The business of agriculture is inherently risky. From volatile commodity markets and unpredictable weather to the ever-present threat of pests and disease, farmers operate in an environment where success is constantly hanging in the balance. When credit is introduced (often the essential lifeblood of modern farming) to fund everything from seeds and fertilizer to machinery and land, the risk factor multiplies.
However, borrowing capital doesn’t have to be a high-stakes gamble. The concept of “low-risk credit farming without sacrificing the farm” is not an oxymoron; it is a vital strategy for long-term viability and generational succession. So, what are some practical steps and financial tools necessary for a farm operation to effectively leverage credit, grow the farming business, and manage the debt load in a way that safeguards its most valuable asset: the farm itself?
Low-risk credit farming — that is the topic of today’s Firm to Farm blog post by RFD-TV legal and tax expert Roger McEowen with Kansas’ Washburn School of Law.
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Understanding the Credit Landscape - Risk vs. Reward
Credit in agriculture is not about simply borrowing money; it is about financial leverage. Used correctly, a loan acts as a force multiplier, allowing a farmer to purchase inputs or assets that generate a return far greater than the interest paid. Used poorly, it becomes a crushing burden that can lead to foreclosure or forced liquidation. What a farmer does not want to happen is to lose the land, equipment, or home that was pledged to secure the loan. A farmer also does not want to lose control by being forced into management decisions (e.g., selling grain prematurely, altering cropping plans) by a lender due to a distressed financial position.
So, what is “low risk” credit farming? It’s the disciplined pursuit of maximizing financial leverage while minimizing the exposure of core, irreplaceable farm assets. It is a shift from a reactive, debt-fueled strategy to a proactive, equity-building approach.
Financial management. The most critical factor in low-risk credit use is not the interest rate or the loan product, but the quality of the farm’s financial records and planning. A low-risk borrower knows their net worth down to the dollar and understands that the balance sheet is their ultimate defense. While lenders may require appraisals, farmers should maintain their own conservative, “liquidation value” for assets. The true measure of financial health is often the working capital—current assets minus current liabilities. A strong working capital position allows a farm to cover unexpected expenses and service debt even during a poor crop year without selling long-term assets.
Equity (assets - liabilities) is the farm’s risk buffer. Lenders rely on the debt-to-asset ratio. A ratio below 50 percent is generally considered safe for an established farm, meaning that for every dollar of assets, the farm owes 50 cents or less. A ratio climbing toward 70 percent signals high risk and reduced flexibility. Ag lenders often consider a farm with a 30 percent debt-to-asset ratio to be in a strong position. Significant factors that influence the ratio are land values and interest rates.
Realistic Cash Flow Projections
Farmers often secure operating loans based on production history, but low-risk management requires a forward-looking, “what-if” mentality. Before signing a loan, every farmer should “stress test” the repayment plan. This involves building a budget based on three scenarios: optimistic (high yields/prices), expected (historical averages), and pessimistic (low yields/prices—e.g., 85 percent of average yield and 90 percent of current market price). A loan should be taken only if the pessimistic scenario still shows sufficient cash flow to comfortably cover principal and interest payments. The difference is the repayment buffer, a non-negotiable safety margin.
Strategic Credit Deployment: When and How to Borrow
Good debt and bad debt. Low-risk credit management also means being highly selective about the purpose of debt. Not all borrowing is created equal.“Good debt” pays for itself and increases farm equity. For example, an operating loan that funds inputs such as seed and fertilizer, which directly generate revenue within the current crop cycle, is “good” debt. So is a loan used to acquire land with a return on investment (ROI) higher than the interest rate? Also, a loan for equipment that demonstrably reduces labor costs or increases harvest efficiency enough to justify its annual ownership cost is a “good” loan.
“Bad debt” is any debt that is for items that depreciate rapidly and do not directly increase revenue. Examples include consumer purchases, non-essential farmstead improvements, or overspending on highly customized, niche equipment. Low-risk farmers aggressively avoid this category.
Matching loan terms to asset life. A common and destructive mistake is short-term financing for long-term assets. This creates a high annual payment burden that chokes cash flow. The goal should be that the annual debt service payment is significantly less than the asset’s annual value.
Consider the following as a guide:
| Asset Type | Optimal Loan Term |
| Operating Inputs (Seed, Feed) | 6-12 Months (Paid by single harvest/sale) |
| Machinery/Equipment | 5-7 Years (Matches high-use depreciation schedule) |
| Land/Infrastructure | 15-30 Years (Matches slow depreciation and productive life) |
The Low-Risk Toolbox - Financial & Physical Strategies
General risk mitigation. Safeguarding the farm requires implementing risk mitigation tools both inside the office and in the field. This involves several components. First, it includes securing the best terms. Even a half-point reduction in interest on a large land loan can save tens of thousands over the life of the loan. Low-risk farmers maintain excellent credit scores, shop multiple lenders (FSA, commercial banks, Farm Credit), and are prepared to negotiate. Another component involves carefully determining whether a fixed-rate or a variable-rate loan is optimal. While variable rates can be lower initially, they introduce an unknown risk. For large, long-term loans (like land), fixed-rate debt is a key risk-management tool. It locks in the farm’s highest cost, making cash flow predictable.
Another aspect of risk mitigation involves maintaining a contingency fund. Low-risk farms treat a specific, dedicated portion of their working capital as an unrestricted cash reserve. This money is not earmarked for inputs; it is reserved for a market crash, a catastrophic weather event, or a sudden equipment breakdown, preventing the need to panic-sell assets or take out high-interest emergency loans.
Physical and production risk mitigation. The first line of defense for physical and production risk mitigation is crop insurance. It is a critical component of revenue protection and essentially a guaranteed line of credit from a third party in the event of failure. A farmer should always select a coverage level that, at a minimum, covers the entire operating loan and all scheduled debt payments. This is non-negotiable for low-risk credit farming.
For farmers and ranchers, price risk is often more devastating than yield risk. Implementing a disciplined marketing plan using tools such as forward contracts, futures, or options reduces the farm’s exposure to market volatility in its expected crop revenue. By locking in a profitable price for a portion of the expected yield, the farm guarantees the ability to service a portion of the debt, regardless of later market declines.
Another way to minimize price risk, diversifying income streams (e.g., adding a livestock component, specialty crops, or agritourism) ensures that the farm is not entirely dependent on a single commodity or market. This inherent stability makes the farm a less risky credit prospect.
Avoiding Personal Guarantees
While often unavoidable, low-risk farmers negotiate aggressively to limit the scope of personal guarantees, especially on corporate debt. The ultimate protection for the family farm is to maintain the corporate veil (e.g., an LLC or S-Corp structure) between the business debt and personal assets, wherever possible. This is the legal foundation for having the ability to utilize “low risk” credit “without sacrificing the farm.”
Conclusion
Low-risk credit farming is not a technique; it is a culture of financial discipline. It requires the same level of expertise in the farm office as it does in the field. It also involves a farmer’s relationship with their lender. That has traditionally been viewed as a partnership defined by trust built through transparency and execution.
When a challenging year hits, the low-risk farmer is proactive, not reactive. They call the lender before the payment is due, presenting a clear, honest assessment of the situation, a revised cash flow projection, and a specific plan to remedy the deficit (e.g., selling an aging asset or requesting a short-term deferment). This honesty distinguishes a financially sound operation experiencing a temporary setback from a borrower in serious distress.
The successful, generational farm operation views debt not as a desperate measure, but as a carefully measured tool. It is secured on the foundation of robust working capital, impeccable record-keeping, a non-negotiable cash flow buffer, and comprehensive insurance. By adhering to the principles of matching debt terms to asset life, using credit only for profit-generating ventures, and having a proactive risk mitigation plan, farmers can indeed leverage the power of credit to grow and thrive, ensuring that the farm remains in the family, productive, and secure for subsequent generations.
