1/11/99

Contacts:
Neil E. Harl, Economics, 515/294-6354
Susan Thompson, Agriculture Information, 515/294-0705

ISU ECONOMIST URGES FARMERS TO BUILD TEAM, STUDY OPTIONS

AMES, Iowa -- Low commodity prices, led by the unprecedented lows for hogs, are wreaking havoc on the balance sheets of Iowa farmers. Although the most recent hog inventory report offered some hope of a rebound in prices, there are still difficult months ahead. Meanwhile, 1999 crop prices remain a question mark.

The beginning of a new year is the time for producers to focus on how they will work through this time of low prices, says Neil E. Harl, an Iowa State University economics professor. "Farm families need to review their personal situation, looking not just one year ahead but two, three or more," he says.

Farmers in their 60s might want to meet with retirement counselors to discuss the best way to manage their farming operation as they prepare for retirement. Younger producers might want to assess off-farm opportunities, or the need for additional training if they believe they will be entering the general workforce.

"Don't view your situation in isolation," Harl says. He recommends individual producers build a "team" of people who can help assess their current situation and future options. This team might include an attorney, tax adviser, ISU extension program specialists, community leaders and support groups. "Stay in close contact with your team," Harl says. "When equity is disappearing at a rapid rate, it's frightening."

Once a support team has been assembled and a farm family's individual situation evaluated, it's time to meet with lenders. "Surprises are not a good idea," Harl says. "You need to keep your lender fully apprised of your financial situation."

Harl says one lesson learned from the Farm Crisis of the 1980s was that farmers shouldn't wait until serious action such as foreclosure or bankruptcy become necessary. "Debt restructuring may be possible," he says. Debt restructuring can include such things as stretching out the payment period of a loan, a reduction in the loan's interest rate or forgiveness of principal.

Farmers who find themselves with more debt than they can handle should familiarize themselves with other options, too. For instance, forfeiture of land can be done with thirty days notice, with the land simply returned to the seller. Of course, all payments and improvements made on the land also are forfeited.

Foreclosure is a legal step secured lenders can take to settle a debt on land or other real property, usually where a mortgage is involved. Harl says once property is seized and sold, the previous owner still has one year to come up with the necessary funds to reclaim it.

Farmers who have used "moveables" as collateral for a loan, such as breeding stock, crops in storage and machinery, might find themselves in default. These items can be repossessed under the Uniform Commercial Code.

Harl says these scenarios assume the lender is a secured creditor. In the case of a loan that is not secured by collateral, producers may be faced with legal judgments that can turn unsecured creditors into secured creditors in the eyes of the law.

Bankruptcy is another legal remedy that some producers may want to consider, Harl says. "Bankruptcy can give the producer a fresh start," he says. But he also cautions that some debt cannot be walked away from, and secured creditors are always assured they'll receive their collateral value.

There are four types of bankruptcy, Harl says. Chapter 7 is a complete liquidation, with Chapters 11 and 13 providing some reorganization of debt. The bankruptcy provision best suited to producers is Chapter 12, which is set to expire at the end of March.

Chapter 12 was enacted in 1986 for an initial seven-year term. It was extended five years in 1993, but expired at the end of September. A provision to make Chapter 12 permanent was debated in Congress in October but didn't pass. So supporters of Chapter 12 pulled it from a larger bill and got it extended through Mar. 31, 1999.

Harl says he and others will continue to urge Congress to make Chapter 12 a permanent part of the federal bankruptcy code. "If Chapter 12 is allowed to expire again at the end of March, farmers seeking bankruptcy protection will need to resort to other reorganization provisions that don't fit their situation as well," he says.

Harl says no matter what avenue a producer takes to deal with debt problems this year, it's important to research the possible tax consequences. Even with low commodity prices, producers could find themselves with taxable gains on some livestock, crops and depreciated machinery. There also may be taxes on discharged indebtedness, he says.

"I wish I had better news," Harl says. But he encourages producers to "not despair. Reach out to others. Think in terms of a team of people who can help you. Don't wait until it's too late to take control of your situation. We'll get through this."

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