FRANKFORT, Ky. – The Kentucky Beginning Farmer Loan Program (BFLP) distributes funding monthly to assist individuals with farming experience who desire to develop, expand, or buy into a farming operation. Eligible projects include purchases of livestock, equipment, agriculture facilities, and real estate; securing working capital; or investing into a partnership or LLC.

The program is a result of the 1998 Master Settlement Agreement in which Kentucky and 51 states and territories reached the agreement with four major cigarette manufacturers. The settlement resolved state lawsuits against the tobacco companies for Medicaid and other health costs related to smoking.

The Kentucky General Assembly and the Department of Agriculture took half the funds from the settlement and assigned them to the Kentucky Office of Agriculture Policy (KOAP). The goal was to diversify Kentucky agriculture away from tobacco and to grow Kentucky farm income.

KOAP set up a participation loan program in 2004 to fund BFLP. The program is open and available to anybody in Kentucky, with one exclusion. “The only exception we have for the BFLP is you cannot have owned another farm for more than 10 years,” said Brian Lacefield, KOAP director. “You could have farmed for more than 10 years, but if you own an existing farm, that would be what would knock you out as a beginning farmer.”

The program was originally funded with $20 million of the master settlement dollars, but through additional funding and revolving loans with retained interest, the current portfolio has grown to over $100 million. Lacefield emphasized the success of the program. “With over 1,300 loans and over $187 million out the door, paid off and paid back, we only had four losses,” Lacefield said. “I’ve loaned a lot of money and that’s a pretty good rate.”

Funding requests may be up to 50 percent of the total cost of the project or up to $250,000. The loan can be used to help farmers make an initial land purchase or they may buy into a going concern. “If you have an existing farm operation, maybe a multi-general partnership and a partner wants out, the next generation can buy an interest in that operation or if nobody wants to get out and they want to divide the interest, they can buy into it,” Lacefield said. “But it can also be used to buy equipment or infrastructure.”

“We’re continuously accepting, approving, and closing loans,” Lacefield said. “We’ve got something going on all the time and we run this $100 million loan program with two designated employees because of our partnership with our participating lenders.”

The participation loan program works with any lender that does business in the state of Kentucky to meet the challenges young and beginning farmers face when trying to access capital. “It could be an Ohio-based bank, as long as they have branches in Kentucky,” Lacefield said. “We have three different farm credit systems in Kentucky, community banks, regional banks, large national banks, area development districts that will do participation loans, we’ll work with whomever. We will utilize their underwriting, will utilize their loan documents they take care of everything, even servicing the loans, then we’ll buy up to 50 percent participation.

“We’re helping these lenders make these loans by taking the risk,” Lacefield said. “We’ll take the second lien on equipment, a second mortgage, or on the property, then we loan our funds out at a below-market interest rate. Our rate doesn’t change, our loans are fixed at 15 years, 2.75 percent interest.”

Lacefield underscores the fact that the lending program has several measures in place to mitigate financial risk. “One, we’re working with participating lenders, so you’ve got another banker that’s going through the process of working with the applicant, having them develop a detailed business plan. Then we require a mentor,” Lacefield said. “It can’t be an immediate family member or anybody with a financial interest in the transaction.”

County extension agents and members of the farm analysis program are examples of those who serve as mentors. “We try to find a good fit,” Lacefield said. “Somebody who will take it seriously and fill out the reports annually, meet with them, and truly be that mentor sounding board.”

The Master Settlement Agreement was a turning point for Kentucky agriculture. Before the settlement, more than half (54 percent) of Kentucky farm families raised tobacco. Over 48,000 farm operations accounted for 25 percent of Kentucky’s agriculture receipts. Today, there are fewer than 1,000 farmers in Kentucky raising tobacco and tobacco is less than 4 percent of state agriculture receipts.

Kentucky agriculture receipts have grown from $3.5 billion in 2000 to over $8 billion in 2022. “We’ve done a great job being part of it,” Lacefield said. “It’s a great story when you watch so many of these farm families and communities that have been able to replace tobacco with other crops and enterprises and transition successfully.”