Chapter 12 Bankruptcies Don’t Fully Reveal the Pain in Farm Country
Ag News Feed
The original article appeared on the Dairy Herd Management website.
By: Tyne Morgan
The pain in dairy country is escalating… as brutal winter weather forced Mitch Thompson to dump milk for the first time ever
“As a young farmer, I never have (dumped milk) in my career, but in talking with my dad, he never had, either,” said Mitch Thompson, a dairy farmer and forage harvester from Lewiston, Minn.
The headache and heartache in dairy country is not new, as waning milk prices have caused dairies to disappear at a historic pace.
“There are a lot of people that have a lot of doubt on everything and are really down,” said Thompson. “There are a lot of good farmers that have left the industry, and that’s hard to see.”
While states like Minnesota and Wisconsin are seeing an uptick in Chapter 12 bankruptcies, the situation isn’t consuming agriculture everywhere. Economists at The Ohio State University recently dug into the number of farm bankruptcies, with the findings published in ag lender Farmer Mac’s Spring Edition of “The Feed.”
“One of the things they found digging through all of the U.S. court Chapter 12 bankruptcy filings is that, yes, all those news stories are true, the number of bankruptcies is up in 2018, but it’s not an alarming increase,” said Jackson Takach, economist with Farmer Mac.
The Ohio State University economist Robert Dinterman co-researched the trends, discovering averages over the past few decades.
“Since 2005, we’re kind of at a range that on average we probably see around 450 to 500 bankruptcies filed for farmers each year,” said Dinterman.
Dinterman said the U.S. saw 498 Chapter 12 bankruptcy filings in 2018 and 501 in 2017, which is right in line with average, and well below the uptick agriculture saw in 2011. One major reason why there isn’t a surge in filings is land values.
“We’re not seeing a large decline in farm farmland values across the United States,” said Dinterman. “There are particular regions in the U.S. where we have seen declines in farmland values and where we do see farmland values declining that’s where we also see a little bit of spikes in bankruptcies as well.”
Dinterman says while some states are seeing Chapter 12 bankruptcy filings rise, filings are nowhere near levels produced in the 1980s.
“We’re not seeing anything that is historically anywhere close to massive stress in the farming industry,” he said. “To give you a couple of numbers, back in the 1980s when the Chapter 12 code became an available option for farmers, we saw roughly 7 to 10 farmers per 10,000 farms filing for Chapter 12. What we saw the past two years is something closer to 2.5 farmers.”
But Dinterman said just looking at the number of Chapter 12 filings isn’t an accurate measure of the farm economy today.
“I would actually say that the bankruptcies are more of a ‘canary in the coal mine’ type situation,” said Dinterman. If you’re going to act if you’re going to assess their cultural economy you don’t want to just look at bankruptcy. You want to look at all different measures, so you look at the price indices, look at how commodities are kind of trending over time, look at yields, look across farmland values.”
The reality is lower commodity prices means financial stress is mounting for many in agriculture, and one attorney said it’s showing up with many farmers that don’t qualify for Chapter 12 today.
“Many farmers have debt that’s greater than you can file using a chapter 12 bankruptcy; the limit is $4,411,400,” said Joe Peiffer, attorney and owner of Ag & Business Legal Strategies in Cedar Rapids, Iowa.
Peiffer specializes in bankruptcies. He said the $4.1 million cap for bankruptcy is too low.
“I have a farmer who filed about a year ago, and he was bucking the limit then, which is a little less, not much less, and he’s farming about 1400 acres, all but 80 which is rented,” said Peiffer.
Stories like this are something Peiffer says are way too common. Legislation introduced by a bipartisan group of lawmakers was recently introduced in Congress called the Family Farmer Relief Act would raise the debt limit for Chapter 12 bankruptcies to $10 million – a move Peiffer says can’t come soon enough.
“It’s important to give farmers an escape hatch if they have to downsize in order to make it work,” said Peiffer. “Otherwise, the taxes will be an impediment that will stick with them a long time.”
Peiffer says filing for Chapter 12 bankruptcy isn’t an “easy out” for an operation carrying the burden of negative margins. Instead, it gives producers a fresh start.
“Chapter 12 is not easy; no, bankruptcy is easy,” said Peiffer. “You have to list every debt you have, you have to list every asset you have every creditor, your list is given notice of what’s gone going on. And they have the opportunity to come in and examine you about what happened and where you’re going.”
If a producer is in a dire situation to pay mounting debt, Peifer thinks quick action is key.
“The people who are decisive and make decisions and change are the ones that have the best opportunity to stay in the game,” said Peiffer. “Those who continue doing what they’ve always done if they’ve been losing money on corn and beans for many years and they don’t change anything, will continue losing it until they lose the farm.”
Mark Greenwood, chief diversified markets officers for Compeer Financial, sees first-hand the financial stress some producers are facing. He said it’s vital producers take an accurate financial snapshot of their operation by examining their financial position.
“It’s kind of like doing a physical checkup every year,” he said. “You need to see where am I at today, am I getting tight on working capital and could I do some things to help with some liquidity,” said Greenwood.
Greenwood said a couple of ways producers can reduce debt include chipping away at pricey land rents or even eliminating non-performing assets. Any farmer faced with negative margins and climbing input costs, Greenwood suggests thinking outside the box.
“The one thing we often hear from farmers is healthcare benefits, and what they have to pay for insurance and it’s exorbitant,” said Greenwood. “But all of a sudden if one of those family members can get off-farm income to help defer some of those expenses, what we’ve seen there is that does help the bottom-line, but I know those decision are difficult.”
Price pain that doesn’t seem to be improving for most, but Greenwood said a proactive approach and being honest and transparent with any lender, can go a long way in ensuring the longevity of your livelihood.
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