, provided that violation was beyond the borrower’s control and that they are not liable for negligence.

As the COVID-19 pandemic continues to keep much of the United States on lockdown, access to federal aid (e.g., the FSA loan program), has become increasingly vital to hemp producers. Last month, Congress for the first time ever passed a measure to allow farmers to take advantage of Small Business Administration (SBA) relief programs.

On June 27, New Frontier Data will host a free webinar aimed at helping hemp farmers navigate SBA relief programs.