Managing Farm Debt

Wednesday, January 21, 2026

Strategies for sustainable growth

By Mary Loggan

Taking on debt is often an essential part of running and expanding a farm operation here in Ontario. Whether covering yearly working capital needs, such as crop inputs or livestock purchases, or investing in fixed assets like land, machinery, and buildings, debt is a tool that many rely on.

Yet, managing debt responsibly is critical to safeguarding the long-term stability and success of the farm business. With fluctuating input costs, commodity prices, and increasingly unpredictable weather patterns, producers must carefully evaluate and balance their debt levels.

Better Farming recently connected with Jason Inman, FCC senior special credit account manager, and George Klosler, FCC senior district director, to explore the common reasons farmers take on debt, how to assess new borrowing, and strategies for managing debt.

Understanding farm debt

Farmers commonly take on debt to fund both operational needs and capital investments, Charlottetown, P.E.I.-based Inman explains.

“A farmer can assess taking on more debt by considering sound business principles. Specifically, they should evaluate whether the asset they intend to finance will generate a marginal rate of return over costs to be able to cover both variable and fixed costs to the extent that they can support the new debt payments.”

Klosler, based in Woodstock, agrees and adds that the value of an asset can extend beyond immediate financial returns.

“For example, the extra parcel of ground may be cash flow negative, but it is a way to secure nutrient management requirements for the long run. In summary, with any asset purchase, ask yourself what concrete value this is bringing to the operation.”

Evaluating capacity for more debt means assessing current leverage, profitability projections, market volatility, management ability, and contingency plans, Inman notes.

He recommends producers assess the following:

• The degree to which you are currently leveraged.
• Will you be able to achieve the additional gross profit required to support the additional debt?
• Is the market volatile on input costs and pricing? To what extent can you mitigate this, and what is the margin for error such that it would put scheduled debt repayment at risk?
• Do you have the management competencies, financial controls and monitoring in place for the contemplated expansion?
• What is Plan B if the plan does not materialize according to expectations (i.e., access to capital to support the business, ability to absorb liquidity shortfalls, crop failure and access to insurance and income stabilization programs).

“This thorough self-assessment enables producers to make informed decisions while safeguarding their farm’s sustainability,” he says.

Warning signs and risks

According to Inman, overleverage can threaten a farm’s stability.

He points to some clear warning signs:

• Historical annualized earnings that provide little cushion beyond that required to fund annualized principal and interest payments.
• Tight working capital with no ability to restructure based upon the composition of fixed assets.
• High degree of debt relative to equity.

Klosler recommends involving professionals to examine costs and income benchmarks.

“They should look to work with an appropriate professional to identify costs that are above industry norms and devise a plan to reduce them.

“Likewise, is income lower than industry norms, e.g., on an acre basis? Also, be sure to look to reduce and sell redundant assets.”

Proactive strategies include completing annual or multi-year budgets and cash flow analyses to understand when expansions or additional borrowing are feasible.

Klosler advises, “A basic fundamental strategy is to complete an annual or multi-year budget and cash flow analysis. This helps not only to plan for the year but can give you a sense of where things will begin in Year 2 and further out.”

He says the key to success is understanding production costs to guide decisions. Protecting the farm through key person retention strategies and transparent communication with creditors also plays a vital role.

Inman emphasizes keeping creditors informed and offering workable solvency plans involving options such as payment deferrals, debt restructuring, or even formal proposals under the Farm Debt Mediation Act.

Long-term sustainability

Producers struggling with debt should not hesitate to seek professional support.

Inman encourages consultation with professionals to analyze performance trends, financial position, and explore restructuring or partnerships.

“If the financial distress is related to poor operational performance within their control, a consultant should be engaged to provide advice on a remediation plan. If the farmer has too much debt, free services are available to them under the Farm Debt Mediation Act.”

This includes appointing consultants to work collaboratively with farmers and creditors to develop sustainable plans.

“In times of financial stress, farmers can also consider strategies such as liquidating cash and investments to reduce debt, selling inventory or capital assets where feasible, and consolidating or refinancing loans to achieve lower interest rates on more manageable repayment terms.”

These approaches must be weighed carefully against their long-term impact on the farm’s income-generating capacity and tax consequences, he says.

Effective communication remains paramount.

Inman advises, “Be open and honest with creditors, providing disclosure of the situation and financial transparency to secured creditors. Seek to instill confidence in creditors that you are committed to the business’s success and to providing a plan to resolve the financial difficulties within a defined timeline.”

Klosler agrees. “Always communicate early and have a plan or course of action in mind.” BF

Key takeaways

• Evaluate debt based on business value and marginal return. Before taking on new debt, farmers should assess whether the asset being financed will generate a marginal rate of return sufficient to cover the new debt payments.
• Assess with a multi-faceted approach. Producers need to carefully evaluate current leverage, potential gross profit increases, market volatility, management capabilities, and contingency plans like insurance or access to liquidity. This detailed assessment helps determine if additional debt is sustainable.
• Recognize warning signs of overleverage early. Warning signs include minimal earnings beyond debt service requirements, insufficient working capital without restructuring capacity, and a high debt-to-equity ratio. Timely, professional advice to identify high costs or income gaps, and to reduce assets, is crucial.
• Use multi-year budgeting and know your costs for growth. Completing annual or multi-year budgets and cash flow analysis, along with understanding production costs, guides prudent decision-making for expansions and debt management. BF