After the bankruptcy epidemic

The financial woes of US farmers have spread from select sectors in specific regions to swathes of the industry. What will the market look like in a few years’ time?

Wander around the Midwest these days and you may come across an unfamiliar sight. At this stage of the season, most crops should be in the ground; but now and again, tracts of productive land remain unplanted. “Any time I drive by a fallow field right now, my first reaction is that this is somebody who’s in trouble and did not get the working capital they needed to plant the crops,” says Ken Nofziger, head of Murray Wise Capital, a bankruptcy-focused firm based in Illinois.

As was evident in our recent presentation on the topic, US farmers’ financial malaise is deep and likely to get worse. Troubled operations are going bankrupt at an accelerated pace. This has been years in the making, Nofziger tells us. Half a decade ago, distress was mostly isolated to citrus and tomato farms in Florida. But it has since spread “across a wide variety of commodities and it’s become nationwide,” he notes. Strawberries, potatoes and sweet potatoes have taken a hit; the grain markets are starting to turn.

“And the one area that’s really gotten ugly is dairies,” Nofziger says. “There’s a number of fairly good-sized dairies that are in bankruptcy, but at the same time I’m seeing and hearing that there’s upwards of a hundred that have either filed or should be filing sometime soon. It’s a very tough marketplace.”

How did we get to this? Nofziger attributes grain woes to a supply-demand imbalance that’s been depressing prices for the third year in a row. Operating costs, meanwhile, have remained high: owning or leasing land is expensive. So is labor, with California and Florida among the tightest markets.

But the crisis is not only down to macro dynamics, says Nofziger. In the coming weeks, we will run a series of case studies exploring the main drivers behind high-profile bankruptcies, ranging from dairy farms to strawberries.

Preliminary findings suggest the downfall of ag operations sometimes owes to its owners’ lack of discipline – during bad times and good. Nofziger recalls seeing family-owned farms having four or five years during which lumps of cash were generated, but not reinvested in the business itself. Instead proceeds went towards “buying houses, planes or boats,” he says, leaving the farm unprotected when the good period ended.

Conversely, those who exercise caution – and benefit from economies of scale – can hope to be spared. Some will even find opportunities in the downturn. “As long as those operators are well capitalized they’re going to be able to survive these cycles.”

Nofziger expects little relief from public figures. In relative dollars, he points out, “it’s not huge amounts,” and it’s unclear what politicians can do to alleviate the problem, other than cranking up subsidies. “I don’t think we’re in a point of the cycle where that’s going to happen,” he says. Instead, further concentration is likely to occur, until a handful of dominant players emerge in each product basket.

“Whether it’s carrots, tomatoes or strawberries, most commodity classes go through these periods of difficulties and you find that you end up with a dominant three, four or five producers in any commodity class. It’s natural attrition,” Nofziger argues. Smaller players will have a hard time competing, if only because they don’t enjoy the same access to retail markets. But some very large players won’t be spared. When you need millions in working capital to get your crops in the ground, size can rapidly cease to be an advantage.

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