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CRS-4
of captive financing by equipment dealers and input suppliers (e.g., John Deere Credit and
Pioneer Hi-Bred Financial Services). Life insurance companies historically also have
looked to farm real estate mortgages for diversification.
Farmers' Balance Sheets
Debt levels vary greatly among farmers. Only 66% of farmers have any debt (farm
or nonfarm), and only 38% have farm debt. USDA expects total farm debt to rise by
3.6% in 2005, reaching a record $213 billions Total farm assets are expected to rise by
3.6% in 2005, reaching $1.5 trillion and resulting in a 14.2% debt-to-asset ratio. Debt-to-
asset ratios for the sector have been relatively stable for the past decade. Thus, farm
equity has been rising because increases in debt typically have been offset by larger gains
in farm land. Economists attribute much of the continued growth in land values to
government payments.
Recent strength in farm income generally has given farmers more capacity to repay
their loans or borrow new funds. USDA economists estimate that the farm sector is using
about 48% of its debt repayment capacity (measured as the actual debt relative to the
maximum feasible debt) in 2005, down from a 53% average over 1995-2004. Debt
capacity usage over 60% indicates potential widespread problems, as was the case from
1977-1986. Although credit conditions are good overall, some farmers may experience
financial stress due to individual circumstances (10%-20% of commercial- and
intermediate-sized farms).
Farm Bankruptcy: Chapter 12
In response to the farm financial downturn of the early 1980s, Congress added
Chapter 12 to the Bankruptcy Code in 1986 (P.L. 99-554). It has special provisions for
farmers compared with other bankruptcy chapters, strengthening farmers' bargaining
position with creditors. Chapter 12 is more about reorganization of debt than bankruptcy
because it allows secured debts to be written down to the fair-market value of the
collateral and repaid at lower interest rates over extended periods. Chapter 12 is seen by
many as a policy response to the social stigma attached to family farm failures during the
Great Depression. It gives struggling farmers another chance to reorganize and repay their
debts, rather than forcing them into liquidation and off the farm.
Chapter 12 has succeeded in keeping some farmers in business and has encouraged
informal lender-farmer settlements out of court. But it has increased costs to society by
encouraging inefficient farmers who would otherwise liquidate to remain in business, and
allowing efficient farmers who could otherwise continue to farm to charge off part of their
debts. Bankruptcy costs include legal fees and the efficiency costs from continuing to use
labor and capital in otherwise inefficient enterprises.6
s Economic Research Service, at [http://www.ers.usda.gov/Briefing/FarmIncome/wealth.htm].
6 For more background and analysis on farm bankruptcies, see the USDA Economic Research
Service at [http://www.ers.usda.gov/Briefing/Bankruptcies] and CRS Report RS20742, Chapter
12 of the U.S. Bankruptcy Code.
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Monke, Jim. Agricultural Credit: Institutions and Issues, report, March 17, 2005; Washington D.C.. (https://digital.library.unt.edu/ark:/67531/metadc815611/m1/4/: accessed July 17, 2024), University of North Texas Libraries, UNT Digital Library, https://digital.library.unt.edu; crediting UNT Libraries Government Documents Department.