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AGRITHOUGHT REPORTS

September 2015

On America’s farms, the hair under seed caps is greying. According to the U.S. Department of Agriculture (USDA), the average farmer is now a bit over age 58, and the vast majority of those producers have been working their land for 10 or more years.1 In addition, producers age 55 and older own nearly 70 percent of all U.S. farmland, while leasing just over half of the nation’s agricultural acreage.2

For those reasons, it’s no surprise a huge transfer of land will occur in the next few decades. However, an array of data suggests much of it won’t remain in the family. For example, a 2013 AgWeb survey of over 1,000 producers found 80 percent had thought about succession issues, but less than half had created a transition plan.3 Meanwhile, a separate study by Iowa State University discovered 47 percent of surveyed producers had not discussed succession with anyone, and only 27 percent had identified someone to take over the farm operation.4

For those deeply concerned about the future of family farms, those numbers are not an encouraging sign.

“This is more than transitioning a business. This is about helping secure the future of rural America,” said Jessica Lehman, associate vice president of Farm Credit Mid-America in Louisville, Ky. “When we talk about succession planning in this setting, it’s so much more than just the assets. It’s about transferring family values, business management skills and leadership skills to the right person in the next generation.”

UPHILL CLIMB FOR YOUNGER FARMERS


Over the past three decades, a confluence of factors has made it harder for young people to successfully take up farm life. Since the early 1980s, the midpoint acreage for farmland rose from just under 600 acres to over 1,100 acres, since larger holdings were able to deliver better return on equity for major crop operations. The most significant increase took place in the nation’s heartland, where acreage-intensive crops such as corn, soybeans and wheat make up a majority of the annual harvest.5 During this same period, the number of young farmers has trended steadily downward.

percentage of all owned acres by age

Source: USDA Census of Agriculture, 1974-2012

In the accompanying chart, note how acreage owned by producers in the 25-34 and 35-44 age cohorts peaked in 1978 and has declined ever since. Conversely, land holdings have steadily increased in the 65 and over group and remained relatively steady in the 55-64 age range.

While farming has always had high barriers to entry, it’s clear sound planning can go a long way to ease the crunch of land, equipment and input costs for younger people who want to carry on a farming legacy. While those plans clearly involve people, they also need to include a long-term view of how the land will be managed.

“A key principle I like to use is, ‘Let the farm speak, and let it speak loudest,’” said Don Schreiber, JD, CLU, ChFC, director of the advanced consulting group at Nationwide Insurance. “That way of thinking helps open up the conversation, keeps things from getting personal and allows for a singular focus on the best interests of the farm.”

SUCCESSION PLANNING: STARTING CONVERSATIONS, BUILDING BLUEPRINTS FOR A SOUND TRANSITION


According to the U.S. Small Business Administration, only 30 percent of family-owned businesses (including farms) survive to be operated by a second generation, and a mere 16.5 percent make it to the third generation.6 Since the vast majority of all American farms are family-owned, the kitchen table is often the best place for owners to have early conversations about their legacy dreams. Even for families with young children, it’s not too early to begin planning for succession, since unexpected events can derail good intentions.

As the next generation moves into adulthood, it’s a good time to start having “family meetings,” during which the owners can outline their hopes for the farm’s future. More specifically, discussions should cover the core skills needed to own and manage the farm, and review how that meshes with the talents of children who wish to remain on the land. These family meetings also need to consider the interests of adult children who have established lives away from the farm, or those who may be unable to succeed their parents as producers.

“In circumstances where adult children have been away for many years and are not planning to take over the farm operation, one option is to look at the skills of hired hands,” said Lehman from Farm Credit Mid-America. “For example, was a person hired because he was a great worker or mechanic, or does that person have the management skills to one day take over the operation?”

To help provide structure to these conversations, Nationwide launched a “Land as Your Legacy®” succession planning initiative, which it operates in partnership with a number of local Farm Credit offices around the country. This initiative outlines four primary steps to effective succession planning:

  • Farm income. This involves an assessment of current income and projections on whether that revenue stream can continue supporting the next generation. A key element of this review is for both owners and possible successors to candidly think through the long-term viability of current farm operations. If consensus is reached on any operational changes, this early step allows those shifts to be made over a period of years.

  • Risk management. Assuming general farm liabilities, such as mortgages, equipment payments or land rental costs are covered as part of a farm income discussion, a major risk management consideration is potential medical costs. For example, if an owner has a significant health issue, the succession plan must account for current or potential prescription drug costs, medical treatment, hospitalizations, and long-term care. Given the steadily rising cost of U.S. healthcare, any transition plan that does not identify and address these issues faces serious financial risk.

  • Mentorship and financial independence planning. Farming is a highly complex business, and successful producers need good negotiation skills, marketing savvy, strong decision-making and emotional maturity. That said, owners who have developed those traits must find ways to translate them into leadership and management training for the farm’s chosen successor.

  • Estate planning. This final step has two key components. First, an estate plan must account for often-varied interests among key stakeholders, such as family members who wish to stay actively involved on the farm as well as those who live elsewhere but still have a financial stake in the land. Additionally, a sound plan will employ trusts, partnerships, insurance policies or other tools to minimize taxes while clearly defining both financial and people interests. Nationwide’s Schreiber said the latter point on “people” is too often overlooked.


“The people who get up and operate the farm after the owner has passed away are the most important component of any transition plan,” he said. “Those people need to be placed in positions where they can succeed, and those positions need to be reflected in both the estate plan and the farm’s business documents.”

LINE UP A GREAT SUPPORT TEAM


While the family and financial dynamics of every farm are different, the need for solid third-party planning support is not. All succession plans will benefit from outside expertise in accounting, financial planning, insurance and law. To build the right team, seek out recommendations from friends who have moved through recent generational transitions, or consult with a local agricultural business specialist at a local university extension office. Before hiring anyone, producers should conduct personal interviews to ensure they can comfortably communicate with all members of this important team.

SOURCES:


1Kurtzleben, Danielle (February 24, 2014) “The Rapidly Aging U.S. Farmer” U.S. News and World Report
http://www.usnews.com/news/blogs/data-mine/2014/02/24/us-farmers-are-old-and-getting-much-older

2Widmar, David and Gloy, Brent (February 3, 2015) “Aging American Farmer and Their Farmland” Agricultural Economic Insights
http://ageconomists.com/2015/02/03/aging-american-farmers-and-their-farmland/

3Humphreys, Kate (November 8, 2013) “The Drive to Succession” Farm Journal Legacy Project
http://www.farmjournallegacyproject.com/article/the_drive_to_succession_NAA_Katie_Humphreys/

4Iowa State University (2006) “Iowa Farmers Business and Transfer Plans” Iowa State University Extension
http://www.extension.iastate.edu/bfc/sites/www.extension.iastate.edu/files/bfc/Farm%20Business%20Transfer%20Plan.pdf

5United State Department of Agriculture (2013) “Farm Size and the Organization of U.S. Crop Farming” Economic Research Service
http://www.ers.usda.gov/media/1156726/err152.pdf

6Ohio State University (May 10. 2013) “Transitioning family farms to the next generation” Ohio State University College of Food, Agricultural and Environmental Sciences
http://cfaes.osu.edu/students/about-us/campus-news/transitioning-family-farms-the-next-generation
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