A third-generation farmer, Matt Gibson eyed a big expansion of his family’s business in late 2011, as grain prices soared in a searing Midwestern drought.
By August of 2012, days before corn prices peaked, the Gibson family had borrowed nearly $18 million in a series of loans from Chicago-based BMO Harris Bank.
The Gibsons took on more debt after the drought broke the following spring, sending grain prices tumbling. By 2015, with grain prices at half their peak, BMO and others creditors sued the Gibson businesses seeking to recoup more than $30 million.
The travails of Matt Gibson, 39, and his family are emblematic of a new class of “go-go farmers,” a term coined by fellow Midwest growers and agricultural economists. Many, like the Gibsons, borrowed heavily to expand their farms, then borrowed more in an effort to plant their way out of a commodity price crash, according to dozens of interviews with Midwest farmers, lenders and agriculture experts.
Their distress could foreshadow broader economic turmoil in the grain sector, which includes corn, soybeans and wheat.
“We’re in for a very, very rough time,” said Jim Mintert, director of Purdue University's Center for Commercial Agriculture. “It’s going to take several years to work our way through this.”
A Reuters analysis of federal data on agricultural lending in the grain-producing “I-states” - Illinois, Indiana and Iowa - shows that delinquency rates on farmland and production loans are rising sharply.
“It’s definitely a red flag,” Robert Johansson, chief economist for the U.S. Department of Agriculture, told Reuters.
The total dollar amount of nonperforming bank farm loans in the three states shot up to $288.2 million in the second quarter of 2016, up from $132.5 million in the second quarter of 2013, the year after corn and soybean prices peaked, according to data from the Federal Deposit Insurance Corporation.
The federal government doesn’t track large farm bankruptcies, but a special category of bankruptcies for smaller farms - Chapter 12 filings - points to distress in the grain sector. In the top Midwest grain states, the number of Chapter 12 filings, limited to those with less than $4.03 million in debt, were 51 percent higher in the 12-month period ending June 30 of this year compared to the same period in 2013, according to federal court data. In Iowa, the top corn producer, Chapter 12 filings had climbed 125 percent.
Another troubling indicator: The proportion of extremely leveraged grain and other row crop farmers in the U.S. - those with debts totaling more than 71 percent of assets - doubled, to 2.4 percent, between 2012 and 2015, according to the latest available USDA data.
In all, about one in three U.S. farms raising grain and other row crops, not including cotton, last year were categorized by the department as “highly leveraged” or “very highly leveraged,” meaning their debts equaled at least 41 percent of assets.
“I expect these categories to get larger,” the USDA’s Johansson said. “We should be looking at this.”
Such statistics match up with the stories of agrarian hubris and family desperation that are piling up in coffee shops and courtrooms across the Midwest. The common narrative is a struggle against low grain prices and high debt after years of credit-fueled expansion.
Matt Gibson and his attorneys declined to comment for this story, citing ongoing litigation. The rise and fall of their family farm is chronicled in the records of lawsuits against Matt Gibson and Gibson family businesses filed by BMO Harris and other creditors. Gibson family members who, according to court records, co-owned the businesses - including Larry and Vergel Gibson, Matt’s parents, and his wife, Amy Gibson - did not respond to repeated requests for comment and their attorneys declined to comment.
BMO Harris also declined to discuss its loans to the Gibson family, citing the litigation. The bank said in a statement that it seeks to avoid lawsuits and continues to make new farm loans, while working with current customers to restructure delinquent loans.
“This is a challenging period for grain producers,” the bank said in a statement. “We’re actively working with our customers to help them navigate their way through the cycle.”
BETTING THE FARM - AND THE CROPS
In past farm downturns, farmers typically owned most of the land they farmed, and thousands filed for bankruptcy in the 1980s after falling behind on high-interest land and equipment loans. Interest rates are near historic lows today. But modern farmers are increasingly using credit to finance operations - borrowing to rent land, and to buy equipment, seeds and pesticides - leaving them exposed to falling crop prices, agricultural lenders and bankruptcy experts said.
Matt Gibson, soon after graduating from Indiana’s Valparaiso University in 1999, returned to help his family’s farm in and around Newton County, about 65 miles south of Chicago, according to a Gibson business website. As grain prices soared, the family ramped up operations. By 2012, Gibson, his family and the companies they owned had pledged land, crops and equipment as collateral to BMO Harris and other creditors, according to court records. As their debt grew, they promised grain not yet grown and calves not yet born, along with a farmhouse and other property.
The Gibsons were part of a larger expansion binge by farmers in the Midwest. In Indiana, Iowa and Illinois, the number of farms with $1 million or more in annual gross cash farm income - a USDA figure that does not account for operating costs - increased 65 percent between 2011 and 2014, according to USDA data. In 2014, these more than 12,400 large farms occupied one out of every three acres of land farmed in the I-states and pulled in 41 cents of every farming dollar.
Many farmers who expanded - in the face of falling prices and rising global competition - were younger, said Robert Craven, director of the University of Minnesota’s Center for Farm Management.
“A lot of these ‘go-go farmers’ have never really seen a downturn in agriculture,” Craven said. “For them, it’s only been good times out there.”
Other tales of woe abound in grain country.
Ernie D. Johnson, an Indiana farmer, borrowed nearly $159,000 from the Agriculture Department in 2014 and 2015, pledging his corn as collateral, according to federal court records. But Johnson sold the grain and stopped paying the government, the USDA alleged in a lawsuit filed by the U.S. Attorney on the agency’s behalf in bankruptcy court.
Johnson and his attorney, KC Cohen, did not respond to requests for comment.
Missouri farmer William Michael Miller owed more than $6.5 million to creditors—including his largest lender, Farmers Bank of Northern Missouri; equipment maker Deere & Company; and equipment lenders AgDirect and CNH Industrial Capital—by the time he filed for bankruptcy in March of 2016. He was preparing to plant corn and soybeans on more than 7,200 acres in Missouri and Iowa when at least one farmland rent check bounced, according to documents filed in Miller’s Missouri bankruptcy case.
Miller “was always looking for more ground to rent, to get bigger and pay more than anyone else,” said Iowa farmland owner Russ Helbing, whose family rented nearly 4,000 acres to Miller. “He wanted to be the biggest farmer around.”
Miller did not return calls for comment. His attorney, Donald Scott, declined to comment.
‘MORE ROPE’ FOR FARMERS
The growing distress of Midwest farmers illustrates the myriad threats now facing U.S. agriculture: intense competition for land; competing demands for limited water; a strong dollar that raises U.S. export prices; extreme weather patterns; and rising foreign competition.
This past spring, corn and soybean farmers planted every spare stretch of dirt they could find—a record 178.2 million acres, according to USDA data—in a bid to expand their way out of their financial problems.
In October, the USDA forecast that the largest-ever U.S. corn and soybean crops would flood an already swamped global market this fall. Grain prices continue to hover at multi-year lows in the U.S. and worldwide.
To weather the economic storm, many farmers have relied on a spigot of bank credit that can be traced to the aftermath of the U.S. subprime mortgage crisis, which started in 2007. When mortgage underwriting standards tightened after the housing crash, banks and other agricultural lenders extended more credit for farmland as a new source of business, said Minnesota-based agricultural attorney Joseph D. Roach, a former agricultural banker who also is a farmer.
Prices for Midwestern farmland rose by more than 20 percent between 2010 and 2013 in some states and counties, according to data from the Kansas City Federal Reserve Bank. In Iowa, the weighted average for all grades of farmland jumped 72 percent from 2010 before peaking in 2013 at $8,296 an acre, according to an Iowa State University survey.
An extended U.S. drought during the period pushed agricultural commodity prices to record highs, making farmland loans more attractive to banks.
Some lenders, eager to grow their portfolios, stopped following their own lending guidelines, said Roach and other lenders and lawyers interviewed by Reuters. Grain cooperatives, equipment makers, seed sellers and other entities also extended easy credit, he said.
“I started to notice all these bankers letting the farmers have more rope,” said Roach. “They couldn’t give out the money fast enough.”
RENTING THE FARM
In the wake of the 2012 drought, the Gibsons turned to BMO Harris for help in increasing their acreage and expanding their cattle business, according to federal court documents.
Their timing was terrible. After corn and soybean prices hit historic highs in the summer of 2012, grain prices and grain-farm revenues started to fall.
Corn, which topped $8 a bushel in the summer of 2012, has lately traded for about $3.50. Soybeans have seen a similar collapse: Their price hit nearly $18 that year but has since fallen to less than $10. Soft red winter wheat traded above $9 a bushel and now brings about $4.
By the fall of 2014, Matt Gibson and his family started to lose control of their debt. They missed loan payments, which over time triggered higher interest rates. Around the same time, some of the BMO Harris loans began hitting their maturity dates, requiring payment in full, according to federal court documents in the BMO Harris case.
Meanwhile, the Gibson businesses were still under contract to pay above-market rents to farm huge tracts of land.
The Gibsons had generally paid reasonable interest rates on their many loans. But in June of 2014, Gibson signed a memorandum of understanding to buy a small herd of 271 Black Angus cow-calf pairs on credit from Boswell Livestock Commissions Co Inc, according to court records.
After putting $50,000 down, Gibson owed the balance - $771,000 - to Boswell in 90 days. He agreed to pay 7 percent simple interest per day - a 2,555 percent annual rate. With interest and principal charges, payments would total $5.63 million for the 90-day loan.
An interest rate that high would be illegal on a credit card or a car loan, according to Indiana’s usury statute, but agricultural loans are not covered by state or federal regulations that protect most consumers.
Gibson still has not repaid the cattle debt in full, according to a lawsuit filed last month by Boswell and its bank against Matt Gibson and BMO Harris. Boswell officials and its attorneys declined to comment on the case, citing the ongoing litigation.
‘GOOD DIRT’ AT AUCTION
On August 20, 2015, BMO Harris Bank sued Gibson Grain & Supply and two other Gibson businesses in federal court, claiming loan defaults.
Gibson’s creditors began repossessing assets, court records show. Deere & Company, Deere Credit, and CNH Capital America took back dozens of pieces of equipment. Landlords turned over thousands of acres to new tenants. A federal judge ordered much of the remaining farming assets to be sold at auction: about 848 tillable acres, farm equipment, a steel-pole building, and a farm house.
On a snowy early February morning, inside the crowded hall at the Jasper County Fairgrounds, three people from BMO Harris huddled together, scribbling notes, as auctioneer Jonathan Kraft paced in front of the somber crowd.
Kraft stomped to punctuate his description of the high-quality acreage at auction: soil types, ease of access, past crop yields.
“This is good dirt.”
“A great deal.”
The auction brought in $5.98 million, after the auctioneer’s commissions, according to court documents.
Today, the Gibsons continue to farm, but on a smaller scale. They were able to refinance a few hundred acres of the original family land, a source close to the family told Reuters, and to save the family farmhouse that Matt Gibson’s grandfather built.