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Highly leveraged farmers could face distress amid volatility in ag industry, pricing Infographic by Rachel Harper

Highly leveraged farmers could face distress amid volatility in ag industry, pricing

BY Sunday, January 07, 2018 12:21am

Farmers’ increasing use of credit to finance operations has left some operators financially exposed during a volatile period for the industry.

In West Michigan and nationwide, farmers have turned to debt at a time of declining commodity prices and slumping farm incomes. 

When coupled with elevated real estate values that have leveled off after growing rapidly from 2009 to 2014, it’s a pairing that has some researchers recalling the factors that led up to the farm crisis of the 1980s. 

“Trends in declining net farm income, increasing debt use, and declining land values are projected to continue beyond 2017 and pose a problem to the agricultural sector. These factors place financial stress on farms, which may or may not be able to sustain these levels of stress,” according to a report last year from researchers at Ohio State University and the U.S. Department of Agriculture’s Economic Research Service.

In a forecast released in November, the Economic Research Service projected farm real estate debt to reach $236.4 billion, an increase of 4.6 percent and an all-time high in non-inflation adjusted debt. 

The growing appetite for debt amid industry-wide challenges has caused agricultural lenders to closely watch clients’ losses for signs of trouble.

“Those we are fortunate enough to do business with, they still have that equity they are able to rely on or they are in a position where we can maybe help modify loan payments year by year,” Dave Armstrong, president and CEO of East Lansing-based GreenStone Farm Credit Services, told MiBiz

“At some point, when (farmers’) risk-bearing capacity starts to evaporate with negative margins longer term, then we are going to be out of options, too,” he said. 

One of the leading lenders for the ag industry, GreenStone provides financial services ranging from loans, equipment and building leases, crop insurance and more. 

Since the end of 2014, Armstrong said balances on GreenStone’s revolving lines of credit have increased 19.1 percent, signaling that farms are using more credit to finance operations, whether for seed, machinery, livestock or crops.

As farm operators leverage up, it could cause financial strain on the companies, especially given the recent volatility in the industry. Net farm income plummeted 50 percent from a high of $123.8 billion in 2013 to $61.5 billion in 2016, according to data from the Economic Research Service. The agency’s latest forecasts have net farm income rebounding by 2.7 percent last year to $63.2 billion, still below 2009 levels. 

“Anecdotally, I would say yes, more producers are borrowing money for operating purposes, whether it’s through conventional sources like GreenStone, commercial banks, or through dealer credit (i.e., the seed corn company, the chemical and fertilizer company, etc.),” Armstrong added in an email to MiBiz. “It obviously varies a lot from those who still do not borrow any money to those that are borrowing more due to a lack of profitability.”

Armstrong attributed this lack of profitability to “a world surplus of commodities (particularly corn, soybeans, wheat, and dairy) that has caused prices to fall below the cost of production. 

“It’s mainly an oversupply situation,” he said.

Even the burgeoning pork industry in Michigan could face lower prices at a time when significant investments in processing capacity and supply have come online recently. 

The USDA reports production in the U.S. could reach a record high 6.8 billion pounds for 2017, followed by a 4 percent projected increase in production in 2018, adding to the pressure on hog prices.

For the farmers in the market, the focus needs to be on the demand side of the equation. 

“If you look at ag in general, production has been good, which puts pressure on commodity prices,” said hog farmer Paul Pridgeon of Montgomery, Mich.-based Pridgeon Farms LLC

“What I know is American farmers have done a really good job producing their commodities, whatever it may be, (there’s) been production across the board,” he said. “It’s all about demand. If demand is there, we will be fine. … It’s the nature of commodity markets. We produce a certain amount of pork and the amount of demand out there dictates the price. (The) market has to clear the product somehow.”

NO SPIKE IN BANKRUPTCIES

For over-leveraged farm operators who experience a prolonged dip in incomes, the next step could be to file for bankruptcy. 

In West Michigan last year, Paw Paw-based Spiech Farms LLC, Niles-based Minisee Farms Inc. and Cherry Growers Inc. of Grawn filed for bankruptcy protection in the U.S. District Court for the Western District of Michigan. 

Additionally, Zeeland-based Boersen Farms Inc. flirted with bankruptcy while under court-appointed receivership stemming from a case involving $145 million in unpaid balances owed to creditor CHS Capital LLC of Minneapolis. 

While the case was later dismissed when LT Capital LLC — an entity registered to the CFO at Zeeland Farm Services Inc. — assumed CHS Capital’s interests in the debt, Boersen farms faced a wave of other lawsuits last year related to its ongoing financial struggles. 

A federal judge in Utah ordered Boersen Farms to pay more than $19.5 million to Tetra Financial Group after breaching an equipment leasing contact. In another lawsuit in the U.S. District Court for the Eastern District of Missouri, agricultural giant Monsanto Co. has accused Boersen Farms of breach of contract for failing to pay for more than $2.3 million in corn and soybean seeds it bought for the 2016 growing season.

Bankruptcy attorney Cody Knight of Kalamazoo-based Rayman & Knight, who advised Spiech Farms in its filing for Chapter 11 bankruptcy in December 2017, said he’s seen a great deal of financial distress among agricultural companies large and small over the last several years. 

“Low commodity prices, high inputs and high land prices,” said Knight of why West Michigan farmers are struggling. “The immigration issues (also) made it harder for fruit producers for a while.”

Legal experts say that despite some recent bankruptcy activity, West Michigan farmers are not filing for Chapter 11 or Chapter 12 at an unusually high rate in recent years. 

A Chapter 12 bankruptcy allows a distressed family farming-related business “with regular income” to develop a plan to repay all or part of its debts, according to information provided on the federal court website.

“In our district, we saw a small spike in Chapter 12 case filings in 2015, but filings have been low in 2016 and 2017,” said Laura Genovich, who serves as the Chapter 12 bankruptcy trustee for the U.S. District Court for the Western District of Michigan.

According to data supplied by Genovich, 24 farms filed for Chapter 11 bankruptcy in 2016, up from 15 farms in 2015. However, only eight farming-related companies filed for Chapter 11 and another three filed for Chapter 12 as of November 2017, the latest figures available.

“In terms of the future, it’s hard to predict,” Genovich said of possible filings in 2018. “Some farmers are able to work with their lenders to modify their loans outside of bankruptcy. For others, bankruptcy may remain a viable option. In Chapter 12, the intention is for the farm to continue operating; it is in everyone’s best interest for the farm to succeed and generate revenue to pay its debts, and the bankruptcy system offers some protection for farmers while they work through that process.”

FINANCIAL DISTRESS GROWS

The joint Ohio State University and USDA research report found that bankruptcies are “a lagging indicator of financial stress” for farmers, but projected that “financial distress and bankruptcy rates will be on the rise” given the current market dynamics. 

While Armstrong said bankruptcies in GreenStone’s portfolio “aren’t really more pronounced” in recent years, he acknowledged farmers may be in trouble if their losses continue unabated.

According to Jim Byrum, president of the Lansing-based Michigan Agri-Business Association, farms are much better positioned today to weather periods of financial stress, especially compared to the situation in the 1980s when farmers were highly leveraged and interest rates were high.

“We aren’t seeing anything near what we saw in the early and mid ’80s — not even close,” Byrum said. “There were serious problems (then). … The difference (now) is interest rates are low, farms aren’t leveraged at the level they were in the ’80s, (and) they certainly have a much better equity position.”

That’s a stance echoed by the OSU and USDA researchers, who noted the strong equity situation “mitigates the effects of the current downturn” and coincides with a period of historically low farm bankruptcies. 

“While the farm sector debt-to-asset ratio peaked above 20 percent in 1985, debt-to-asset ratios have not been above 15 percent since 1995, which helps illustrate that the magnitude of financial stress today is not as severe as the 1980s farm crisis,” the researchers wrote in the report. 

However, Byrum is watching closely for continued dips in crop prices, which can cause “some hiccups” for farmers.

“We are not seeing across the state of Michigan — and I monitor this pretty darn closely — farmers leaving the industry … or a change from the norm,” he said. 

MiBiz Editor Joe Boomgaard contributed to this report.

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