What it means
The department was founded in 1862 and today covers a wide range of work. This includes farm support, food safety, forestry, conservation, rural housing and nutrition programmes for families and schools.
Its scale makes it one of the largest federal departments. For finance, the most useful part is its lending and guarantee activity.
The Farm Service Agency makes direct loans to farmers who cannot easily borrow from banks, and it guarantees loans made by commercial lenders. Rural Development offers loans, guarantees and grants for housing, businesses and community facilities in smaller towns.
A loan guarantee means the government promises to cover a share of the lender's loss if the borrower defaults. This lowers the bank's risk, so it is willing to lend to businesses it would otherwise decline or to offer better terms.
The borrower still deals with the bank, but the government stands behind part of the loan. The department also supports farm incomes through crop insurance, which is delivered through private insurers but backed and subsidised by the government.
It publishes crop forecasts and market reports that traders and food companies use to plan. These reports can move commodity prices, so finance teams in agriculture follow them closely.
For a manager outside farming, USDA matters because food prices, rural investment and agricultural trade rules all pass through it. Food manufacturers, retailers and logistics firms watch its forecasts to anticipate costs.
Lenders and investors also use its programmes to reduce risk in rural projects. Nutrition programmes are another large part of the department.
SNAP, the Supplemental Nutrition Assistance Programme, helps low-income households buy food, and school meal programmes provide breakfasts and lunches. These programmes support demand for grocers and food producers, so retailers track their funding closely.
In practice
Real-world examples.
Example
A family farm needs a $600,000 loan to buy equipment. A local bank agrees to lend because a USDA guarantee covers most of the lender's risk. The farm's finance manager also budgets for the guarantee fee that the bank passes on, and she compares the total cost with an unguaranteed loan at a higher rate.
Example
A food manufacturer building a plant in a small town qualifies for a guaranteed business loan from Rural Development. The lower risk allows the bank to offer a longer repayment period than it normally would. The company must report its employment and loan performance to the programme each year, so it adds a small reporting task to its finance calendar.
Example
A commodity trader reads a USDA crop report showing lower than expected corn yields. She adjusts her forecasts for prices and tells her clients to expect higher feed costs. Her clients, mostly food manufacturers, use the information to decide whether to lock in prices with suppliers for the next six months.
Formula
Calculation
Government payout on a guaranteed loan = guarantee percentage x lender's loss
Suppose a bank lends $1,000,000 to a rural food processor under a USDA guarantee of 80%, and the borrower defaults. After selling the collateral, the bank's loss is $400,000. The guarantee covers 0.80 x 400,000 = $320,000, so the bank bears the remaining 400,000 - 320,000 = $80,000. Actual guarantee percentages vary by programme, so the figure used here is an assumption for illustration.Case study
Seen in the real world.
Prairie Gate Foods is an illustrative, fictional company that wants to build a $5,000,000 grain processing plant in a rural county. Local banks hesitate because the project is large relative to the area's economy.
The finance director applies for a loan guarantee through a USDA rural business programme, which reduces the bank's exposure on the loan. The bank agrees to lend, and the company accepts a guarantee fee and extra reporting requirements.
In this illustrative story the plant opens on schedule and creates 40 local jobs. The finance director notes that the guarantee fee is a real cost, but that without it the project would not have reached financial close. The director also records the guarantee fee as a financing cost and spreads it over the life of the loan, so it does not distort profit in the first year.
Watch out
Common mistakes.
- Thinking USDA only deals with farmers, when it also supports rural businesses, housing, nutrition and food safety.
- Assuming a USDA guarantee means the government lends the money, when the loan usually comes from a private lender.
- Believing a guarantee removes all risk for the borrower, when the borrower remains fully liable for repayment.
Questions
People also ask.
What is the difference between a direct loan and a guaranteed loan?
In a direct loan the government lends the money, while in a guaranteed loan a bank lends and the government covers part of any loss.
Does USDA only support US farms?
Its lending and support programmes are aimed at US farms and communities, although the department also works on trade and food aid abroad.
Why do USDA reports matter to traders?
They contain forecasts of supply and demand that can move commodity prices.
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