Rising Farm Distress: Preparing for Increased Agriculture Bankruptcies in 2026–2027

Financial institutions lending to the agriculture sector should prepare now for a continued wave of borrower distress and bankruptcy filings in 2026 and 2027. Chapter 12 farm bankruptcies surged 46% in 2025—yet another annual increase—highlighting the financial struggles facing the industry. USDA forecasts point to another year of compressed margins in 2026, with net farm income dipping to $153.4 billion and sector-wide debt climbing to a record $624.7 billion.

Current Distress in the Agriculture Sector

The U.S. farm economy has experienced a multi-year downturn characterized by eroding profitability, escalating costs, and rising leverage. After record highs in 2022, net farm income has declined, with 2025 marking the latest contraction. The causes include:

• Falling Revenue. Weak crop prices—particularly for corn and soybeans—combined with softening livestock margins, have reduced cash receipts for four consecutive years. Global surpluses and uneven export demand continue to suppress prices.

• Elevated Costs. Production expenses remain near record levels, driven by fertilizer, fuel, labor, chemicals, and interest expenses.

• Rising Leverage. Farmers increasingly rely on larger operating loans and carryover debt to bridge gaps. Many are tapping credit lines simply to plant, with repayment periods lengthening.

What Lies Ahead

The outlook for 2026 is bleak, indicating continued distress into 2027. USDA’s February 2026 forecast projects net farm income at $153.4 billion—down 0.7% nominally (and 2.6% inflation-adjusted) from 2025—while net cash farm income increases modestly higher only because of government payments (expected to approach 29% of bottom-line support). Without those payments, market-based income would fall further. Cash receipts are expected to fall, production expenses look to stay high, and debt will continue increasing. Industry analysts and the American Farm Bureau Federation warn of a “generational downturn,” with a fourth consecutive year of income pressure forcing greater reliance on debt. 

Practical Steps: Proactive Preparation for Defaults and Bankruptcy

Lenders should not wait for defaults to materialize or bankruptcy cases to be filed. Instead, proactive measures now are critical. While every credit is different and requires individual evaluation and attention, there are several measures that may generally improve a lender’s position ahead of default or bankruptcy:

• Audit Loan Files: Verify perfected liens on real estate, equipment, crops, livestock, and accounts receivable. Evaluate and address intervening liens. If possible, strengthen covenants, reporting requirements, and cross-default provisions in any workout documentation.

• Respond Promptly to Defaults: If appropriate, issue notices of default immediately to start the clock on default interest, acceleration, foreclosure timelines, and statutory cure periods. Clear notice preserves leverage and puts borrowers on notice of lender rights.

• Establish a Workout Framework: Deliver a pre-negotiation letter that expressly preserves all lender rights and sets the stage for any workout. Employ a dual-track approach: negotiate while advancing enforcement actions in parallel to preserve leverage.

• Evaluate Modifications Versus Extensions: Modifications may reset terms and provide stability, but require new underwriting. Extensions buy time but may only defer inevitable losses. Choose the appropriate route for your credit.

• Strengthen Your Position: Obtain additional collateral and personal guarantees where available. Exercise caution, however, to avoid preference or fraudulent transfer exposure in bankruptcy.

Proactive portfolio management now may materially improve recovery outcomes if borrowers file for bankruptcy in the coming months.