The transfer of monetary wealth is the primary consideration for families considering transitioning the dairy farm from the older generation to the younger generation. However the transfer of intellectual wealth and family values are critical components of the transfer process, which determine the success of the transfer and the long-term viability of the farm.

From my observations, the perpetuation of family values, which include hard work, thriftiness and the ability to have an open mind towards the adaptation of new technology and management practices, have contributed to the success of many farm businesses.

These farms place a high value on education and learning. The owners are constantly reading a variety of farm publications, talking with their peers and attending extension and producer meetings. Successful producers are constantly trying to work smarter and improve their farms’ profitability.

Many of these owners hold PhDs from the “School of Hard Knocks” with specializations in common sense, how to make and save dollars and get along with people! These are important values that can be learned from the older generation and are integral in the financial success of a farm.

Can and will the younger generation embody, plan to perpetuate their family’s values and have the financial management skills to successfully operate the farm in a highly cyclical industry? Does the young generation have the ability to look at long-term industry trends and create a plan which will position their farm to be financially viable in the future?

Will the next generation be comfortable taking on risk to improve long-term profitability? Is the younger generation willing to sacrifice in order to purchase an adjacent farm because it will position the farm to milk additional cows in the future?

These are important questions that need to be answered when the older generation is considering transferring the farm to the next generation.

Is the current operation generating sufficient income to support another family? Will the land base that is owned or can be rented on a long-term basis enable the farm to be expanded?

Over the past 30 years, economics have forced families to increase herd sizes due to rising equipment and input costs in an environment where commodity prices have remained nearly static.

The bottom line is as follows: Is the farm profitable and can the profitability be sustained in the future? If the farm is not profitable, can the farm be made profitable and can the profitability be sustained?

If the families can honestly answer yes to nearly all the preceding questions, then the family should consider initiating a program to transfer the farm to the younger generation. If families feel that the following scenarios apply to their farms, then a farm transition program should not be started.

Sometimes the younger generation lacks the financial management skills to operate a business. Does the older generation want to see their financial assets squandered by the younger generation?

One of the most difficult aspects of farm transition is the transfer of decision making from the older to the younger generations. To be successful, the older generation must be willing to give up responsibility and the younger generation to take on responsibility.

Is the older generation willing to train the younger generation to manage the farm? The younger generation needs to be responsible and be held accountable for the performance of a small part of the business. The younger generation cannot be constantly seconded by the older generation regarding decisions they made.

Likewise the younger generation must be given the financial resources to properly manage their area of responsibility. Otherwise the family member will be high-priced farm help and not a future manager.

If mistakes are made, did the person learn from their mistakes? The older generation and other family members cannot be constantly bringing up mistakes made by an individual 20 years ago. Management responsibilities will be increased as the younger generation proves that it can successfully manage its area of responsibly. During this time the younger generation will be growing and creating equity for the entire farm.

As part of the farm transition plan, a portion of the farm’s equity will be transferred to the next generation. The difficult issue is when the older generation will turn over all the management control to the younger generation.

The transfer process has to be structured to provide security for the older generation’s equity. Every family is different.

My observation is that overall management control is transferred to the younger generation when equity is at a level where the younger generation must take full responsibility for managing the business. Otherwise, if the younger generation does not “dig in” and manage to the best of their ability, their equity can quickly decline due to lack of management.

Patience is another virtue that can be taught by the older generation. Rome was not built in a day! Many families that have gradually increased farm size and cow numbers over a period of years have been successful. The older generation can provide insights regarding how and why their decisions have increased the farm’s income-producing assets (dairy cattle).

Conversely they can provide “inside” knowledge why some farms were not profitable. The older generation needs to have a frank discussion with the younger generations regarding using debt as a tool to increasing a farm’s net worth. The older generation can provide examples of highly leveraged farms that did not survive in time of depressed prices and high input costs.

My observation of successful farms is that each generation has been “hungry” or driven to increase income-generating capital (lactating dairy cattle versus land, buildings, machinery). They are not content to sit on their laurels and maintain the status quo.

Many younger managers fail to understand that the preservation of a farm’s net worth is a dynamic, not static, process and that each generation must be in the wealth creation mode. A business whose primary goal is to maintain the status quo will go backwards and eventually go out of business.

The older generation can discuss how preceding generations created and increased the family’s wealth. Likewise they can discuss the impacts on current family wealth if the previous generations had not been innovative and increased the family’s income-generating assets.

There is a successful family farm that I have watched significantly increase its intellectual and financial wealth over the past 40-plus years. In the mid-1960s, two brothers installed a milking parlor. The brothers purchased adjacent farms in the ’60s and ’70s. Family members were brought into the business in the ’70s and ’80s. The herd was expanded in the ’80s and early ’90s to support the additional partners.

Now the third generation has entered the business. Hard work, thriftiness, production of high-quality forages and adapting new technology are several factors that have contributed to the success of this multigenerational farm. However, I feel successive generations’ passion to breed an outstanding herd of registered Holsteins and the desire to take their farm to the next level have been the driving factors that have significantly increased family equity.

Over 40-plus years, this farm’s milking herd has increased from 80 to more than 1,000 cows. Every generation has had its challenges. The younger generation needs to exhibit respect, patience and the humility when asking their elders questions regarding how their family and neighboring families created human, intellectual and financial wealth. This can be eye-opening experience!

The older generation has a wealth of information. History repeats itself. The younger generation can be successful by learning from the older generations’ mistakes and not repeating them in the future. PD

Peter Callan
Business Management
Virginia Tech
peter.callan@vt.edu