The Ag sector is looking at the lowest net farm income in 2016 since 2002, with a drop of 56% from 2013 prices. This is across the board, with decreases in dairy, meat, poultry, vegetable sand feed crops. Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag. Further, Farm Asset value is expected to decrease another 1.6% this year and debt to increase 2.3% for farms and non real estate debt to increase 3.8%. Net farm cash income projected for 2014-2015, when the numbers are finally in, down 27% and net farm income is down 37%. Add in a hotter than average July and low commodity prices and it is uncomfortable time in the ag sector.
Why does that matter? Iowa is consistently ranked #2 in gross farm receipts and is responsible for 7.6% of the US gross receipts in the Ag.
I have referred to this last “good run” of farming as the rise of the “shorts farmer”. A shorts farmer is one who hasn’t had to have livestock to spread out risk or make hay for, can afford to hire out crop scouting and spraying, and can trade equipment to avoid getting covered in grease doing maintenance and repairs. Shorts, while good for swimming, may not be the best gear for the rising waters ahead.
As trouble waters may be brewing, it is appropriate to review some basic concepts that perhaps we in the Ag community haven’ t had to consider in quite awhile.
Chapter 7 bankruptcy is a complete liquidation of non exempt assets, leaving the filer with some cash, some basic tools of the trade, the equity in their residence , retirement accounts, and up to $7,000 in equity in a vehicle. Eligibility depends on the size of the household. In Iowa, a single person can file if they are under $46,009 in annual income, 2 person household goes to $60,872 and so on. They can be filed once every 8 years. They are quick, taking about 3-6 months to discharge most debts. Some debts will haunt you to the grave, including tax debt that is less than 3 years old, credit purchases made with in 90 days of filing, alimony/child support, government fines and student loans (with some small relief avaialbe for those who truly can do no work).
Chapter 12 is a bankruptcy tailored for farmers, with the requirement to repay creditors tied to a five year plan that is connected to the production schedule of the ag economy, which is different that a factory. Farmers who file can only have $4,031,575 in debt to be eligible. That is owing $10,000/acre on 403 acre and nothing more, which isn’t really that outlandish. Those who don’t qualify will go to a 13 or a 11.
If you are thinking about filing a bankruptcy, you can do pre bankruptcy planning. Pull your financial statements, run a cash flow, get your taxes done and filed and meet with an advisor. Sometimes, the lenders can restructure your debts without filing a formal bankruptcy. Iowans have a tendency to hang on too long and miss opportunities to reset the game pieces and as result, end up consulting advisors and bankers when it is already too late.
Beware of gifts or below market sales prior to filing a bankruptcy, These transfers can be set aside and pulled back into a bankruptcy filing. Additionally, creditors who receive payments from someone who files bankruptcy can have those payments pull back into the bankruptcy estate if they were made 90 days prior to the filing. The creditor has some defenses, to include showing that the payments were ordinary business transactions but it can sometimes be more painful monetarily than it is worth.
Think about the round baling being done this summer. The custom operator who waits in the field for the check and cashes it promptly now doesn’t care about a 1 March bankruptcy but the operator that avoids conflict and waits to send bills until December may be writing a check to the bankruptcy trustee for the work they did and collected on. If someone who owes you money files bankruptcy and you receive the notice or read it in the paper, stop contacting them at once. You have the opportunity to do some investigation into whether any you are going to get paid, but calling the debtor to ask is not the way to handle it.
