Farm Bankruptcies Drop Thanks To Federal Aid, But Falling Cash Receipts And Elevated Debt Portend Trouble Ahead
By Maura Webber Sadovi
Chapter 12 family farm bankruptcies fell in 2020 for the first time in six years, in part because federal aid helped offset pandemic supply chain problems that resulted in the forced dumping of milk this spring. But declining farm cash receipts and high debt levels have many worried that Chapter 12 filings will resume their upward tack once government aid programs are rolled back, according to two economists.
The total number of family farm bankruptcy filings dipped last year to 523, below the nine-year high of 567 in 2019 but still the second-highest annual amount since 2010, federal court filings show. The decline comes even as larger farms became eligible to file for specialized relief after the debt cap was raised in August 2019, the economists said.
A decline in Chapter 12 filings would mark an end to the multi-year rise in farm bankruptcies due to a range of woes, including the trade war with China. But it’s not yet clear whether the downshift marks a sustainable change in momentum or a temporary pause.
Court closures in the wake of the Covid-19 pandemic have made it more difficult for farmers to file for bankruptcy relief, and a wave of pandemic-related federal aid — ranging from specific farm aid to the Paycheck Protection Program — has propped up farm finances, according to the economists and a farmer.
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“I don’t think we’re getting a clear view of bankruptcies this year,” said John Newton, chief economist at the American Farm Bureau Federation, one of the country’s largest farm lobbying groups, in an interview with Debtwire ABS in late December. “It’s going to take some time to really evaluate all the economic impacts.”
Commodity prices, land values may not be enough
Early in the year farmers were reeling as shuttered schools and restaurants disrupted their supply chains and slaughterhouse closures due to Covid-19 made it difficult to find places to process cattle, hogs and poultry, he said. By year’s end farmers were helped by higher commodity prices, but that won’t be enough to keep some out of bankruptcy, according to Joseph Peiffer, an Iowa attorney.
An anticipated 43% rise in net farm income in 2020 to $120 billion was driven in part by $46.5 billion in payments from the farm bill and conservation programs as well as such ad hoc stopgap federal programs as the Coronavirus Food Assistance Program, Newton wrote in a December 3 report. Through the latter, the USDA bought billions of dollars in produce, milk and meat which was then distributed through food banks, churches and non-profits.
Meanwhile, projected farm cash receipts from product sales dipped to $367 billion in 2020 from $370 billion in 2019, according to Newton. This year, if the ad hoc farmer aid is stripped away, net farm income will likely drop to the $90-$100 billion range, proving that farm income in 2020 was “a false positive,” Newton wrote.
It is also possible that bankruptcies may be stabilizing, but debt levels held by farms are still elevated, said the second economist. That will keep pressure on farmers, and could result in more filings if the emergency aid drops off in 2021, said the second economist.
Another factor is land values, which have allowed many strapped farmers to tap their equity for more debt or sell and get out of farming altogether rather than filing for bankruptcy. Unlike the 1980s farm crisis, the average value of farm real estate per acre has risen annually since 2016, but mostly plateaued in 2020 at $3,160, according to an August USDA report. Values in Kansas, Nebraska and the Dakotas were an exception, falling 2.3% on average, according to the report.
The most powerful kind of bankruptcy
Strong land values are a lifeline for both the distressed farmers who use Chapter 12 to reorganize and stay in businesses and those who end up liquidating in Chapter 12 — which lets them avoid paying taxes on their farm sales, the sources said.
For instance, a farmer who sold his Iowa farm out of a Chapter 12 bankruptcy in early December for $3.47 million faces $600,000 in federal taxes on the sale at closing, according to Peiffer. But the farmer will be able to discharge that tax through his bankruptcy case, something that would not have been possible if he had filed a Chapter 7 bankruptcy. “Chapter 12 is the most powerful chapter of the bankruptcy code,” said Peiffer.
The stew of federal aid and rapidly shifting business patterns leaves many farmers unsure where they stand. Carol Clement, who lost her father to the virus last spring, still isn’t clear about the full impact that the pandemic has had on her businesses in 2020 due to myriad changes in expenses, costs and consumer demand.
Clement and her husband, John Harrison, own and operate Heather Ridge Farm in Preston Hollow, New York, where they raise grass-fed beef cows, sheep, goats, pigs, chickens and turkeys. Clement saw a big uptick in sales early in the pandemic as more “down-staters” moved to the Catskill Mountain area to work remotely in the spring and summer. But now many of those temporary customers have disappeared.
The virus’s November surge meant that Clement had fewer customers for her 20-pound turkeys due to downsized family gatherings. She pivoted, quickly deciding to process some of the birds as ground turkey meat and others into turkey legs and breasts. But Clement didn’t add the costs of additional required trips to slaughterhouses to her already rich $6.90 per pound turkey prices. And until she finishes calculating her taxes for the year, Clement won’t know how all the changes have affected her finances.
With the virus still raging, Clement and other small farmers are “all leery of what the next year’s going to bring,” she said.
Maura Webber Sadovi is a Debtwire ABS editor and reporter. She can be reached at Maura.Sadovi@acuris.com.