URBANA, IL – A new analysis from FarmDoc Daily shows that while financial leverage can improve farm profitability, it also sharply increases risk—especially in years with low net farm income. Using FINBIN data from 2007 to 2024, the study compared performance of crop farms with debt-to-asset ratios above and below 0.40.
On average, high-debt farms posted stronger retained earnings during good years, largely due to larger scale and higher reinvestment. But their earnings and net worth fluctuated far more. In 2024, a low-income year, high-debt farms saw average returns on equity of just 0.9%, compared to 1.6% for low-debt farms. For the most highly leveraged farms (above 0.60), returns dipped to -3.8%.
With interest rates rising above 8% since 2023, many farms may need to reconsider their debt levels. Expansions that once made financial sense in a low-rate environment may now carry significantly more risk.
Analysts caution that optimal debt varies by farm, but the shift in interest rates should prompt careful re-evaluation. High leverage may deliver returns in good years—but can erode performance quickly in bad ones.