Thomas Jefferson recognized more than a century ago that “agriculture is our wisest pursuit, because it will in the end contribute most to real wealth, good morals and happiness.” Today, agriculture, food, and related industries contribute more than $1 trillion to U.S. GDP. They account for more than 20 million jobs—more than 10 percent of U.S. employment. This wise pursuit, however, is currently under an economic siege that will not soon abate.
Market watchers have long been predicting that historically low commodity prices of the last several years would lead to a financial crisis in the ag industry. That crisis has arrived. Despite unprecedented levels of productivity, record levels of farm bankruptcies are occurring across much of the Midwest.1 Trade disputes and competition from other countries have created volatility that, coupled with the low commodity prices, has forced agribusinesses that have not yet sought protection from the courts to increasingly rely on borrowings to sustain operations. U.S. farm debt now exceeds $400 billion, which is a level not seen since the last farm crisis of the 1980s.2 Recognizing the industrywide challenges, lenders are increasingly reluctant to lend to ag businesses. Right now, many lenders are declining to renew annual crop and other input loans that farmers need to plant this year’s crops.
This edition of the JCR includes an overview of how the agricultural industry began its financial slide and provides advice for agribusiness owners and their advisors on how to survive the crisis. This edition also provides advice to lending institutions on how to protect their interests, given the varied and often secret liens associated with the business of agriculture.
Phillip Kunkel and Jeffrey Peterson discuss issues that arise when lending to an agribusiness under financial stress. They lay out the potential traps in Article 9 of the Uniform Commercial Code, the pitfalls created by the archaic but still existent model for agricultural liens, the issues created by production and marketing contracts, the concerns that may arise when the agribusiness is receiving support from the federal government, and the challenges of enforcing security interests and protecting loan value in a bankruptcy proceeding.
Daniel Dooley, CTP, explains the economic indicators that predict that insolvencies in the agricultural industry will continue to increase. He describes the causes of the current commodity price slump and the pending farm crisis and gives practical advice to agricultural business owners on how to fight back against the financial challenges posed by the present economic climate.
Peter Martin writes about the causes of the agricultural industry’s erosion of working capital and provides an overview of debt structures available to agribusinesses. He stresses the importance of cost control and gives suggestions for ways farmers, ranchers, and other agribusinesses can reduce costs to maximize revenues and preserve working capital.
Clinton Cutler provides advice to professionals on how to deal effectively with agribusiness lenders. He details the importance of understanding both the lender’s perspective and the client’s situation, understanding legal options and negotiating tactics, and presenting a realistic plan to the lender.