Chapter 12 farm bankruptcies have hit highs not seen for a decade in some states and some are wondering whether the farm economy could be headed for a crisis similar to the one that occurred in the 1980s. A deeper look at the numbers tell a different story.
Farm bankruptcies are far from the lofty levels seen in the late 1980s, and Chapter 12 bankruptcies fell slightly last year, from 501 in 2017 to 498 in 2018. However, the rate of bankruptcies per 10,000 farms of 2.46 has risen slightly over the past several years, according to data from the American Farm Bureau Federation (AFBF).
“We have fewer farms and larger farms than we did in the 1980s. It’s a different environment,” says John Newton, chief economist at AFBF.
Thus, while the overall bankruptcy numbers look nowhere near as bad as they did in the 1980s, the situation could deteriorate if margins remain poor, with some states, some sectors of agriculture, and some regions of the country faring worse than others.
“Ag land values have held for a while, but with interest rates rising, commodity prices low, and debt increasing, it could get worse if asset values decline,” Newton said.
No doubt, the farm economy is hurting. In 2018, net farm income dropped by nearly half to $66 billion from 2013’s peak of $134 billion. For the next 10 years, USDA projects net farm income will remain under $80 billion. Working capital has also plunged while total debt has soared. Since 2012, working capital has fallen by 70 percent. Meanwhile, total debt has climbed to a record high $450 billion, both in real and nominal terms, says Newton.
Yet the nation’s farms are still in better shape than they were in the 1980s, when farmland values crashed.
“Today, interest rates and inflation are low, which helps to maintain farmland values,” says Rob Johansson, USDA’s chief economist. “Fixed-term debt today has replaced the variable-rate debt of the 1980s.”
In the mid-1980s, Johansson says that the debt-to-asset ratio was around 20 percent, while in 2018 it was only 13.5 percent, and debt as a portion of net income in 2018 was 25 percent, compared to 1983’s record high of 60 percent.
Data, however, can be misleading. For example, Chapter 12 works best for small farms that have overextended and have assets to sell, partly because the maximum debt level allowed under Chapter 12 is $4.15 million, says Kristine Tidgren, director of the Center for Agricultural Law and Taxation at Iowa State University. Chapter 11 and Chapter 7 bankruptcies also do not show up in farm bankruptcy data.
“These farms can downsize to pay off their creditors without having a substantial tax hit,” she said. Large farms must file Chapter 11 if they want to continue farming.
For farms that don’t have anything to sell, Chapter 12 often will not work because lenders require the farm to demonstrate it will have sufficient income to service restructured debt. For instance, Tidgren says that when interest rates are falling, farmers can refinance high-interest debt to reduce overall debt payments.
But when commodity prices are low and interest rates are rising, like they are today, farmers have a more difficult time putting together a plan to repay creditors. “For a lot of folks who are struggling, Chapter 12 is not a good option,” she notes.
Thus, looking at Chapter 12 bankruptcies alone doesn’t tell the full story. Many farms, both those in Chapter 12 and others, are servicing debt with off-farm income, Newton says. “People are rolling short-term debt into long-term debt and that is not sustainable,” he notes.
“The Pacific region is more diversified than the traditional row crop regions, given the tree fruit and nut cops and vegetables grown there,” Newton said. “And the larger California dairies are likely outside the Chapter 12 limit.” In the Southeast, he says, crops like cotton are capital intensive and these farms also likely fall outside Chapter 12’s debt limit.
Chapter 12 bankruptcies in Wisconsin last year hit highs not seen in more than a decade and were more than double what they were in 2009, according to AFBF data. Other states with decades-high levels of Chapter 12 filings were Indiana, Kansas, Minnesota, North Dakota, South Dakota, and Utah.
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