NEW ORLEANS — Despite unemployment rates dipping to nearly a 50-year low in 2019, experts say rising interest rates and a record in total farm debt will pressure farm income and possibly “increase the risk” of bankruptcies this year.
In particular, Laura Genovich, an attorney for the law firm Foster Swift Collins & Smith PC, said that as farmers “likely” pay more interest in 2019, there will be an additional “strain on already tight operating (margins).”
The current economic conditions, according to Genovich, suggest “that more family farmers could seek bankruptcy protection.”
“Whether this results in more bankruptcy filings depends, of course, on each individual farm’s situation and lending terms,” she wrote an email to Michigan Farm News, noting, however, that anticipation for an increase in Chapter 12 bankruptcies over the last several years hasn’t resulted in more filings. Just yet.
According to a report from Agri-View, Chapter 12 bankruptcies filings in the U.S. decreased 8 percent from 2017 to 2018. In the Western District of Michigan, there were reports of four bankruptcy filings in 2017, down from 15 in 2015.
In 2018, Genovich said records show only two Chapter 12 cases were filed through the Western District of Michigan with one filed so far this year.
“We have seen Chapter 12 filings decline nationwide,” Genovich said. “These numbers relate only to Chapter 12 bankruptcy cases, which involve small farmers who continue operating their farm. It is more difficult to track farmers who stop farming and file Chapter 7 (liquidation) bankruptcy, and Chapter 11 cases (involving large-scale farms, like Stamp Farms).”
According to Dr. John Newton, chief economist for the American Farm Bureau Federation (AFBF), the “expectation is for (interest) rates to rise twice in 2019, although that could change.”
This, in turn, “would certainly increase farm-level borrowing costs,” he told Michigan Farm News this week, adding that the ag sector’s debt-to-asset ratio has grown for six consecutive years to 13.5 percent.
“Interest rates do remain historically low, however,” Newton said. “As to farm bankruptcies, certainly continued pressure on farm income could increase the risk of bankruptcy, but the outlook for some commodities is improving in 2019.”
In terms of 2018 net farm income at $66.3 billion, it was the third-lowest number in the last 20 years, according to Newton. He notes that while gross farm income was up 1.3 percent last year, the increase was outpaced by a 4.2 percent increase in production expenses, resulting in an overall 12 percent decrease in net farm income.
Add into the equation farm debt rising to $410 billion, up 30 percent over the last five years, and Michigan farmers might be stretched to their breaking point.
Although Genovich reports Chapter 12 bankruptcy filings declining in Michigan, a report from the Minneapolis Federal Reserve indicates a troubling trend within the upper Midwest region. And that is — 84 farms in Ninth District states, which cover farms in Minnesota, Montana, North Dakota, South Dakota, the Upper Peninsula of Michigan and northwestern Wisconsin, have filed for Chapter 12 bankruptcy protection.
This number, compiled over the last 12 months ending in June 2018, is “more than twice the level seen in June 2014,” Ronald Wirtz, director of regional outreach at the Minneapolis Federal Reserve, wrote in the report.
“Not all states are feeling the same effects,” Wirtz said. “Wisconsin, for example, is seeing about 60 percent of all bankruptcies among Ninth District states. It appears that bankruptcy filings have been particularly high among dairy farms there. Though the state is the country’s number two milk producer, it still has many small farms, which tend to be more exposed to large price fluctuations. The average dairy herd in Wisconsin is still just 153 cows; in California, the average herd is 1,300.”
According to Creighton University’s Rural Mainstreet Index for January, more than 40 percent of bank CEOs “expect farm loan defaults to be (the) biggest 2019 challenge.”
Where does that leave Michigan farmers?
“If you look at how much of our debt is represented by the annual income in agriculture, this year it’s at 97 percent,” Newton said in a statement. “That’s a 32-year high. Another year of low prices, combined with higher interest rates and higher costs of servicing those loans, really makes you wonder how long we can continue to be in this situation across agriculture.”