Apr 17, 2019

Trends Show Chapter 12 Bankruptcies Not Rising At An Alarming Rate
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By: Tyne Morgan

Earlier this year, the Wall Street Journal released a story about how a wave of farm bankruptcies is taking over agriculture right now. While certain states are seeing an increased number of Chapter 12 bankruptcy filings, and every bankruptcy is a hard situation for any farm family, the spring edition of Farmer Mac’sThe Feed” shows it’s not a situation consuming agriculture everywhere.

“One of the things they found digging through all the U.S. Court Chapter 12 bankruptcy filings is that, yes, all those news stories are true, the number of bankruptcies was up in 2018, but it’s not an alarming increase,” said Jackson Takach, an economist with Farmer Mac.

Economists from the Ohio State University looked at the trends in Chapter 12 filings each year, evaluating whether the recent downturn in commodity prices is impacting the number of bankruptcies agriculture is seeing.

“What our study kind of looked at is how have the trends in filing rates for chapter 12 trended over time. And 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 Robert Dinterman, co-author of the report released in “The Feed.”

In 2018, agriculture saw 498 Chapter 12 bankruptcies filed. In 2017, filings reached 501. While those numbers are still big, Dinterman said it’s in line with the general trend.

“We’re kind of at a stabilized period of time in about 500 bankruptcies filed each year,” Dinterman said. “This is not by any means an all-time high, in any way shape or form. Just recently, 2011 was a time where we had the highest recent bankruptcies filed–upwards of 700 Chapter 12 bankruptcies filed around that period of time. So, that was when we actually had a slight increase in bankruptcies.”

“Any bankruptcy is a hard outcome for sure, so we don’t want to downplay the importance or influence of the farm bankruptcies, but we did want to show that the numbers are not yet alarming and that’s a good thing for the sector overall,” said Takach.

It’s not a comforting situation everywhere. Economists say the largest number of bankruptcy filings resides in Wisconsin, as well as North Dakota, South Dakota, Nebraska and Kansas.

With the decline in commodity prices, how is agriculture not seeing a larger jump in Chapter 12 filings? Economists say there are a few factors at play, but the main factors are debt-to-asset ratios and land values.

“Another big reason why we’re not seeing any kind of massive increase in bankruptcies is that land values are doing fairly well,” said Dinterman. “We’re not seeing a large decline in farmland values across the United States. 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 a spike in bankruptcies, as well.”

Takach said two other factors that provided cushion for some producers were good yields and Market Facilitation Program payments. Takach said above-average yields helped buoy financial pain from prices in some areas, while the tariff aid relief was a factor of timing.

“Having those payments toward the end of the year probably helped to save a few more people if they were cash strapped and they were facing January 1 payments on their debt,” said Takach. “They were able to make those payments with some of the cash that they were they received through those programs.”

While payments and yields are helping farmers wade through tough economic times, he said the fall of prices from the highs in 2014 is steep, but prices are falling from a record-high level.

“When you think about where we were coming from, which was record-high farm incomes at a national and operator level; profit levels I’m sure some folks in 2013 and 2014 thought were never possible,” said Takach. “When you compare net farm income to 2013 or 2014, it looks devastating. When you take a wider lens and you look maybe back a few more years from that, the profit levels today are virtually identical to where we were in the early 2000s.”

Takach said that doesn’t mean profit levels are where producers want to be, but the drop in farm income came from a record-high level, which makes the decline look even more severe.

Dinterman said while a historical look at the 1980s also shows the number of farm bankruptcies today is nowhere near historical highs.

“To give you a couple of examples, back in the 1980s when the reform Chapter 12 became an available option for farmers, we saw roughly seven to 10 farmers per 10,000 farms filing for Chapter 12,” said Dinterman. “What we saw the past two years is something closer to 2.5 farmers. In addition, the actual first year that Chapter 12 was available we saw about 30 farms per 10,000 farms filing for Chapter 12. So, we’re nowhere near those highs.”

“That’s where I think context matters,” said Takach. “The current financial situation is not devastating to all producers. It’s devastating to some, but it’s also not the same.”

While Chapter 12 filings aren’t increasing at an alarming rate for economists, Dinterman said it’s important to remember the intended purpose of Chapter 12, which is a unique bankruptcy option for only the farming and fishing industries.

“For Chapter 12, the biggest reason for that is just kind of the uniqueness of our culture. A lot of farmers are going to be asset rich, but cash poor,” said Dinterman. “They have a lot of their equity tied up into farmland values, as well as tied up into machinery and operations of that kind of nature. Filing for Chapter 12 allows farmers to actually continue their operations currently and just restructure their debts in such a way that they can write down their current debts to the current market values.”

Dinterman said just looking at Chapter 12 filings is the only indication to measure the heath of the agricultural economy. He said economists also look at price indices, how commodities are kind of trending over time, crop yields and trends in farmland values.

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