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Farm bankruptcies stable, but credit condition worse
 

By MICHELE F. MIHALJEVICH

MINNEAPOLIS, Minn. — A recent report from the Federal Reserve Bank of Minneapolis paints a concerning picture of increased farm bankruptcies in its Ninth District – Minnesota, Montana, North and South Dakota and Wisconsin.

Over the 12 months ending June 2018, the bank said 84 farm operations in those states had filed for Chapter 12 bankruptcy protection. The number is more than twice the level seen in June 2014.

Nationally, and in this region, the number of recent bankruptcies has remained stable – and in some cases, decreased – though credit conditions continue to deteriorate, according to those who monitor the agricultural economy.

Through the third quarter of 2018, 369 farms filed for Chapter 12 nationally, said Robert Dinterman, post-doctoral researcher with the Farm Income Enhancement Program in The Ohio State University’s Department of Agricultural, Environmental and Development Economics. That’s down from all of last year, when 501 farms filed.

He doubts enough farms will file in the last quarter – generally when fewest bankruptcies are filed – to reach 2017 numbers. In 2014, 360 farms filed.

In Illinois, nine farms filed for bankruptcy through 2018’s third quarter; in 2017, eight filed. For Indiana, it has been 13 in 2018, 11 in 2017; Iowa, 11 in 2018, 18 in 2017; Kentucky, 10 in 2018, 16 in 2017; Michigan, seven in 2018, 16 in 2017; Ohio, five in 2018, 10 in 2017; and Tennessee, eight in 2018, 12 in 2017.

Following Chapter 12 filings is the best way to track bankruptcies in the agricultural industry because they are only available to farmers, Dinterman noted. Those filers may continue to operate their farms and look for ways to restructure debt and refinance their mortgages.

To file for Chapter 12, an operation must be within the debt limit of $4.15 million. Chapter 12 cases generally remain open 3-5 years.

In his report for the Minneapolis Fed, Ronald A. Wirtz, director of regional outreach, said the strain of low commodity prices and – for some – tariffs is “starting to show up not just in bottom-line profitability, but in simple viability. Current price levels and the trajectory of the current trend suggest that this trend has not yet seen a peak.”

Not all states in the Ninth District are feeling the same effects, he reported. Wisconsin has about 60 percent of all bankruptcies in the district. Bankruptcy filings have been particularly high among dairy farmers there, Wirtz explained.

Tariffs probably didn’t cause any increases in bankruptcy filings, Dinterman said. “Many of the tariffs were put into place in June,” he said. “That would be a really quick turnaround time for bankruptcies to go up. Tariffs continue to cause uncertainty for farmers and they should be concerned if (tariffs) drag out.

“The rise in interest rates could also give pause for farmers and maybe cause some to consider filing for bankruptcy.”

David B. Oppedahl, senior business economist for the Federal Reserve Bank of Chicago, said it’s a more challenging time for farmers today than as recently as 2014.

“The principal thing that’s causing financial conditions to deteriorate is the stream of income from farming is lower,” he pointed out. “There are many reasons for that.

“Prices are down for key agricultural commodities and (there’s been) a disruption of trade flow. Respondents (to a survey) are expecting to have lower incomes this winter. There are opportunities for strong ag producers. At the same time, others who aren’t as astute in their practices, they’ve been very challenged.”

Bankers have told Oppedahl they’re somewhat concerned about interest rate increases and low commodity prices. “Those things are making it more difficult for farmers to cash-flow their loans. With yield increases, farmers did have strong production. It’s not all bad news, but even with higher production, revenues weren’t as strong as they would have liked.”

Oppedahl said for the fifth quarter in a row, the availability of funds for lending by agricultural banks was down in his district relative to a year earlier. In the third quarter of 2018, demand for non-real estate farm loans was higher than a year earlier. Repayment rates for those loans were lower in the third quarter than they were in the third quarter of 2017. Loan renewals and extensions were higher, he added.

Loan repayment indices have been lower year-by-year for several years, noted Michael Langemeier, a Purdue University professor of agricultural economics.

“Liquidity continues to deteriorate,” he said. “More operators are below critical levels. Liquidity is tight and more operators are having difficulty. To get an operating loan, it’s hard to make a decision to borrow money on land you’ve already paid for.

“It helps that debt-to-asset ratios are still quite low. They can take on more debt associated with land. Land values are coming down, but they’re still pretty strong.”

Farmers who are considering bankruptcy may feel as if they’re out of options, Langemeier said. “Their liquidity is tight and there’s not much cash left there. There’s no wiggle room.”

He doesn’t think bankruptcies will jump as long as land holds its value. Values would still be pretty strong even if they dropped 5 percent. Before talking to a banker, he recommends knowing the financial status of the operation and making sure balance sheets are up to date.

1/9/2019