Operating Debt per Acre

What is the ratio

Operating Debt per Acre

How is it calculated?

Max Grain Operating Debt / Number of Planted Acres

Goal of the Ratio

The goal of this ratio is to show how much debt financing is used per acre farmed.  For a farmer, they have input costs that go into putting a crop into the ground (seed, rent, chemical, etc).  By knowing how much debt financing the borrower has available, the banker then also knows how much of the crop is financing through equity, which reduces the banks risk.  

When is it used?

For lending to grain farmers.

Rules of Thumb

Lower is better - A lower ratio indicates that the borrower is utilizing less debt financing and more equity financing, which lowers the amount of risk present in an operation.

Pitfalls of this Ratio

There are two primary pitfalls with the ratio:

1. Mixed Operations: The first pitfall of this ratio occurs when the borrowers operation consists of more than just a grain farm.  If for instance the borrower has both a grain and livestock operation, but only has a single line of credit, this will inaccurately skew the result because not all of the debt is related to the grain operation.  Being able to segregate usage between operations would be essential in an accurately sing this ratio in a mixed operation.
2. Tax Planning Debt: The second pitfall may occur due to the timing of when the ratio is calculated and what tax planning debt the farmer has taken out.  Unlike many other businesses, farmers are able to manage their taxable income through cash accounting.  The farmer does this by either waiting to sell their grain (effectively lowering their revenue) or by prepaying for the coming year's expenses (effectively increasing their expenses).  In order to still have cash available, it is common for a farmer to obtain additional operating debt at the end of the year in order to complete this tax planning and as a result, a farmer's debt per acre will be skewed at that point in the year.

What changes in the ratio could mean:

1. Rising input prices
2. Carryover debt from unprofitable prior year
3. Carryover grain inventory that hasn’t been sold

Other Relevant Terms

• Capital
• Line of Credit
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