Debt service coverage ratio: Anchoring farm financial fitness

Farm debt outstanding climbed again in 2023, enough that it surpassed $146 billion. The rate at which it grew – 5.1% – might give pause for thought.

We use a key measure of Canadian agriculture’s financial health, the debt service coverage ratio (DSCR), to understand how producers have been able to cover debt payments in periods when income fluctuates, or interest rates rise.

Understanding farm debt outstanding

Canadian farm debt has grown 6.4% on average each year between 2019 and 2023. It’s now over the C$146 billion mark. But neither fact is cause for concern if farm income continues to gain enough to meet debt service payments, cover costs of production and, over time, grow equity. That’s still true even in periods when debt grows faster than income.

To understand the magnitude of farm debt outstanding, we need to look at income, and how trends in income will be able to match trends in debt obligations. Canadian 2023 farm cash receipts are estimated to have totalled C$99.5 billion. They grew 50% between 2019 and 2023, helping net cash income grow 110% in that same period. This helped to keep the average DSCR for dairy, cattle, and grains and oilseeds farms* in a healthy range between 2019 and 2023 (Figure 1). Hogs dipped below a healthy range in 2023 as operations faced slaughter capacity challenges in Eastern Canada. Challenges are expected to persist throughout 2024 that will keep the DSCR under pressure.

Figure 1: Rising net income maintains healthy average DSC ratios across sectors

Source: FCC Portfolio data

What does the future hold?

Price volatility and higher borrowing costs can raise financial risk. But while rising rates and swinging incomes can challenge the ability to meet debt obligations, Canadian ag is, overall, in a good spot to weather any downturn that may occur.

As with each ratio we highlight throughout this series, the DSCR is only one view of the financial health of Canadian agriculture. Using different ratios together fills out the big picture. As well, using the average DSCR as we’ve done here doesn’t begin to tell the whole story, as it reflects both operations with recent production investments and lower DSCR scores, and more mature operations carrying lower debt levels (and higher DSCR scores). Work with your lender and accountant to determine the suggested ratios for your specific industry and be sure to understand them according to your own strategy and the risks facing your own operation.

*This analysis is based on data from FCC’s portfolio (2019 – 2023).

Are you comfortable using financial statements to better manage your operation? A good place to start is your accountant or an FCC Relationship Manager.

Article by: Amanda Norris, Senior Economist