Farm Bankruptcies Clearly Trended Higher In 2019 – DTN

Though the number of farms filing Chapter 12 bankruptcy increased in 2019 from the previous year, an American Farm Bureau Federation analysis found the number of filings in the fourth quarter fell from the previous two quarters.

The agriculture economy is coming off five years of falling commodity prices and weather disasters on top of trade and federal biofuel policy uncertainties.

The AFBF analysis released on Wednesday shows overall Chapter 12 farm bankruptcy filings increased from 2018 to 2019 by about 20%. It is the largest increase in filings since 2010 when Chapter 12 filings increased by 33% coming off the recession of 2009.

There were 595 Chapter 12 filings in 2019, according to AFBF’s review of court data, or about 100 more than in 2018. The highest number of filings in recent years was in 2011, when 637 farms filed for Chapter 12.

So, in 2019, there were 2.95 bankruptcies per 10,000 farms, just below 2.99 in 2011. There are a little more than 2 million farms in the United States.

Not Necessarily Surprising

AFBF Chief Economist John Newton told DTN the group will continue to watch Chapter 12 filings closely.

“Until things start to show general signs of improvement, we’ll continue to do so,” he said.

The rate of filings was much higher in 1987, the year after the Chapter 12 provision was created. According to AFBF, the rate stood at a little higher than seven bankruptcies per 10,000 farms in 1987.

The 147 filings in the fourth quarter of 2019 were a 14% increase from the same quarter last year but an 8% drop from the third quarter of 2019. Still, the number of filings has seen a quarter-over-quarter increase for five consecutive quarters.

AFBF said the increased filings were not necessarily surprising given the headwinds in agriculture along with a 2019 change in Chapter 12 law to raise the debt ceiling to $10 million.

Economists will get a closer look at the state of the farm economy when USDA’s Economic Research Service releases its farm income statement and balance sheet estimates next week.

Regional And State Numbers

Wisconsin led the nation in Chapter 12 filings in 2019 with 57, perhaps not a surprise considering persisting low milk prices. Georgia was No. 2 with 41 filings.

Other specifics:

  • Ten states either saw record-tying or record-breaking numbers of Chapter 12 filings, that includes Iowa, Illinois, Kansas, Minnesota, Nebraska, New Hampshire, Ohio, South Carolina, South Dakota and Wisconsin.
  • AFBF found all but three regions saw higher Chapter 12 rates in 2019 compared to 2018.
  • The 13-state Midwest led all regions in accounting for 46% of Chapter 12 filings, recording 273 in 2019 compared to 234 in 2018.
  • Southeastern states came in at No. 2, accounting for 22% of all filings.

“Depending on perspective, net farm income in 2019 inflation-adjusted dollars is either down 33% from a record high or up nearly 40% from the decade low set in 2016,” AFBF stated in its analysis.

“Regardless of perspective, net farm income in 2019 is slightly above the 20-year average but was supported in large part by the Trump administration’s efforts to financially shield farmers from unfair retaliatory tariffs.”

AFBF said that, without trade support, farm-related income from crop and livestock sales in 2019, when adjusted for inflation, would have been at the second-lowest level in the past 10 years at $63.6 billion.

“The corollary to this is that farm bankruptcies could have been worse considering the record-high farm debt of $415 billion (in nominal terms) and the likely difficulties servicing this debt without the revenue from the Market Facilitation Program,” AFBF said.

“The Trump administration is not expected to announce a third round of trade assistance, given the welcome trade news with respect to Japan, USMCA and a China phase-one deal. As a result, farm financial conditions in 2020 will come down to — notwithstanding any other black swans — a race between the additional grain and oilseed supplies likely to come online following a record prevented planting year and any demand boosts for U.S. agriculture that results from these new and enhanced trading opportunities.”

Ag Lending Declines, Too

Even as farms continued to show signs of financial distress, the volume of agriculture loans at commercial banks declined in 2019, according to the Federal Reserve Bank of Kansas City, although farm lending volumes remained historically high.

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Total non-real estate farm loans decreased by about 12% in the fourth quarter, according to the Federal Reserve Bank, and for the first time since 2017 declined in consecutive quarters.

“Following average annual growth of more than 10% in 2017 and 2018 and several quarters of sharp increases, lending activity contracted in the second half of the year and, on average, was 5% lower in 2019,” the bank said in an analysis.

“Despite decreasing from a year ago, farm lending volumes remained higher than the 20-year average. Total volume of non-real estate loans averaged about $90 billion in 2019 and was about 8% above the average since 1999. Overall, persistent weaknesses in the farm sector have continued to stimulate strong demand for agricultural lending, although Market Facilitation Program payments in the second half of 2019 and relatively strong crop yields may have curbed demand in the fourth quarter.”

Steps To Take In Worst-Case Situations

During a July 2019 webinar, Donald L. Swanson, an attorney with Omaha-based law firm Koley Jessen PC LLO, said strategies to improve a farm’s finances will work only if farmers support them.

Farmers should start talking to experienced lawyers right away, he said, when they get into a tough situation. In addition, Swanson said it was important to fully disclose everything with the bank, and that accurate and candid discussions are necessary.

Farmers who file Chapter 12, he said, will need good financial data and realistic projections throughout a bankruptcy proceeding. It is necessary to have accounting expertise on board.

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