Following the enactment of the Family Farmer Relief Act of 2019 in August, there has been endless speculation as to whether the Act’s dramatic increase in the Chapter 12 maximum debt limit—from about $4.4 million to $10 million—would catalyze a spike in Chapter 12 farm bankruptcy filings. Recent agricultural lending and other economic data indicate the answer is probably “yes,” especially within certain ag commodities and regions (hint: dairy and the Midwest).
According to Farm Bureau statistics, 2019 farm debt is projected to hit a record-high $416 billion, with $257 billion of that being secured by mortgages on agricultural real estate. Perhaps more significantly, ag loan maturities have been stretched to all-time highs in a number of categories, with the average maturity of non-real estate loans being stretched to an average of 15.4 months.
And while net farm income has also risen—$88 billion this year, the highest since 2014—some 40% ($33 billion) of that income is derived from some form of government/trade assistance (Market Facilitation Program payments) or insurance proceeds.
But the question remains: do these ominous numbers indicate that a spike in Chapter 12 filings is just around the corner, especially now that the debt limit has more than doubled? Broad-brush, national statistics might suggest otherwise. For the 12-month period ended September 2019, Chapter 12 filings nationwide were up 24% versus the prior 12-month period, to 580 cases. But that’s well short of the 676 cases filed in 2011, the last year Chapter 12 filings peaked. And nationwide filings actually decreased 2% from 2Q to 3Q 2019—a period that includes the first month following the August 23 effective date of the Family Farmer Relief Act and the new $10 million debt cap.
But if we drill down on the available statistics (which are rather scant; the Office of the U.S. Courts doesn’t track or aggregate Chapter 12 filings by debt levels, for example) and take stock of recent headlines and other anecdotal data, there seems to be only one, reasonable conclusion to draw: a Chapter 12 bankruptcy boom is on the horizon, with dairy producers being the highest risk candidates to file.
First, if you compare Chapter 12 filings from the month of June 2019 with the month of September 2019 (the most recent one-month periods available), there’s a dramatic 44% uptick in filings (from 36 to 52). Of course, filings in Nebraska (10 new cases) accounted for the lion’s share of this move, and are probably largely attributable to record flooding in the state this past spring. But it’s still a notable upward move in such a short timeframe—especially if you bear in mind that September was the first full month following the effective date of the new $10 million debt limit.
Second, participation in the dairy-specific crop insurance program, Dairy Revenue Protection (DRP), has been aggressively expanding: in just its first year of existence, more than 50 billion pounds of milk have been covered, with significant concentrations of coverage blanketing all of the major Midwest dairy-producing states/regions of, Wisconsin, Michigan and Western New York.
Third, the recent bankruptcy of Dean Foods—the country’s largest dairy processor—is certain to have a domino effect on a huge swath of the country’s dairy producing regions. Long before filing Chapter 11, the company canceled more than 100 producer contracts, and there may be significantly more to come.
If the Chapter 12 boom does happen, a number of interesting and unique issues are sure to be raised for farmers, lenders, and other ag stakeholders. I will consider these issues in subsequent posts.
About the Author:
Stuart Laven is a Cleveland, Ohio-based bankruptcy and restructuring attorney who focuses his practice on representing FSA lenders, producers, and other significant stakeholders in agricultural bankruptcies, out of court restructurings, and financings across much of the Midwest, including all U.S. Bankruptcy Courts in New York, Ohio, Michigan and Wisconsin. I can be reached at email@example.com. Read my bio here.
Sources: Office of the United States Courts (bankruptcy filing data); “Farm Bankruptcies Rise Again,” Farm Bureau Market Intel (fb.org), John Newton, October 30, 2019; “Dean Foods, America’s biggest milk producer, files for bankruptcy,” CNBC.com, Amelia Lucas, November 12, 2019.