Claims About Farm Bankruptcies Do Not Justify Increasing Aid for Farms

Throughout the pandemic, amidst stimulus package debates and worries about crushing federal deficits, farming interests have persistently, and on occasion aggressively, lobbied Washington for additional subsidies to bail out failing farms. Frequently, as has been the case over the past two decades, their arguments for substantial increases in farm subsidies have involved claims that farm bankruptcies are surging and therefore the agricultural sector is in dire financial straits.

Such claims about farm failures appear to resonate with congressional committees and the general public. There is, however, no evidence that increases in farm bankruptcies filed under Chapter 12 of the bankruptcy code in any way reflect widespread financial difficulties among farms. Legislators should therefore ignore claims that large percentage increases — or, for that matter, decreases — in farm bankruptcies say anything about the state of the farm economy.

First, farm bankruptcies are extremely rare events, so small changes in their numbers can appear very substantial. For example, in 2018, 498 farms filed for bankruptcy out of approximately two million US farms. In 2019, the number of bankruptcies “exploded,” increasing by almost 20 percent to 595. This meant that 0.03 percent of all farms — i.e., one in every 3,300 farms — filed for bankruptcy. The increase of 97 farm bankruptcies out of a total of two million farms is effectively a statistical blip.

Second, sector-wide net cash incomes from farming, on an inflation-adjusted basis, were slightly above average in 2019, scarcely suggesting a financial crisis. But after the data on 2019 bankruptcies was published in early February, the statement that a “20% increase in farm bankruptcies occurred in 2019” — an entirely misleading number — was widely disseminated, and convinced many on Capitol Hill that the farm sector was already in a financial crisis before any COVID 19 impacts were being felt.

In fact, in terms of bankruptcies, farm businesses do amazingly better than the rest of the US economy. In 2019, when the US economy was exceptionally healthy, about six million businesses were operating across all other sectors of the US economy. Of those, 22,780 filed for bankruptcy, yielding a 0.38 percent bankruptcy rate — over ten times larger than the 0.03 percent rate for farms.

Notwithstanding the pandemic, from 2019 to 2020, farm bankruptcies declined by 7 percent. In 2020, 553 farms filed for bankruptcy under Chapter 12, 42 less farms than in 2019. The massive amount of $29 billion in COVID-19 aid received by farmers may have had some impact on those numbers. But this decline is effectively another statistical blip in a year when farm incomes surged to near-record levels because of COVID aid and relatively high harvest prices for many crops.

Using tiny changes in a miniscule number of bankruptcies as an indicator of financial stress within the farm economy is wildly inappropriate. Sector-wide, farms use their net cash income for debt servicing, but, as the chart showing farm bankruptcies and net cash income (adjusted for inflation) from 2000 to 2019 indicates, there is no correlation between net cash income and bankruptcies.

If Chapter 12 bankruptcies were a good indicator of the general state of the farm economy, you would expect increases in bankruptcies to be relatively closely linked to decreases in net cash income. They are not. In some years (e.g. 2002 and 2014), when income goes up bankruptcies go down; in others (e.g., 2009, 2010, and 2019), income goes up or remains relatively stable while bankruptcies go up; and sometimes, farm incomes go down and bankruptcies go down (e.g., 2004 and 2015). A simple statistical test also indicates no meaningful link between farm incomes and farm bankruptcies (see Figure 1: The correlation coefficient is 0.06, and not statistically different from zero).

So what factors drive farms into bankruptcy? As with all businesses, farming included, owners are not immune from making ill-advised investments, committing to bad marketing decisions, or undergoing behavioral and other health-related diseases that have financially catastrophic effects. A farm owner’s financial woes may also result from loss of income from other sources (e.g., losing off-farm employment or owning failing investments in other businesses).

Certainly, more studies are needed to identify why bankruptcies are so rare among US farms, but there is zero evidence that numerically minimal increases in Chapter 12 bankruptcies justify massive infusions of federal aid. Farm interest groups and others who cry out for new federal subsidies, else food production will collapse and Americans starve, should base their appeals on facts, not fiction or anecdotes based on the misleading use of data. And Congress and the executive branch should rely on accurate data and objective analysis in making decisions about whether those pleas should be accommodated at the expense of larger federal budget deficits.