The Pea Protein Market Shift: Why Producer Bankruptcies May Play a Big Role

If you are purely data driven in how you view near-term agriculture market trends, peas don’t seem to have a bright future: production is up 40 percent from a year ago, but prices (of the heavily exported commodity) are the lowest in 20 years, due largely to heavy tariffs imposed by China (35%) and India (50%).

But if you are more disposed to a longer-term, big-picture thesis, peas look like the cash crop of the future, with nothing but exponential growth and upside on the horizon. Demand for Beyond Meat and other meat substitutes has expanded rapidly and shows no signs of slowing down: 327 domestic pea protein products debuted in 2019, versus 11 a decade ago. Globally, the number is 1,300 products. (Source: CNBC.com)

For some producers who are stuck in long term contracts to raise depressed or low-margin crops (or purchase seed for those crops), bankruptcy (Chapter 12 for producers with less than $10 million of debt; Chapter 11 for larger balance sheet producers) presents an opportunity to literally walk away from those contracts/crops and immediately take advantage of more lucrative pea crops.

Bankruptcy Code section 365 (which applies to farm/ag debtors the same way it does to non-ag business debtors) gives debtors in bankruptcy broad ability to “reject” burdensome ongoing “executory” contracts and unexpired leases. When a contract or lease is formally rejected (via a motion and bankruptcy court order, or as part of a Chapter 12/Chapter 11 plan), any remaining contract payment obligations (e.g., long term purchasing quotas or rents) are treated as unsecured claims against the bankruptcy estate, and the debtor is completely relieved of any go-forward commitments. There are subtle exceptions to this rule for payment or other obligations that arise after the bankruptcy is filed (post-bankruptcy payments/obligations have “administrative” priority status), but the substantial benefit to the reorganizing producer is the ability to walk away from long-term contracts.

The same section of the Bankruptcy Code also gives debtors the right, if certain conditions are met (like curing any past payment defaults), to “assume” an ongoing contract and continue performing under it after its exit from bankruptcy, even if the bankruptcy filing itself would have been a technical default/breach of the contract that would give the other party the right to cancel the contract. This Bankruptcy Code device may prove strategically lucrative for those producers who want to move forward with an existing pea seed/bulk pea sale or other profitable/promising long-term contract as they refocus their operations and right-size their balance sheets.

Published by Stuart A. Laven, Jr., Esq.

Stuart Laven is a Cleveland, Ohio-based bankruptcy and restructuring attorney who focuses a significant portion of his practice on representing FSA lenders, producers, and other significant stakeholders in agricultural bankruptcies, out of court restructurings, and ag financings across much of the Midwest, including all U.S. Bankruptcy Courts in New York, Ohio, Michigan and Wisconsin.

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