Smaller Farms Facing Lower Debt Ratios Than Others

WASHINGTON, DC – The income that a household has available to pay its debt, referred to as the term debt coverage ratio (TDCR), is often used to measure loan repayment capacity. A ratio of less than 1.0 indicates the farm household is in a repayment capacity “red zone” and does not have sufficient income to meet its loan payments. According to the Economic Research Service (ERS), the share of medium and large farms with a repayment capacity in the red zone, over the past 20 years, has exceeded the share of small farms. On average, households that operate small farms earn most of their income off the farm and have relatively little farm debt. Since peaking in 2012, net cash farm income has been falling as the share of medium and large farms in the red zone increased. The increase was particularly steep for large farms – from 8.1 percent in 2012 to 12.4 percent in 2017. In contrast, small farms remained largely insulated from the downturn in the agricultural economy due to the reliance on off-farm income.