By Doug Graves
WASHINGTON, D.C. – Most farmers across the country have tightened their belts and are doing their best to make ends meet. Most, that is.
An American Farm Bureau Federation (AFBF) “Market Intel” report shows a total of 627 bankruptcy filings during the 12-month period from June 2019 to June 2020, marking five consecutive years of Chapter 12 bankruptcy increases.
“Each bankruptcy represents a farm in America struggling to survive or going under, which is both heartbreaking and alarming,” said AFBF President Zippy Duvall. “Even more concerning, the difficulty staying afloat is made worse by the (COVID-19) pandemic and related shutdowns as farmers are left with fewer markets for their products and lower prices for the products they do sell.”
Wisconsin was hit the hardest, with 78 filings in the 12-month period, followed by Nebraska with 41 and Iowa with 37. Michigan had 16, Illinois had 13, Ohio and Indiana each had 12, Kentucky had 11 and Tennessee had nine.
More than 50 percent of the Chapter 12 filings were in the 13-state Midwest region, followed by 19 percent in the Southeast.
AFBF Chief Economist John Newton said the filings are concentrated in the Midwest likely due to several years of low crop and milk prices.
“The incidence of bankruptcies does remain low, approximately three per 10,000 farms, but the trend is concerning, given where we’ve been and the COVID-19-related economic struggles that are certain to follow.”
The immediate challenges to the agriculture sector with respect to COVID-19 are well documented, Newton said. A lesser-discussed concern is the impact of high unemployment on off-farm income and, ultimately, debt repayment capacity.
“The last considerable increase in loan delinquencies coincided with the Great Recession,” Newton said. “During that time, unemployment reached nearly 10 percent and off-farm income fell by as much as $10,000 per household, resulting in farm loan delinquencies that exceeded three percent in 2010. This increase in delinquencies is likely a major factor in farm bankruptcies rising to their highest levels of the decade in 2010.”
U.S. unemployment averaged 5.76 percent from 1948 until 2020, reaching an all-time high of 14.70 percent in April. Experts say this could affect the ability of farmers, notably small- to medium-sized farms, to service a record $425 billion in debt, because many farmers rely on off-farm income as a stabilizing force.
In 2017, Congress added Section 1232 to Chapter 12, which allows farmers to de-prioritize capital gains taxes resulting from the sale of assets used in farming, including land. Farmers can treat that tax debt as ordinary debt, which in some cases may be discharged at the end of the case. This and the many other features of Chapter 12 can make it one of the most powerful reorganization tools in the Bankruptcy Code.
“Low interest rates certainly help, but farmers and ranchers need an immediate injection of working capital,” Newton said. “The Coronavirus Food Assistance Program (CFAP) will help, but early estimates of the damage to the farm economy suggests more is needed.”
CFAP will use the funding and authorities provided in the Coronavirus Aid, Relief and Economic Security Act (CARES), the Families First Coronavirus Response Act (FFCRA) and other USDA existing authorities. CFAP includes two major elements – direct support to farmers and ranchers, and USDA purchase and distribution.
“Every farm bankruptcy potentially represents the end of a family’s dream,” Duvall said.