A Simulation Study of Maximum Feasible Farm Debt Burdens by Farm Type

Abstract

Financial leverage, which magnifies the effect of farm income instability upon bottom line profitability, becomes less feasible as income fluctuation increases. The combination of wide fluctuations in income coupled with heavy debt-servicing commitments can render the farm insolvent, imperiling continued survival. Determining how much debt a given farm can service is therefore a matter of considerable importance. Studies that have explored the effects of income variability upon debt usage have for the most part focused upon one or limited farm types. Few have attempted to identify maximum feasible debt burdens consistent with continued survival of the firm. In an analysis of Ohio dairy farms, Falls found that changes in interest rates had only slight effect upon maximum feasible debt levels and also that large dairy farms could sustain greater debt-to-asset (D/A) ratios than small farms. Wehrly and Atkinson estimated that dairy-hog farms could service debt loads ranging from 46% to 60% of assets, depending upon farm size and ability of the farm family to live frugally. Patrick and Eisgruber found that managerial ability and long-term loan limits were the most important factors influencing farm growth; while Boehlje and White determined that maximization of net worth requires heavy debt loads. Finally, Baker has proposed to index land payments to farm prices and yields in a model including amortization insurance and a mandatory debt reserve.