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10-26-2018 08:20 PM - edited 10-26-2018 08:36 PM
Thank you Rick its nice to hear from you. I hope all is going well for you as this season comes to a close.
As I have written before, I never intended to have a discussion about bankruptcy rates. I mentioned it in passing in a post about how the farm community needs to adapt to new ideas in order to fight the difficult trend of falling prices and rising production costs. The original sentence was taken out of context, and just like the news media that kept harping on Russian collusion for a year and a half, I have had to answer one after the other posts that misinterpreted what I wrote and would not leave me alone about it.
I did not write that "farm businesses have a high bankruptcy rate as compared to all business bankruptcys". What I wrote is that if you compare the number of farm business bankruptcies relative to the number of farm businesses, that rate would be higher than any other bankruptcy rate as measured the same way in most any other industry. I think restaurants are higher. What it means is that for every hundred businesses in any ONE industry when viewed against every hundred farm businesses, it is more likely that there would be a farm bankruptcy than there would be a bankruptcy in any other individual industry. Not all industries combined, but each individual industry. The farm industry is more difficult to survive in than almost every other industry, due to factors that you know well, some within your control and some out of it. So its not an unexpected phenomenon that there are better chances to fail in farming. Congress recognized this when they wrote Chapter 12 into the Federal Bankruptcy Code specifically with the intent to relieve farmers of their unique problems that manifest more than in any one other industry in the American economy. The fact that they have not rescinded that Chapter of the Code is because those problems still exist in large enough numbers compared to other industries that the relief granted is still needed, albeit as you wrote not to the same degree as in the 1980s
And yes, you are correct that the farm industry has a much lower rate of bankruptcies than is found in all of the non-farm industries combined. But there are something like 30 non-farm industries in the US economy, so when you look at one industry at a time you find that the total bankruptcies in each individual industry of the entire non-farm economy is very small when spread out among all the industries. As an example, if there were but eight industries in the US non-farm economy, and they each experienced the same rate of bankruptcy, then that 8.41 number would be split 8 ways to give a rate per industry of about 1.05 business failures per 10,000 businesses, which is less than half per industry as what is found in farming.
Anyway, I did not think the sentence was important, and I have written that since. The important point that no one wants to talk about is embracing new ideas of doing business when the financial situation is against you. I wish I had received as many replies about that important point as I did about the bankruptcy statement.
If what I wrote was so unclear that anyone thought I was comparing the farm industry to the rest of the industries together in the economy, then I am sorry I was not clear about that. I also am sorry I wrote any reference to the bankruptcy subject at all, because I gave my detractors enough of an erudite point of statistical analysis to divert attention away from what I was really seeking to say.
10-26-2018 10:16 PM - edited 10-26-2018 10:35 PM
Okay, Ray. Respectfully, 1 more (basic math) chance on the bankruptcy thing. Not really taken out of context -- You stated it quite obviously in your posts, as part of your premise for how we're going broke and need your help. I also like reading your posts about the futures market, yet wish you would settle down with the attitude about essentially everything else.
Here's the lesson (again, just stated yet another way) --
Let's say there are 30,000,000 nonfarm businesses, and there are 25,000 nonfarm bankruptcies.
Now, let's say there are 10 industries represented in those 30,000,000, each with 2500 bankruptcies.
2500 divided by 3 million, is exactly the same as 25,000 divided by 30,000,000.
AND, it is still over 3 times the rate of farm business bankruptcies.
No matter how you slice it, the answer is the same. You don't divide the rate among the industries, the average rate remains the average rate. Some may be higher. Some may be lower. But the average is the average, and the rate is the rate.
PLUS, if you say that some/most of the 10 nonfarm industries are well below the rate of farm bankruptcies, then obviously for the nonfarm industries remaining, their bankruptcy rate is even much worse. Just the law of averages.
As for individual industries that have higher bankruptcy rates than farm businesses, construction comes to mind as one of the higher ones, but I didn't actually do any searches to try to find out.
Edited -- here's a link from a brief search --
Looks like Oil&Gas/Energy/Mining would likely have a high rate of bankruptcies, though the link doesn't give percentage rates in comparison to total businesses within the industries.
10-27-2018 12:43 PM
Okay, to oput this issue to rest, I got in touch this morning with a former colleague who is an analyst in commodities at a well-known investment bank who would know for sure what the real situation is and probably be able to describe it better than me. Here's what he wrote back :
"It’s a stupid argument that no one who covers this sector would waste a moment questioning. The bankruptcy stats tell only a part of the story. What I see is the number of farms in the US has been decreasing by about 4000 every year since the turn of the century, its been worse recently. At the least, a quarter of those that disappeared did so out of distress, so right off the bat you’re looking at 1000 farms a year that could not make it out of about 2 million farms. 500 of those are bankruptcies and another 500 are distress sales where either the owner couldn’t qualify for Chapter 12 reorganization, the creditors said no way, the cash flow of the farm was crap, or the owner didn’t want to screw up his credit rating because it would keep him from renting a farm the next year.
When anyone tells you there’s only 500 farm bankruptcies a year in farmland, they’re using one statistic to hide the truth. There’s 1000 or so farm fails every year, and the rate of fail is much more than in any other major industry except restaurants because they nearly always fail sooner or later.
The bankruptcy stats don’t tell the real picture because farm owners have land assets so they have something to sell when they wanna get out, but most failed business owners aside from farms are in retail or service industries and all they have to offer creditors is the good will of the business which obviously ain’t much or they would not be going tits up. So you can’t get a good view measuring bankruptcy data when it comes to farms, you have to look at numbers of farms because a failed farmer often doesn’t have to file bankruptcy but failed anyway.
So for the rest of the economy, you have 25,000 bankruptcy filings mostly under 3, 7 and 11, and few asset sales. It turns out that the 25,000 is a good measure of US business failures outside of farmland, its not much more than that. So if you have 25,000 failures for what, 30 million businesses outside the farm world, and you match that with the rate of 1000 farm fails a year for 2 million farms, you wind up with something like 15 or 1600 failures in the overall economy for every 2 million businesses, and since there are 20 major industries, divide that 1600 by 20 and you get about a fail rate of 80 business failures per year for every 2 million businesses for every major industry outside of farmland and 1000 failures for 2 million farms in the farm industry.
And that’s why no one questions that farms fail a lot faster than any other major industry. Anyone who thinks otherwise tell him to stick it he doesn’t understand the situation."
End of story.
10-27-2018 11:07 PM
Oh please, you've now heard more or less the same thing from two different people, one of whom analyzes this kind of information for a big firm. Can't you guys ever drop anything ? Enough already...
10-28-2018 07:54 AM - edited 10-28-2018 10:30 AM
I really appreciate that you have shared your technical analysis for the corn market recently, please keep remembering that.
But your bankruptcy rate analysis in your last post is still incorrect.
I agree that the real failure rate for farms is higher than the bankruptcy rate. It is that way for all businesses. I'm ok with the 1000 failures per year figure. Let's agree on that point. Fair enough?
I will also agree to your statement " It turns out that the 25,000 is a good measure of U.S. businesses outside of farmland (you meant farming instead of farmland, right?)
I also will agree with your next statement " So if you have 25,000 failures for what, 30 million businesses outside the farm world, and you match that with the rate of 100 farm failures a year for 2 million farms, you wind up with something like 15 or 1600 failures in the overall economy for every 2 million businesses,"
But here is the spot where your thinking is flawed. I am not trying to be a wise guy, and you can get this Ray, you just have to be able to have an open mind and realize that you could actually have made a mistake.
Your mistake is when you "divide that 1600 by 20, and you get a fail rate of 80 business failures for every 2 million businesses outside of farmland" You have forgotten to also divide the 2 million businesses by 20 .
You have said, and I agree with, 1600 failures for every 2 U,S,million businesses. If you want to extrapolate that out for each industry, then you must divide both the 1600 AND the 2 million by 20. Hence:
1600 failures per 2 million U.S. businesses equals 80 failures per 100,000 businesses of each industry.( there are 20). That is the part you have missed.
Please bear with me. I want you to understand this, because your really important point has been that farm failures are the worst of almost all U.S. businesses, save restaurants. The figures presented do not support that conclusion.
If there were only 80 failures per 2 million businesses of each industry, as you later state, there would only be 1200 failures per 30 million business. But in truth, there are 25,000 per 30 million businesses, as you have stated and I agree with.
Lets look at it another way: If there are 20 industries that make up the 30 million U.S. businesses, that averages out to 1.5 million businesses for each industry. 20 U.S. industries times 1.5 million businesses per industry equals 30 million total U.S. businesses. Can we agree on that logic?
25,000 failures per 30 million U.S.businesses equals 1200+ failures per 1.5 million businesses of each industry. Can we agree on that logic?
If one of the industries had 2 million businesses ( like farming) , instead of the average of 1.5 million, and that industry had the average failure rate, then that industry might have about 1600 failures in its 2 million businesses. Can we agree on that logic?
OR, how about this? If we use your "80 business failures per year for every 2 million businesses of each industry", there would only be 1200 U.S. business failures per year for the 30 million total U.S. businesses. Ridiculously incorrect. Instead, we have agreed that there were 25,000 failures per 30 million U.S. businesses. 25,000 failures per 30 million equals just over 1600 failures per 2 million.Can we agree on that logic?
Well then, if you have agreed so far, then how about this? 1600 failures per 2 million businesses of ANY single industry is more than 1000 failures per 2 million farm businesses. That means that farm failures are in line with other U.S. average business failures.
The real end of story will be when you realize your error, admit it, and realize that farming failures have been in line with, and actually probably less than the average U.S. business. That does not mean that we cant use your technical analysis of the current corn market.
It takes patience and persistence to figure out that a simple math mistake pointed out by a couple other posters has led you to an incorrect conclusion about the current state of american agriculture.I know you have it in you. It will take guts to admit it in print. I hope you have it in you.
As BA Deere pointed out ,the farm bankruptcy rate is inconsequential. Farming is not just a way of life as they used to say, For most of us farmers, it has not been just a way of life for several decades .It is very much like most other U.S. businesses , constantly under pressure to increase in size,adapt, change, embrace new ideas, get more efficient, deal with lower margins,look for possible new ways to do business. But nearly all businesses face similar problems. The strong or lucky buy out the weak, or unlucky, similar to the laws of nature. But the fact remains that a very large percentage of farm attrition is simply farmers retiring after decades in business, with the only distress being old age and aches and pains. Even 4000 per year is only 1 farm out of 50, most being farmers well past normal retirement age.
Again, I really appreciate your technical insight to markets that you have shared. It gives me another perspective as compared to my fellow farmers, other market analysts, USDA data and reports, grain buyers, etc.
But it is important to me that you can logic out that 1000 farm failures per year out of 2 million farms is a lower percentage of failures than 25000 failures out of 30 million businesses. And thus , farming is like most other U.S. businesses, fraught with constant changes and challenges to be successful. Consolidation is rampant, pretty inevitable with constant technology changes.
10-28-2018 10:59 AM - edited 10-28-2018 12:59 PM
The bankruptcy rate of traders is very high when then spent too much time doing bankruptcy analysis when they should be writing computer codes and looking at charts, that's for sure ! 8-)
I actually would prefer that more traders went bankrupt and got out of the industry, because just like one novice at the Black Jack table screws up the odds of winning for the experienced professionals playing at the same table, a few dumbazz traders can screw up the workings of an entire market, especially if they are managing a large amount of capital.
10-28-2018 12:37 PM
Rick, I appreciate everything that you wrote and I agree with many of the calculations. And if not for the fact that you are a consummate gentleman and an overall really great guy, I probably would not be taking the time to reply. Aside from trying to make a living in the market, I live with and care 16 hours a day for my 91 year old aunt who has severe dementia and cannot do anything for herself save for bring the fork to the mouth. So if sometimes I seem a bit edgy in what I write about topics like this business failure thing, please bear with me because I get maybe 4 hours of sleep a day and I don't really have the time to discuss something as irrelevant to the whole big picture as this.
The only thing I will say is this : if you want to make a comparison of any two things in life, the comparison has to be of items that are adjusted to be identical as much as such adjustment can be performed. So to compare business failures of the farm industry to the business failures in any other industry in America with the use of national numbers for the entire non-farm country, you have to make adjustments to the national numbers with respect to overall survey size and numbers of businesses per industry. You have a farm industry with 2 million businesses and an overall non-farm economy with 30 million businesses. As such, we have to adjust that 30 million number to an equal number of businesses as in farming, which means to divide the number of 30 million businesses by 15 so that you are looking at two million businesses at a time. And you also have to adjust the overall non-farm business failures for 30 million businesses down to an average number of failures per every 2 million businesses, which requires a likewise division of 25,000 by 15.
At that point you are making a comparison of equals with respect to number of business in farming to an equal number of businesses in the non-farm economy.
But that is not enough for an industry to industry comparison, because on one hand you have just the farm industry while on the other side of the ledger you have all the industries bunched together. So the second part of the adjustment is to divide the 2 million non -farm businesses and their number of fails by the number of industries represented by those 2 million businesses.
Once you do those two adjustments, and ONLY then, are you comparing the farm industry with other individual industries of like size. You have to make the two calculations because one simple division cannot adjust at the same time two separate factors of a) numbers of non-farm businesses and fails, along with b) numbers of non-farm businesses and fails per EACH non-farm industry. Remember, we are comparing not just business failures of the farm and non-farm industries, but also the business failures of any one of the 20 non-farm industries with the farming industry. Thus the national numbers that bunch all non-farm businesses as well as all industries together must be adjusted in two ways, and thus the need for the two separate division calculations to adjust that national number.
Another way to think of it is imagine if the farm industry was one country, which it may be soon in this country the way things are going. That farm country has 2 million businesses, and they have one industry - farming. Then imagine 15 other countries of 2 million businesses each. Each of these 15 countries do no farming but each has 20 different industries. The farm country has 1000 business failures per year, all in farming since that is their only industry. Each of the 15 non-farm countries has 1,667 business failures per year, spread equally among the 20 industries that comprise each country.
So in that example, each industry in each non-farm country has 83 business failures per year per industry, which total 1,667 total business failures.
Now if you want to compare the business failures of the farming country with any one industry in the non-farm country, its easy to do since both countries being compared have the same number of businesses and you have data per industry in each country to compare with the farm industry of the farm country.
At that point you are making a comparison of equals. Now if all 15 non-farm countries merged, then yes, you would have 1,250 business failures per industry, but that's out of 30 million businesses. The original number of business failures per industry for every 2 million businesses would be the same.
The bottom line is as I wrote above, you need to adjust the number of failures in overall non-farm businesses first down to how many failures for every 2 million businesses, and then for how many business failures per industry for every 2 million businesses. That's the only way to make an even observation between two equal groups. That takes two division calculations, not one.