Full text of Agricultural Highlights : May 1987

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DALLAS
Federal Reserve Bank of Dallas

May 1987

How Many Texas Farmers and Ranchers Are Leaving
Agriculture Because of Financial Stress?
One facet of the prolonged agricul­
tural downturn of the 1980s is the con­
cern about farmers and ranchers leav­
ing agriculture because of high levels
of financial stress. Texas survey esti­
mates for 1986 range from about 2,900
for primarily commercial farmers to
more than 20,000 if all individuals
doing some farming are considered.
The lower number is indicative of com­
mercial operations, while the higher
number reflects lifestyle changes by
those who are likely to be principally
nonfarmers.
Who Really Is a Farmer?

The U.S. Department of Agriculture
defines a farm as a place from which
agricultural products worth at least
$1,000 were sold or could have been
sold. Given that very low threshold, the
total number of operators becomes
very large compared with the number
of operators of commercial farms and
ranches ($40,000 or more in annual
gross sales). For example, the 1982
Census of Agriculture estimated that
Texas had about 185,000 farms and
ranches. Of this total, only 80,000 were
operated by those whose principal oc­
cupation was farming or ranching, and
only about 28,000 were commercial
producers.
Definition of Farmer Steers Estimates

The number of farmers leaving ag­
riculture because of financial stress is
sometimes used as an indicator of the
financial health of the sector and as
a spur to legislation and agricultural
policy direction. For example, the new

Chapter 12 of the Bankruptcy Code
(see companion article) was brought
about by concern for financially
stressed agricultural operators. More­
over, agricultural policy steers about
$16 billion in direct payments to
farmers. The level and distribution of
these payments are affected by per­
ceptions of the financial conditions of
farmers, so estimates of the number of
farmers leaving agriculture because of

financial stress are influential. But the
implications for policy are quite differ­
ent if, say, the farmers leaving farming
are individuals who stop running a few
head of cattle on their hobby ranches
versus cotton farmers with milliondollar gross sales in the Texas High
Plains.
The Texas Agricultural Extension
Service and the Federal Reserve Bank
(Continued on back page)

Chapter 12 Bankruptcy:
Good for the Ailing Farmer but Bad for Agriculture
In October 1986, President Reagan
signed the Bankruptcy Judges, United
States Trustees, and Family Farmer
Bankruptcy Act of 1986. Part of that act
created Chapter 12, a new bankruptcy
chapter that is expressly aimed at
helping farm debtors work through
their financial problems without losing
their farms or ranches. But in
response, lenders to agriculture will
likely restrict credit and pass along
higher costs to all farm borrowers.
Was a New Bankruptcy Chapter
Needed for Farmers?

Over 59,000 nonfarm businesses,
with $43 billion in liabilities, failed
(ceased operations with losses to
creditors) in 1986. The same data show
that just over 2,100 farm and ranch
businesses, with better than $1 billion
in liabilities, also failed. But farm
business failures have the potential to
be much higher than that. The U.S.
Department of Agriculture estimates

that, as of January 1, 1986, 17,200
family-size commercial farms, with
liabilities of $5.96 billion, were highly
leveraged—-specifically, their debtasset ratios were greater than 1.0—and
had negative cash flow. Such farmers
and ranchers are technically insolvent
and are prime candidates for failure.
Thus, a new bankruptcy chapter just
for farmers seems reasonable.
Chapter to Keep Farmers in Business

A major goal of the Chapter 12
legislation is to keep family-size
agricultural producers on their farms
and ranches. Accordingly, among the
new law’s provisions are that (1) the
farmer may reduce the loan amount on
each item of secured property to the
collateral’s current market value, con­
verting the remaining debt to unse­
cured, and (2) the farmer may com­
pletely discharge unsecured debt with
a payout from “disposable income”
(Continued on back page)

Table 1

Table 2

Farmers and Ranchers Leaving Farming
Because of Financial Stress

Operators of Family-Size Farms
Likely to Be Affected by Chapter 12

Source of estimate or data

Number of farmers
and ranchers
leaving in 1986

Texas Agricultural Extension Service . . . .

Cash flow position
as of January 1,1986

2,892'

Federal Reserve Bank of Dallas................

3,7002

Texas Agricultural Statistics Service . . . .

20,7003

Debt-■asset ratio
.71-1.0
Over 1.0

Negative cash flow . . . .

13,200

17,200

Positive cash flow ........

125,000

94,500

NOTE: “ Family-size farm or ranch” has many definitions.
The definition used here is a farm or ranch with
annual gross sales from $40,000 to $500,000.
SOURCE: U.S. Department of Agriculture.

1. Primarily commercial farmers and ranchers.
2. Heavily weighted toward commercial operators.
3. Based on broad U.S. Department of Agriculture definition of farm.

SELECTED INDICATORS OF THE TEXAS AGRICULTURAL ECONOMY
TEXAS FARM REAL ESTATE VALUES

SOURCE: Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.

TEXAS CASH RECEIPTS
FROM LIVESTOCK AND CROPS

PRICES RECEIVED/PRICES PAID
|-

90 (1977 = 100)--------------------------------------

-

87

NOTE: Index is constructed by dividing prices received by farmers in Texas by prices
paid by farmers nationwide. (No separate series exists for prices paid in Texas.)
SOURCES: U.S. Department of Agriculture.
Federal Reserve Bank of Dallas.

FARM DEBT OUTSTANDING AT TEXAS BANKS
—

4.0 BILLION DO LLARS--------------------------------------------------------

—

3.9

—

3.8

—

3.7

—

3.6

35 I

1984

I

1985

I

1986

I

1986

SOURCE: Board of Governors, Federal Reserve System.

INTEREST RATES ON TEXAS FARM LOANS

NONPERFORMING LOANS
AT AGRICULTURAL BANKS
r-

NOTE: RCA rate is for farm operating loans at production credit associations.
FLB rate is for farm real estate loans at the Federal Land Bank.
SOURCES: Farm Credit Banks of Texas.
Quarterly Survey of Agricultural Credit Conditions,
Federal Reserve Bank of Dallas.

6 PERCENT OF TOTAL LOANS

' I

1984

I

1985

NOTE: Nonperforming loans consist of loans past due 90 days or more and
still accruing plus nonaccrual loans.
SOURCES: Board of Governors, Federal Reserve System.
Federal Reserve Bank of Dallas.

I

AGRICULTURAL BRIEFS
• The decline in District agricultural land values,
as measured by the Quarterly Survey of
Agricultural Credit Conditions, slowed again in
the first quarter compared with the last three
months of 1986. Dry cropland dropped only 0.5
percent in the first quarter, its smallest decline
since 1984. Some areas of West Texas and East
Texas actually experienced price increases.
Continued large government payments have
allowed farmers and ranchers to reduce debt
and consider land purchases.
• Bankers expect that livestock operations will
be especially profitable in 1987 when compared
with 1986. Over three-fourths of the agricultural
bankers surveyed believed that livestock prof­
itability would be “ much better” or “ somewhat
better” this year than in 1986. Just over onethird felt that way about cotton, while most
thought that feed grain profitability would be
about the same in 1987 as in 1986.
• Farmers continue to seek ways around the
$50,000 payment limitation on most forms of
farm program benefits. The General Account­

ing Office has reported that 9,000 “ new per­
sons” were created between 1984 and 1986 to
get around the law, and these new persons
received more than $300 million in benefits.
Some commodity groups oppose attempts by
the U.S. Department of Agriculture to tighten
eligibility, but given congressional unrest at
perceived abuses in farm programs, the new
regulations are likely to become reality.
• Private and government forecasts of U.S. cot­
ton exports have diverged since the U.S.
Department of Agriculture (USDA) adjusted
estimates of world cotton production and use.
China, which has been exporting several
million bales of cotton a year, may be out of the
export market this marketing year. Private
forecasts of U.S. cotton exports for 1986-87, at
7.0 million bales, are more optimistic than the
USDA forecast of 6.7 million bales. With the
marketing year ending July 31, part of the
discrepancy may be attributable to different
estimates of how quickly additional sales com­
mitments can be translated into actual exports.

TEXAS COMMODITY MARKET PRICES
UPLAND COTTON
r-

ALL WHEAT

60 CENTS PER POUND-

GRAIN SORGHUM
i— 5.4 DOLLARS PER HUNDREDWEIGHT-----

56

1987

I J, 'I Fr 1' m
« 1 no1
Mi1' A
A 'M
M'J'
SOURCE: U.S. Department of Agriculture.

SLAUGHTER STEERS
-

75 DOLLARS PER HUNDREDWEIGHT-----

~

70

SOURCE: U.S. Department of Agriculture.

FEEDER STEERS
84 DOLLARS PER HUNDREDWEIGHT 1987

1987z '

LSOURCES: Texas Department of Agriculture.
Federal Reserve Bank of Dallas.

54

1JI 1FC M I AAIM
■«>JI IJ I IAASI pOI sUNLIDI rJ

SOURCES: Texas Department of Agriculture.
Federal Reserve Bank of Dallas.

j

'a '

s

'

o

'n '

d

'

SOURCE: U.S. Department of Agriculture.

CORN
— 4.0 DOLLARS PER BUSHEL-

3.5

L-

1.5

I J,

» I ..I .I J. I A„ IS„ IO„ lN..ID„ I

F M A M J

SOURCE: U.S. Department of Agriculture.

Financial Stress (cent.)

Chapter 12 (cont.)

of Dallas have estimated the number of
Texas farmers and ranchers leaving
agriculture in 1986 because of finan­
cial stress (Table 1). These estimates
primarily relate to full-time commercial
farmers. The Extension Service esti­
mate of 2,892 was generated by survey­
ing all Texas county extension agents,
and the Reserve Bank estimate of 3,700
comes in part from a survey of com­
mercial bank lenders to agriculture.
Calculations using Texas Agricul­
tural Statistics Service data show that
more than 12 percent of Texas pro­
ducers had planned to leave agricul­
ture in 1986 because of financial
stress. This would mean about 20,700
farmers and ranchers left during the
year. That very large number would in­
clude not only full-time commercial
operators but also small farmers,
hobby farmers, and part-timers.
—Hilary H. Smith and
Jeffery \N. Gunther

over a period of three to five years.
Chapter 12 is likely to be a boon to
financially stressed family farmers and
ranchers. Farm and ranch real estate
loans can be reduced to the current
market value of the land (which, in
some cases, is over 50 percent less
than the peak value during the 1980s),
with the remaining debt being con­
verted to unsecured status. If land
values rise after this adjustment, the
creditor does not share in the apprecia­
tion. Further, the portion of unsecured
debt that cannot be fully repaid out of
some measure of current income after
three to five years will be written off.

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Costs Outweigh Benefits

The expansion of debtor rights under
Chapter 12 comes at the expense of
lenders to agriculture. Creditors will
respond to the greater risk in agricul­
tural lending by raising credit stan­
dards or increasing credit analysis and

monitoring, or both. Moreover, the cost
of credit for all farmers will go up as
lenders’ loan losses increase because
of Chapter 12. Farmers who are moder­
ately to heavily leveraged with negative
cash flow, as well as those with posi­
tive cash flow but whose debts exceed
the value of their assets, are most
likely to feel the pinch of higher credit
standards and more costly credit.
Table 2 shows a breakdown of opera­
tors of family-size farms by debt-asset
ratio and cash flow position as of
January 1, 1986. The 17,200 farmers
most likely to benefit may be more
than offset by the 232,700 farmers in
other categories who would face
tougher credit requirements. Further, it
is possible that Chapter 12 may have
perverse effects: higher credit stan­
dards may force into bankruptcy some
heavily leveraged farmers who other­
wise might have avoided it.
—Hilary H. Smith