As bankruptcies rise, farmers and lenders hope for big harvests, rise in crop prices

MINNEAPOLIS, Minn. — Bankruptcies are on the rise for farmers in the Upper Midwest, and if low prices continue, anything that affects the high yields farmers have enjoyed in recent years could mean more ag operations will have to consider reorganizing to stay in business, banking experts say.

Meanwhile, another high production/low price year could cause some farmers to simply “throw in the towel,” a Minneapolis Federal Reserve Bank survey says.

In November, the Minneapolis Fed reported that for the year ending in June of 2018, 84 farm operations in the Ninth District (the Dakotas, Minnesota, Montana, Michigan’s Upper Peninsula and northwestern Wisconsin), filed for Chapter 12 bankruptcy protection — more than twice the level seen in 2014.

The trend continued with figures updated in September 2018, said Ron Wirtz, a Fed director of regional outreach. Chapter 12 bankruptcies rose to 92 for the previous 12 months, compared with 76 for the same period ending in September 2017. At the same time, national Chapter 12 bankruptcies declined.

A fair share of the region’s uptick in Chapter 12 appears to be tied to small, struggling dairy operations, particularly in Wisconsin, but continued low crop prices could mean Chapter 12 will become more common, Wirtz said.

“Given the extended nature of low prices, small farms whether dairy, or corn or soybeans, are going to face more pressure, because they can’t make it up on scale (of operations),” Wirtz said.

The bankruptcy trend is “just kind of one more piece of evidence that shows farmers are struggling. I don’t want to say it’s not surprising, but we are entering the fourth year of low prices,” Wirtz said.

“Like any business, the first year of low prices, a lot of businesses can weather that. After the second year, you start to see a little bit more financial stress among more farmers, third year the same thing. It’s kind of a snowball effect, the longer prices stay low, the more businesses that are financially affected because they struggle at making a profit,” Wirtz said.

“Most businesses can do it for a year, maybe two, fewer and fewer can do it three, four, five years going on,” he said.

Chapter 12 bankruptcy has been around for about three decades, and was created after the farm crisis of the 1980s. Filing for Chapter 12 bankruptcy doesn’t necessarily mean an ag producer plans to go out of business.

Chapter 12 gives a farmer or rancher protection from creditors as they reorganize their debt to remain a viable operation, Wirtz said.

Leaders of two North Dakota banking groups say they haven’t seen an uptick in the use of Chapter 12.

However, like Wirtz, they said that if crop yields take a big hit, or the trade dispute with China continues too long, turning to Chapter 12 could become more common for this area’s farmers and ranchers.

“For the most part, things are looking good,” as operating loan renewals continue, said Rick Clayburgh, president and CEO of the 68-member North Dakota Bankers Association.

Bankers say some operators are feeling the pressure of low crop price. Cattle prices have been a bit depressed, too, Clayburgh said.

There is still “a sense of cautious optimism,” Clayburgh said.

At the same time, if low prices continue, or if the region runs into a stretch of drought, too much rain, or other severe weather that knocks down crop yields, “that could change things.”

If yields drop, while input costs go up and prices edge down, “the equity position of the producers will start to get challenged. … If you continue in a cycle where you continue to lose equity … it comes to a point where you have to make difficult decisions,” Clayburgh said.

The trade dispute with China isn’t helping, Clayburgh said.

Much of North Dakota’s soybean crop had been sold in China in recent years. Soybeans were trading about $9.10 per bushel on Feb. 21. That’s down considerably from the $10.71 they traded for on Feb. 26, 2018, according to the Macrotrends website.

“The issue we’ve dealt with is overproduction on soybeans. The trade issue with China has had an impact on price. We don’t want this to continue,” though producers understand what the administration wants to do, Clayburgh said.

Barry Haugen, president of the Independent Community Banks of North Dakota, said the 60 banks in that group have reported “degradation on the asset quality” or quality of the loans.

Haugen said low commodity prices have made margins thin, and some operators have restructured their debt. Operating shortfalls being covered by more medium- or long-term assets, such as real estate.

“Part of the savior is the past two or three years, the yields have been tremendous. We’ve been able to yield their way through this,” Haugen said.

Two-thirds of ICBND members are chartered in towns smaller than 6,000 people, Haugen said, so their loan portfolios are “very ag heavy.”

Sometimes the discussions get difficult.

“I do hear farmers getting up in years considering not farming” and looking at options to lease their land, rather than “looking at a paltry economic year,” Haugen said.

Often, they are people “in the twilight of their farming” years, who have lost some real estate value and are tired of poor returns.

“Do I take my chips off the table here, or do I continue to work hard and see potentially minimal rewards, Of course, that’s a risk in their business,” Haugen said.

That’s a sentiment that popped up in a Feb. 14 story by the Minneapolis Fed’s Joe Mahon.

The regional outreach director quoted an anonymous rural Minnesota banker.

“We are seeing economic stress rising significantly,” the banker said. “Producers are dealing with multiple years of economic pressure, and we are seeing more operations ‘throwing in the towel.’”

Farm incomes and capital spending continued to decrease as of the end of 2018, according to lenders who responded to the Minneapolis Fed’s fourth-quarter (January) agricultural lending conditions survey.

Falling incomes also led to decreased loan repayment rates, while loan demand, renewals and extensions increased, the Fed reported.

The outlook for 2019 is pessimistic, with survey respondents predicting a further decline in income and capital spending.

More than half of lenders told the Fed that farm income decreased in the fourth quarter compared with a year earlier while about two thirds of lenders said capital spending by ag producers fell in the fourth quarter.

Consistent with greater financial stress, loan repayment rates decreased, while renewals ticked up. About 36 percent of the lenders responding to the survey reported a lower rate of loan repayment from a year earlier.

Low or falling commodity prices were a bigger worry for the year ahead, according to the Fed survey. Three of four lenders cited prices as their biggest concern for 2019.

Some lenders told the Fed they worried about luck running out.

“A year of average yields with current commodity pricing would be very detrimental to our area’s farm operations,” an unnamed Minnesota banker told the Fed.