Talking with Mary Nell Preisler, director of the Minnesota Farmer-Lender Mediation service this week made me feel like I'd discovered the canary in the coal mine. So far, farm lenders aren't fessing up to many problem loans in their livestock portfolios, but the launch of loan renewal season Jan. 1 could trigger a turning point. Negotiators like Preisler will be among the first to see if the farm economy is souring.

Minnesota's farm mediation program--one of 34 certified programs nationwide--already has seen a major surge in mandatory debt mediation cases in 2009 and is bracing for an even bigger wave come mid-January. Preisler's Minnesota caseload jumped from 2,002 to 3,107 between 2008 and 2009 as livestock losses mounted and as some crop producers struggled with high input costs. Each case represents a farm loan, and borrowers often hold more than one account. Creditors in that state are required to go through the mediation process before proceeding with foreclosure, repossession or other legal action.

"We're expecting a very busy, busy year," Preisler told me as New Year's approached.

Normally bad loans come down to personal issues such as a major disease by the farm operator or a family member. Divorce also takes a heavy toll on family businesses (Preisler says few farms survive it), and partnership splits often leave the remaining operators with too much debt and too few assets to generate income. In the past, 77 percent of her clients were sole proprietors. The typical borrower averaged ag debt of $273,500 and a median average living expense of $37,250 per year--not a high roller. Commercial banks held about 40 percent of the money they owed, and the Farm Service Agency ran a close second.

But the 2010 economy will mean a whole new set of problems, Preisler adds. She suspects lots of her clients will make the decision to stop farming this year. After two years of livestock losses-- many dairy and pork operators will say they have had enough. When the economy went south, some part-time farmers lost their jobs and their health coverage. They tapped their IRAs and life insurance to keep going, but much of that was spent in 2009. Now troubled farm debtors are entering 2010 with much thinner reserves.

Farrow-to-finish pork operations have suffered losses 24 of the past 26 months--the last 15 months straight, said a mid-sized independent that raises 85,000 head per year at our recent DTN Ag Summit in Chicago. His goal is a $15 per head profit and he hopes to be the last man standing in the swine business, but current futures prices mean he will need to wait for the summer months to project a $22 per head return. Fortunately, his grain operation offsets some of that disaster.

For others, profit improvements are coming too slowly to satisfy lenders, however. Already, some Iowa farm lenders are notifying their customers that loans won't be renewed next season, another farm financial consultant tells me. Forrest Buhler, a staff attorney with Kansas Agricultural Mediation Services, also reports an uptick in dairy cases (and to a lesser extent, swine and beef operations) as lenders lose faith in their ability to recover.

Preisler's mediation service tries to give borrowers options by reamortizing loans or lowering interest rates to make payments more affordable, or helping to determine what can be sold or downsized. (No farm lenders have so far written bad debts down to appraisal value, perhaps remembering the uproar that caused in the 1980s.) But before Preisler works out a restructured plan, she asks the ultimate question. "Do you want to put all your equity at risk? When is it time to say uncle? When is it time to back off and say 'I'm 55 and I want to retire with something.' "In 2010, Preisler thinks she knows the answer.

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