It’s spring – and that means farmers must get into their fields. The usual planting time for corn begins around April 25. For potatoes, a Wisconsin staple, it could be even late March.
But every year, our attorneys encounter several farmers who do not have the operating capital or financing for their spring planting. Farms require large amounts of capital for seed, fuel, fertilizer, labor, and other related expenses to get the field planted.
Without operational financing, the land may lie fallow and the farmer forced to quit and liquidate.
Farmers should look first to their existing lenders and banks. Often these lenders are familiar with the farmer, farm operation, and the integrity of the individuals running the farm.
Another source for operating capital is looking into traditional lending sources, such as farm credit (such as Compeer Financial), a farm service agency, and even life insurance companies.
For struggling farmers, though, these sources may not be available. These farmers may have to look for nontraditional finance sources. These might include family, landlords, cooperatives, and other suppliers.
Suppliers and vendors should not be overlooked. The merchants of seed, feed, and fertilizer need a market for their products and will often extend credit for that purpose. Extension of credit is important for such suppliers’ own business that they are willing to accept more credit risk.
About State Financial Assistance in Wisconsin
In some states, including Wisconsin, state financial assistance may be available.
Wis. Stat. section 234.90 provides that the state guarantee some agricultural production loans. Such loans to finance the purchase of seed, fuel, fertilizer, pesticides, tillage services, or crop insurance, may be eligible.
Eligible loans may be 90-percent guaranteed, but may not exceed $20,000 or an interest rate of 9%. The participating lender must obtain a security interest in the agricultural commodity.
Also, the statute makes no mention about how a reorganizing family farmer should be treated. A farmer may be denied eligibility if it is reasonably likely that the farmer will not face voluntary or involuntary liquidation before the end of the loan term.
The Wisconsin Housing and Economic Development Authority (WHEDA) has supported agricultural-based businesses since 1985, and offers loan guarantee products.
This program, Credit Relief Outreach Program (CROP), allows farmers to purchase services or consumable goods if they cannot obtain conventional financing.
To qualify for CROP, the farmer must meet the following criteria:
have a projected positive cash flow;
have a debt-to-asset ratio of between 40% and 85%;
possess sufficient collateral;
be actively engaged in farming;
does not owe child support; and
has not defaulted on a prior WHEDA loan.
Every spring, we have farm clients in need of debt restructuring who also are in need of crop input financing.
Chapter 12, or any other chapter under the bankruptcy code, should not be thought of as a sure-fire way to get that financing. Nothing in the bankruptcy code requires a potential lender to extend credit.
Before starting a bankruptcy case, we should determine how much operating capital the farm will need and how that capital might be obtained. Without operating money, a bankruptcy reorganization is almost sure to fail.
The time to think about filing a reorganization is not when the money runs out. It would be far better, and improve the chances for success, if a reorganization filing is made at a time in the year when operating money is available.
Chapter 12 might enable the farmer to use the proceeds from the sale of crops or livestock. If the crops or livestock have already been sold, there is no inventory remaining for which the court might approve the sale of and the farmer’s use of those proceeds.
We have seen many instances where crop farmers sell the crops in the fall or winter, with the proceeds rightly going to the secured creditor, but then leaving the farmer with no collateral that might be used for spring planting. Same is true with livestock.
Bankruptcy Financing Options
The bankruptcy code does permit reorganizing debtors to obtain credit. The reorganizing farmer may incur unsecured debt in the ordinary course of business. The code does not define “ordinary course,” but there is some case law that has developed regarding the definition.
Such an unsecured creditor will have an administrative expense in the bankruptcy case.1 Such administrative claims have priority and are paid before other unsecured claims.2
Credit other than in the ordinary course of business can also be obtained, but requires court authorization. This creditor will also have an administrative expense priority claim.
The debtor may be able to grant an input provider a super priority position over all other administrative expenses. Doing so requires a motion, but does not require that any other creditors be provided with adequate protection.
Similarly, the debtor may be able to grant a lien on unencumbered assets to a new input provider. Again, because the assets are unencumbered, there is no need to provide adequate protection to other secured creditors.
Finally, the debtor may be able to offer a junior lien to a crop input provider. This would work best in the not-uncommon situation in which the farmer is asset-rich but cash-poor.
The court can grant a potential lender a lien senior to or equal with existing creditors under appropriate circumstances. The debtor must be unable to obtain credit otherwise. The existing lien holder’s interest must be adequately protected. This adequate protection is sometimes provided by rental payments, and sometimes by granting a replacement lien.
Existing creditors will sometimes extend additional credit in return for the granting of cross-collateralization. A creditor with a secured debt and unsecured debt may be willing to extend additional credit if the unsecured portion of the debt can as a result become secured. Such transactions are carefully scrutinized by both the United States Trustee and the court.
Use of Post-petition Property
Some assets acquired after the case is filed are not included in the estate, and would not be subject to pre-existing liens of creditors – even creditors with after-acquired provisions in their security agreements.
Crops planted after the petition filing date are not subject to the crop liens held by pre-petition creditors. Similarly, government program payments for those crops are not subject to the pre-filing liens.
This provides an opportunity for a new lender to come in with financing for this year’s crops and have a first and paramount lien upon that collateral.
Sale of Existing Assets
Finally, some farmers may be able to sell some existing assets in order to generate operating funds. This would require the farmer to demonstrate to the court that the existing creditor remains adequately protected even without receiving the proceeds from the sale.
Conclusion: Don’t Delay
There are multiple ways by which a farmer may obtain crop input financing.
Bottom line: An examination of the farm’s needs and the options available should be made as early as possible.
Save the Date: 'Considerations for Starting a Law Practice' is May 4
Registration is open for the popular CLE workshop, “Considerations for Starting a Law Practice.”
This CLE workshop guides participants through planning and starting a solo firm. The workshop is Saturday, May 4, 2019, at the State Bar Center in Madison. For more details and registration information, see WisBar.org's Marketplace.
1 11. USC §364(a)
2 11. USC §503(b)(1)