Agricultural Bonds: What They Are and How to Apply

Agricultural bonds, frequently called “Aggie Bonds,” are a financing tool designed to help new farmers acquire agricultural assets. These bonds are part of a federal-state partnership where a state authority issues a tax-exempt bond on behalf of a beginning farmer. The benefit of this structure is that the interest income paid to the lender or bond purchaser is exempt from federal income tax, and often state income tax as well. This tax-exempt status allows the private lender to offer the farmer a loan with a lower interest rate than available through conventional financing.

The primary purpose of these programs is to make farm ownership more accessible for individuals entering the industry. By reducing the cost of borrowing, these bonds help address the high capital requirements associated with starting a farm. This structure enables states to support new farmers without using state funds or affecting their debt limits.

Borrower Eligibility Requirements

To qualify for financing through an agricultural bond, an applicant must meet specific criteria defined by both federal law and the state issuing authority. A primary requirement is that the applicant must be a “first-time farmer.” This is defined as an individual who has not previously owned a substantial amount of farmland, with federal rules specifying this as not owning more than 30 percent of the median farm size in their county.

State residency is a common prerequisite, meaning the applicant must live within the state where the bond is being issued. Another requirement is the applicant’s net worth. State programs establish a maximum net worth threshold for applicants to ensure the benefit is directed toward those with lower financial resources. While federal law provides a baseline, states can add their own specific guidelines, and prospective borrowers must meet all federal and state-level requirements.

Qualified Uses for Bond Proceeds

The proceeds from an agricultural bond are designated for specific capital purchases, up to a maximum amount set by federal law. This limit is adjusted annually for inflation; for 2025, the maximum bond is $667,500. A primary use for these funds is the acquisition of agricultural land, which can include existing farm buildings. Bond proceeds can also finance depreciable property, such as new machinery and breeding livestock. State programs often place limits on how much financing can be used for certain assets, with a cap on funds for used equipment of $62,500, and a broader limit of $250,000 on the total proceeds used for all depreciable property.

Agricultural bonds are not intended for operating expenses. This means proceeds cannot be used for working capital, such as purchasing seed, feed, or fertilizer. Refinancing existing debt is also a prohibited use, as is the financing of a personal residence, even if it is located on the farm property.

Information and Documents for Application

The application process begins not with the state, but with a local financial institution. An applicant must first find a bank or lender willing to participate in the state’s agricultural bond program. Since the lender assumes all credit risk, they make the ultimate decision on the loan itself. The lender will guide the applicant through the subsequent stages and submit the final package to the state authority.

Applicants are required to provide detailed financial statements to demonstrate the viability of the project. This information is used to complete the official state application form. Required documents include:

• A personal balance sheet that lists all assets and liabilities
• Historical income information and projected cash flow statements for the proposed farming operation
• A formal business plan that outlines the specifics of the agricultural project and market analysis
• A signed purchase agreement for the land or other assets being acquired

The Application and Closing Process

Once the application package is complete, the participating lender formally submits it to the state’s designated issuing authority. This agency is responsible for reviewing the application to ensure it complies with all program regulations. The review process involves verifying the borrower’s eligibility and confirming that the use of funds is qualified.

The timeline for the state authority’s review and approval may take up to 60 days from the receipt of a complete application. The authority’s approval does not relate to the creditworthiness of the borrower, as this remains the lender’s responsibility.

Upon receiving approval from the state, the bond is officially issued. The closing process then proceeds, which is handled by the lender. At the loan closing, the bond proceeds are disbursed to the seller of the property or assets. The farmer takes legal possession of the asset and assumes the repayment obligation for the loan.