Before a bank or an input dealer in southwest Minnesota releases an operating loan for the next corn and soybean crop, it asks whether you can pay it from what the farm earns. The balance owed does not answer that. Work out three ratios from the balance sheet and last year’s accounts, write them on one dated sheet, and act on the weakest. The formula matters: in a 2024 Mississippi State guide, a shorter formula counts $24,181 more cash a year for loan payments than the full one. That lifts the guide’s example farm from 1.063 on debt coverage (cash available for loan payments divided by the payments due), a weak result, to 1.22, stable.
What do you answer when the lender asks if the farm can pay?
Answer with three ratios on one sheet, dated and signed, each setting the debt against something different. Debt over assets is what you owe divided by what you own, so it shows how much of the farm is already owed. Debt coverage is the cash available for loan payments divided by the payments due this year. The current ratio is what turns into cash within twelve months divided by what falls due within twelve months.
The example below is invented for the arithmetic: a corn and soybean farm in southwest Minnesota, in dollars. The bands come from the guide of Mississippi State University Extension, the farm advisory service of that US university, which rates each ratio strong, stable or weak.
By the guide’s table, debt over assets of 0.50 is stable, debt coverage of 1.05 is weak, and a current ratio of 1.20 is stable. Coverage is where the pressure sits: the payments are covered with almost nothing to spare.
The 60 percent line for debt over assets is contested: the guide itself says experts disagree on it. It also says what counts as weak depends partly on how much of the land you own. A farm on rented land has no land among its assets and tends to show a higher ratio. Write which line you are reading your own against.
Does the formula you pick change the answer?
Yes, and by a full band. The guide’s full coverage formula has seven terms. It starts from income from operations, adds or subtracts miscellaneous items, adds non-farm income and depreciation, then takes out income tax, the owner’s withdrawals and interest on current debt. The total is divided by the principal and interest due on term loans, which are repaid over more than a year.
Run the guide’s own example farm through all seven terms and the result is 1.063, weak. Run it through the three terms most farms can fill in from their records, profit plus depreciation less withdrawals, and it is 1.22, stable. No figure on the farm changed.
Off-farm income adds 0.18 to the ratio on that farm, income tax takes away 0.32, and interest on current debt takes away 0.02 (our arithmetic on the guide’s figures: each amount divided by 153,741). The shorter formula leaves all three out.
Use the shorter version if the full one needs statements your farm does not keep, but write which one you used beside the result. The guide warns that the benchmark and your farm must be calculated the same way, or you may wrongly conclude that your farm is struggling or succeeding. Never set a result beside the 1.10 line without that note.
Why can a farm with plenty of assets still run short of cash?
Solvency is owning enough to back what you owe, even when what you own is not cash. Liquidity is having the cash on the day a payment falls due. A review of financial analysis in the Revista Venezolana de Gerencia puts it in one line: a firm with liquidity is considered solvent, but a solvent firm does not always have liquidity. The review covers firms in general, not farms.
On a farm, most of what backs the debt is land and machinery. The Mississippi guide defines liquidity as paying short-term bills without long-term changes, such as unexpectedly selling land or equipment or getting a new loan. An owner short of cash and rich in assets pays by selling what the farm needs to produce. A tractor sold in March settles this year and costs next year, and the ratios show that cost only when next year’s figures arrive.
The current ratio also hides what the cash is made of. On the example farm, 100,000 of the 180,000 is crop in the bin. Take it out and the current ratio is 80,000 over 150,000, or 0.53: you cover about half of what falls due this year unless the crop sells, and at the price you valued it.
A ratio also carries no size. Two farms at 1.20, one with 180,000 against 150,000 and one with 18,000 against 15,000, read the same, but the second has 3,000 of room and one late payment uses it up. Write the working capital beside the ratio: current assets less current liabilities, which is 30,000 on the example farm.
What do you do about the weakest of the three?
The weakest ratio, the one in the weak band or closest to it, is where the pressure sits. On the example farm that is coverage. Each ratio calls for a different response, and these responses are a recommendation, not the guide’s.
If debt over assets is the weakest, the debt is too big for what the farm owns. The responses are slow: sell what is not producing, stop adding debt, and give it years.
If coverage is the weakest, the debt may be a fine size and the year does not earn enough to pay it. The guide lists the levers: lower the owner’s withdrawals, raise off-farm income, or sell more at a better price. None of them touches the debt. The article on how much each activity must sell to break even helps you find which part of the farm falls short.
If the current ratio is the weakest, too much falls due at once. Ask the lender whether part of this year’s payments can move to later years at a cost worth paying. Then rank your creditors. In a study of fruit growers in northeast Brazil, the odds that the average farmer defaulted on public-sector debt were 8.03 times higher than on private-sector debt. The authors give two reasons: farmers expect public debts to be forgiven, and private debts are usually short-term, which commits the farmer to pay or risk stopping production. Credit works differently in each country, but on many farms some creditors can wait and others can stop the next crop.
The mistake to avoid is treating every tight year as a debt problem and paying down term loans with cash the season needs. That improves a ratio that was not the problem and worsens the one that was.
What do you write first, and in how long?
Give it an hour with the last balance sheet, the loan statements and the figure for what the family took out, before the lender’s next question arrives. Start with the line that says which formula you used, because without it the result cannot be compared with anything. The guide asks you to watch trends, and last year’s sheet beside this one shows them.
The debt and coverage calculator on this site does the three divisions from your own figures. Reading the debt is one part of running the farm as a business, and the guide to farm management covers the rest.