By Editor on June 2, 2010
Editor’s note: This oped is by James Maroney of Leicester. He is a former organic dairy farmer.
The dairy business in the spring of 2010 is heading for an ugly climax. In previous times, when milk prices were merely low, conventional farmers would hunker down to wait until prices improved. But when prices are $5 to $8 per hundred weight below cost, as they are now, even “efficient” farmers face the prospect of bankruptcy.
Any concern that finds itself cash flow negative will sooner or later be forced out of business. Secured creditors can force a defaulting business into Chapter 7 bankruptcy and auction its assets for their own accounts. The owner gets what is left, which is invariably nothing. Forced bankruptcy carries hard connotations of failure and shame, feelings that proud farmers—perhaps more than any other group—will want to avoid.
But there is an important difference between forced liquidation under Chapter 7 and voluntary reorganization under Chapter 12. Voluntary filing for Federal Bankruptcy Protection is a smart, pro-active tactic available to any farmer who needs time to adjust to market forces beyond his or her control. Under Chapter 12, a federal statute written especially for farmers, the farmer stays in business as a “debtor in possession,” dedicating cash flow not to debt service but to a new business plan. In this cosseted position the farmer receives federal protection from creditors and time to re-order current obligations, to pay them at lower rates or even to discharge the principals on debts altogether. Chapter 12 is so powerful and farmer-friendly that upwards of 90% of farmers who have filed have emerged to continue in business.
As a requirement of filing for Chapter 12, the farmer must submit a new business plan whereby he or she projects a new route to profitability. The court will review the plan for its practicality and applicability to a fresh start. A plan that incorporates major changes, that is, a way to reorganize when regular milk is still selling for $15 per hundred weight, is key. The plan can be any of the farmer’s choosing but, because organic milk sells for $28 per hundred weight, converting to organic provides a unique opportunity for dairy farmers to regain profitability.
Even farmers milking 700 to 900 cows and losing $100,000 a month, can contemplate continuing in business on a smaller, but profitable scale. While large farms that grown corn will need a minimum of three years to convert, the time and money in the form of debt forgiveness provided by the federal government protection would make conversion feasible if not actually smooth: the organic standards require one to three years for compliance but the Chapter 12 statute allows up to five years for reorganization.
Many American corporations, struggling in this economy to adjust to shifting market forces, elect to re-organize under Chapter 11 Bankruptcy Protection. While not as user-friendly as Chapter 12, Chapter 11 affords corporations a similar protection from creditors while they re-design their business plans and renegotiate their obligations on more favorable terms. The federal government recognizes this process as a legitimate feature of capitalism to be assisted. Banks and other lending agencies also recognize bankruptcy as a risk of doing business and they build its unavoidable cost into the fees charged to all lenders. Farmer borrowers also pay their banks to help defray the cost of this inevitable risk. Here, suddenly, all but the 200 Vermont farmers who have already converted to organic are getting $15 hundredweight for their milk and many will face chapter 7 liquidation.
Farmers should not wait for the state to save them. Aside from slowing lake pollution attributable to agriculture, the $4.5 million in Gov. Jim Douglas’ 2010 budget destined for Agriculture and Natural Resources comprises no provision for supply management, for adjusting a seriously broken farm model and therefore no solution to the farmers’ problem at its root. Let’s all be clear: neither the state or federal government is going to do anything to get our farmers a “decent” wage and the Vermont Milk Commission makes a tragic if not a silly mistake in offering them crumbs in the form of “over order premiums” when what they need is a mechanism for curtailing supply.
Bankruptcy protection while converting to organic is one such mechanism and the conditions for it are ripe. If today even the most efficient conventional farms are selling milk below cost, if the average unsecured debt load on Vermont’s 800 conventional dairy farms is $25,000 ($20 million), and if the banks hold collateral on assets that are $100,000 over-secured per farm ($80 million), a statewide, Chapter 12, class-action bankruptcy action could wipe out $100 million of farm liabilities at book value and convert the cash flow that would have amortized that debt to private equity. Such redistribution trumps by two orders of magnitude that parsimonious fillip the Vermont Milk Commission recently proposed by way of an “over order premium” that would have distributed $1,000 to the average farmer to assuage a typical loss of $100,000 per year.
In November 2009, a few dozen farmers were invited to St. Albans to hear Senators Leahy and Sanders press two officials, one from US Department of Justice the other from USDA, about low milk prices. Sanders noted that the dairy processing giant Dean Foods controlled 70 percent of New England milk and had enjoyed record earnings last year. He asked Christine Varney, the assistant attorney general, if she didn’t think DOJ should revive an investigation into anti-trust violations in the processing industry, shelved coincidentally by the “previous administration” (for which almost all those in attendance had surely voted.) This was Mr. Sanders’s solution to the crisis: an investigation already 26 months in process and an eternity away from providing a paltry, ill-defined relief.
No one in Vermont should harbor even the faintest illusion of receiving relief from such an investigation least of all the dairy farmers.
Why then are the farmers continually appealing to the legislature? To file for Chapter 12, they don’t need permission from the governor, the secretary, the congressional delegation, the processors, their coops or anybody else; it is already law. And, if class-action bankruptcy by farmers precipitates a bank crisis, their burden simply moves off 800 Vermont conventional farmers and onto the broader shoulders of the 45 million upscale urban consumers along the eastern seaboard whom our farmers have been subsidizing these past several decades.
To look at it from a slightly different perspective, federal bankruptcy protection, by any other name, is public expenditure. Except the vehicle that provides it takes a far shorter and more efficient route than DOJ investigations into possible anti-trust violations in the processing industry or a cute web site that asks college students as they come to the campus lunchroom checkout to toss in their lose change to save family farms.
Chapter 12 Bankruptcy provides farmers five years during which to reorganize under new market conditions. Through the magic of federally protected debt restructuring coincident with the still-growing demand for organic milk, Vermont farmers will have money to step back and reorganize. When, in as few as one or as many as three years they emerge as certified organic, Vermont farmers will be income producing and squarely on the road to fiscal sustainability. From income they will, like the rest of us, pay property, sales and income taxes. Thus, they won’t need to return year after year to the public trough for assistance. With a new coat of paint, their farms will once again characterize the landscape tourists so love to visit.
Crisis is opportunity and this one in its sheer magnitude is uncommonly persuasive. For those farmers who are still not persuaded, who would wait and see, who don’t want to convert to organic or who worry that there is something unseemly about reorganizing under Chapter 12 Bankruptcy protection, the alternative to missing this coincidence of opportunities is worse: Chapter 7, forced liquidation on a rainy day coming soon.
Maroney: Class-Action Chapter 12 bankruptcy as a farm solution | Vtdigger.org
