Farm bankruptcies keep rising in Minnesota and U.S.

Farm bankruptcies in Minnesota and across the U.S. rose again in 2019, as poor weather and the ongoing trade war with China prolonged a slump in commodity prices and profitability.

While the absolute numbers are small, they have been rising steadily since 2013, a year after the most recent peak in farm profits. Farm bankruptcies in Minnesota, Wisconsin, Iowa, South Dakota and North Dakota were three times greater last year than in 2013. Small dairy farms have led the way.

The extended downcycle since the 2012 peak has led farmers to take on more debt and lenders to demand more collateral. More farmers are turning to alternative modes of borrowing, such as from seed companies or upstart ag lending outfits.

"The situation is just kind of dragging out and wearing people down," said Kevin Klair, director of the Center for Farm Financial Management at the University of Minnesota Extension. "The big difference between this and the 1980s is we're not falling off a cliff. It's a slow, painful grind."

Last year, 30 farmers in Minnesota filed for Chapter 12 bankruptcy, which allows family farms to restructure their finances and avoid liquidation or foreclosure. That was up from 26 a year earlier, a 15% increase. Nationally, such bankruptcies rose 20%, according to data released by the federal court system.

Chapter 12 filings are the tip of the iceberg when it comes to farm financial troubles. Some farmers file for Chapter 7 bankruptcy and liquidate. Corporations or partnerships in which no single farmer owns more than 50% of the farm tend to file under Chapter 11, which is more complicated.

Congress helped farmers by more than doubling the debt limit for Chapter 12 from $4.4 million to $10 million in 2019, which allows more farms to avoid Chapter 11. But that doesn't change the fundamentals of farming. "The stress has been building for quite some time, so I predict you'll see more bankruptcy filings" in 2020, said George Singer, a bankruptcy lawyer in Minneapolis.

Low interest rates, high land prices and the trade war bailout from the U.S. Department of Agriculture helped farmers withstand a poor year in 2019 brought on by the trade war and wet spring.

In the trade war bailout, Minnesota farmers received about $1.2 billion — more than half of it for soybean growers — of the $14.4 billion paid by the USDA through October, according to data compiled by the Environmental Working Group. "We have fewer farmers now than we did five years ago that can self-fund their operation," said Keith Olander, a farm business management instructor in Staples, Minn. Many get jobs off the farm to make ends meet.

Median farm income in the state was $26,000 in 2019, said Olander, who has a database of 2,600 farms. When family living expenses and debt service are calculated, that median farm came out $31,000 in the hole for the year.

"Average family off-farm income was over $30,000 so that's how they make it work," he said.

Winter is when row crop farmers go to the bank for a new line of credit to pay for seed, fertilizer and other planting expenses for the year. That requires demonstrating to a lender that they can pay back the money.

More than half of Minnesota bankers surveyed by the Federal Reserve Bank of Minneapolis in the fall said fewer farmers were able to repay their loans. "A lot of farming operations have been on multiple forbearance agreements, and now the banks are getting pressures internally from their credit committees," Singer said.

Aaron Brudelie, a farm business management instructor in Welcome, Minn., said he estimates 1 out of 10 farmers is now struggling to find a lender.

"They're either needing to put up more collateral to get a renewed operating note, or they're having to sell something," Brudelie said.

The first thing a farmer will sell is underused equipment, Brudelie said. Selling land is "the last resort," he noted, in part because bankers often demand land as collateral.

Farm debt in 2019 was projected to hit $415 billion, a 24% increase since 2012. But that's not as much debt as farmers had in the early 1980s, adjusted for inflation. And the debt-to-equity ratios for farmers are much more reasonable now than heading into the 1980s farm crisis.

Large banks are pulling back from farm lending, however. The nine banks in the country with more than $250 billion in assets — including Wells Fargo, U.S. Bank and Bank of America — have cut their farm lending portfolios by a combined 14% since 2016, or about $2 billion.

"When farming is good, they want to get in, and as soon as it gets tough they want to get out," said Gary Wertish, president of the Minnesota Farmers Union.

More farmers are turning to alternative lenders — getting loans from equipment dealers or seed companies, or tapping higher-interest financing from new entrants into ag lending.

Not only do they generally charge rates nearly double what traditional lenders charge, loans from alternative lenders and company-financed debt can make the situation more complicated for the local banker who's been working with the farmer for years, especially if the loan goes sideways.

"It's a lot tougher to untangle then — who's got first position, who's got second, and who might not get paid," Brudelie said.

All this adds up to an increasingly complicated landscape, said Mary Nell Preisler, director of the farmer-lender mediation program at the University of Minnesota.

"It's getting more difficult every year and more complex," she said. "With the economy the way it is, it's very difficult to make a cash flow work and have a positive bottom line."

Adam Belz • 612-673-4405 Twitter: @adambelz