One of the highlights of my academic career was being elected by my industry peers to facilitate the United States Farm Financial Standards Task Force. Born from the 1980s Farm Crisis, our mission brought together lenders, government officials, academic leaders, and producers to develop standardized financial ratios that could measure agricultural financial performance regardless of operation size or enterprise type.
Our first meeting convened on Super Bowl Sunday at the Marriott Hotel across from Busch Stadium in St. Louis. We began with an overwhelming list of 278 ratios, which we methodically narrowed to 64, then 32, and eventually the "Sweet 16"—deliberately echoing the NCAA basketball tournament format to bring an element of fun to this challenging task. While the original framework has evolved and the task force has become the Farm Financial Standards Council, many of these ratios remain essential tools for lenders, producers, and industry leaders today. As multiple sectors of the farm economy struggle, benchmarking against databases provides a critical perspective on the aggregate economic landscape.
Coverage Ratio: A Key Measure of Financial Health
Among the original task force metrics, the coverage ratio remains one of my favorites—a tool we rely on heavily at our creamery to evaluate financial repayment ability.
The coverage ratio measures whether an operation generates sufficient cash flow to service its debt obligations. It's calculated by taking net farm income (sometimes including nonfarm income), adding back depreciation and interest paid, then subtracting family living expenses or a management fee. This gives us repayment capacity. We then divide this capacity by the total debt service (principal and interest payments). This simple formula and example below help illustrate the ratio.
Coverage Ratio - a Simple Formula
Repayment Capacity = Net Farm Income + Nonfarm Income + Depreciation + Interest Paid − Family Living Expenses or Management Fee
Coverage Ratio = Repayment Capacity ÷ Total Debt Service (Principal + Interest Payments)
Let’s say:
- Repayment Capacity = $200,000
- Debt Service (Principal + Interest) = $100,000
Coverage Ratio = $200,000 ÷ $100,000 = 2.0 or 200 percent
Historically, the 150 percent ratio represented a green light for financial health, while 110-150 percent indicated caution and anything below 110 percent signaled a red alert. With today's challenging farm economy, how do today’s ratios compare when conducting a historical trend analysis?
Drawing upon the historical information compiled for south-central and southern Minnesota in the FINBIN database provides a revealing glimpse of current repayment trends:
The average producer for 2024 shows a concerning coverage ratio of 85 percent. This means repayment capacity—including farm and nonfarm income—is insufficient to cover the debt service obligations. Have we seen this before? Indeed, similar patterns emerged in 2015, 2016, and 2018—years often referred to as the “grinder years” or “lost in the profit deficit years.”
The on the farm reality is sobering: many will need to refinance these losses by pledging assets, (often land) as security, to maintain operations. Some will curtail capital expenditures while others will resort to selling capital assets to generate necessary cash flow.
The situation is even more alarming for the bottom 20 percent of producers who show a -47 percent ratio — the highest negative percentage recorded in the past decade.
At the other end of the spectrum, the top 20 percent maintained coverage ratios well above 200 percent. However, even this represents a dramatic decline from previous years when their ratios exceeded 500 percent.
These contrasts in coverage ratios tell a compelling story of today's agricultural financial landscape. While top performers maintain adequate repayment capacity, the industry average has slipped into the red zone, with the bottom tier facing unprecedented challenges. These aren't just numbers on a page—they represent real farm families making difficult decisions about asset liquidation, refinancing, and operational viability.
As we navigate this period of financial stress, understanding these fundamental ratios becomes even more critical. In upcoming columns, I'll explore additional financial ratios that provide further insight into agricultural economic health, offering both historical context and practical strategies drawn from previous "grinder years" to help strengthen financial resilience in these challenging times.