Many dairymen are considering selling their dairy farms due to huge losses in equity that have taken place in the last 18 months. Once the dairyman has made the decision to sell his dairy farm, the producer should immediately start planning the farm sale. Timing is the key to maximizing profits in the sale of the real estate, equipment and cattle. Meet with your lender Your lender is your business partner. After a producer has made the decision to exit the industry, he needs to immediately contact his lender; the producer will then discuss his proposed exit strategy.

The major question that will be discussed is, “Will the sale of the farm’s assets be sufficient to pay off the farm’s debt and tax liabilities?” Your lender will have an idea of the current value of real estate, cattle and equipment on your farm. A word of caution: Do not be surprised or upset if your lender states that the value of your assets is significantly lower than values used on previous years’ balance sheets.

The buyers of your assets will be producers that have cash reserves and/or ability to cash flow additional debt that will be used to purchase the real estate, cattle and equipment. There will be fewer buyers because many producers are struggling to meet expenses and service debt due to the depressed milk prices.

Many states require producers to hold federal Cattle Animal Feeding Operation (CAFO) and/or state animal feeding operation permits for farms which house more than a specific number of animals. The requirements vary by state. These permits require the farm to have a nutrient management plan developed by a certified nutrient management planner. It can take time to transfer and possibly update the permits. Many auctioneers and real estate agents suggest that the owner initiate the sale of the real estate in early fall since the transfer process may take two to three months or more depending upon the state.

Producers have three options when selling their dairy herds. Producers may want to consider participating in Cooperatives Working Together (CWT) herd retirement program as a means of selling their milking herd. Bred heifers can be sold in CWT’s bred heifer option when the milk herd is sold through the program. Timing is crucial in participating in the CWT. If CWT is not offering a herd retirement program at the time the producer wants to sell his or her herd, the other options would be to sell the milking herd, bred heifers, open heifers and calves at either public auction or privately.

Producers need to carefully weigh their options in selling their herds. I would suggest that owners speak with reputable auctioneers who will give them realistic prices regarding the value of their herds sold at auction or in groups (e.g., entire milking herd, bred heifers, open heifers and calves). Producers tend to remember the sale prices of fancy bred heifers and first-calf heifers. Grade cows, that have calved three or more times, do not sell for more than beef prices because the average cull rate in many herds is 35 percent. Statistically, these older animals may milk one lactation for their new owners before they are culled from the herd. Producers need to estimate the average net sale prices for the cows, heifers and calves in their herds. Remember, it is the average that pays the bills!

The highest prices for farm equipment sold at public auction are generated from auctions held in late January and early February. Many producers who have cash and/or access to credit, try to purchase equipment at auctions because generally the sale prices are lower than equipment purchased at a dealer. The first auctions have the highest demand for equipment. Once producers have purchased the equipment they need (e.g., tractors, forage harvesters, planters, etc.), there will be fewer buyers at the upcoming auctions. If a producer is unable to purchase a piece of equipment by the middle of March, then he will buy from a dealer because he needs the equipment for the coming year. Likewise, there will be lower attendance at auctions held after March 15 because producers are starting to work in the fields.

Meet with your accountant
Once the producer has estimated the sale prices of the farm, herd and equipment, he should take this information to his or her accountant. The accountant will be able to provide an estimate of a dairy producer’s tax liability from the sale of the assets.

As a former lender, many producers have the impression that once the debt is paid off there will be minimal tax liabilities. I strongly encourage producers to work with tax professionals who are knowledgeable about farm taxes. These professionals will be able to create a variety of income tax scenarios for the sale of your farm, cattle and equipment.

The decision to sell your farm assets has income tax consequences that are often not calculated or underestimated. Deferred tax liabilities resulting from depreciation recapture could use up 15 to 40 percent of the assets sold. For example, a John Deere 4020 which was purchased in 1972 for $8,000 is fully depreciated on a depreciation schedule. Assuming the 4020 sells for $8,000 at the farm auction, the recapture of depreciation is $8,000. Thus, the producer will have the sale taxed as $8,000 of ordinary income.

If the farm sale cannot pay off all debt and tax liabilities, the farm will not be sold. The owner will try to ride out the storm and try to sell the farm when the economy has recovered in the next two to three years. In the meantime the owner has a job and a place to live. The best time to sell a farm is when milk prices are high. In a strong milk market, producers are extremely optimistic and purchase cattle to cash in on the high prices. The bad years are quickly forgotten.

Meet with your employees
After an owner has made the decision to sell off the farm, he or she should schedule a meeting with the farm’s employees. Employee retention is a major issue in planning the farm sale. Remember, your employees are the most important asset on your farm.

Producers sometimes try to quietly sell their farms to neighboring farmers who would be interested in purchasing the farm as an add-on to their farms. Even though the seller and buyer have promised not to discuss the farm sale, rumors can quickly spread within the local community, and eventually your employees will hear rumors that their employer is trying to sell his farm. Employees will leave because they need to support their families; thus they may take a job before the farm is sold. Why should they pass up taking good jobs when most likely the farm will be sold in the next several months? The bottom line is the owner must retain the farm’s employees to maximize net returns from the farm sale.

The owner can provide the farm’s employees with the option of participating in a “golden handcuff” agreement to retain employees. The “golden handcuff” is an agreement signed by the owner and employee that states the owner will give an employee a bonus (one to two months of salary) if they work on the farm until the sale of the real estate, cattle and equipment is concluded. The “golden handcuff” provides an incentive for the employee to continue working at the farm and a financial cushion that enables the employee to seek a job that is a “good fit” for their skills and experience.

Numerous potential buyers will make an effort to talk with key employees because the employees many times may provide the buyers with “inside information” about the quality of the equipment and animals. Employees that are happy and have been fairly treated will generally not bad-mouth the owner. The bottom line is that if employees leave before the farm sale, it can be extremely difficult to present the assets in the best possible manner (e.g., stalls are well-bedded, equipment is repaired and is in top-notch operating condition, junk is picked up around the farmstead, etc.)

When I sold my farm I signed a “golden handcuff” agreement with Ron, my herdsman. Ron was an integral part of the success of my farm. This agreement was a way to thank him for his 10 years of hard work and provide him time to find a job that was a good match for his skill set. Ron received more than 30 job offers, and he started his new job two weeks after the farm sale.

Meet with your support team
The owner needs to have a positive attitude throughout the sale process. The sale of your farm is a major life-changing experience; it is scary to say the least. When the owner starts to feel scared, discouraged and depressed about selling the farm, I would strongly encourage him or her to share their thoughts and feelings with trusted clergy and health care professionals. These individuals can help producers work through this life-changing experience. The owner is going through a grieving process because he is leaving a way of life that he loved and has devoted his life to the family dairy farm. If the owner did not have these feelings going through this life-changing event, then they would not be considered “normal.”

During the process of selling the farm, the owner and his family will be constantly asked the following question: What are you going to do after the farm is sold? Most producers are not sure where they will be working after the farm sale because they are spending all their time conducting the day-to-day operations of the farm and preparing for the farm sale. When the owner indicates that he is not sure where he will locate a job, these well-meaning folks will follow-up with one or more of the following comments: “I am sure that you will find something. There are always jobs available for people who want to work. When one door closes, another door (opportunity) will open.” In the owner’s and family members’ minds, the big question is when the opportunities will be available! My advice is to not pay attention to these comments, because these remarks can be depressing.

The owner has to constantly remind himself that there are numerous skills that can be transferred from a dairy farm to an off-the-farm job. In today’s workplace, many employers are interested in hiring former farmers. Farmers have a strong work ethic. They will do whatever it takes to complete the job and are willing to work long hours under adverse conditions to do so. PD

• Peter Callan

• Regional Farm Business
• Management Agent
• Virginia Cooperative Extension
• Email Peter Callan