A few months ago, I heard Steven Bohr of Next Generation Ag Advocates speak in the U.S. where he encouraged young farmers with tools for transition. The average price per acre in Iowa is $6,810, and 34% of the land is owned by people over the age of 75. Additionally, 60% of the land is owned by those 65 and older. The average age of landowners is the oldest in history, land values are at an all-time high, and the cash flow needed to acquire land is outside of long-term profitability, Bohr said.
He added, the current landscape in Iowa regarding the next generation looks like this:
- 68% of farmers have no children who currently farm.
- 51% of farmers have not identified a successor.
- For each farmer under the age of 35, there are six over the age of 65.
I see an opportunity here for young farmers to be developing relationships with non-related parties. Bohr uses a worksheet to discuss the idea that there is a price to buy family land (discounted after debt) that he calls “family land value,” not fair market value. I call this “fair family price.” Regardless, the hard conversations are around expectations about who can purchase farm assets and who can afford to cash flow the purchase of farm assets.
The other part of this storm relates to the expectations of parents to divest farm assets to give gifts or inheritance to non-farm heirs. Somewhere, the perfect storm is begging a new money script from parents as to what is a reasonable expectation for the transfer of farm wealth if the family really wants to keep the farm business intact.
Here are the components of Bohr’s “Farm Succession Perfect Storm.”
- Age of landowner; 60% are over age 65.
- All-time high land values
- Cash flow to acquire land is outside of long-term profitability.
- Farm is a legacy asset.
- Control is difficult to surrender but required to transfer for transition.
- Quality of advice from specialists may be limited by location, experience and incentive.
- Interest rates are increasing.
- Longevity of landowner is seeing the “sandwich” generation losing ownership opportunity.
- Family fights over fair versus equal are needing to view performance-based pay versus inheritance-based pay.
- Farming is difficult, and each generation produces fewer farmers who are willing or able to take risk.
- Tax law uncertainty with estate, income, capital gains (and basis in the U.S.)
- Deferral mentality: Procrastination causes owners to be susceptible to emotion decision making mixed with greed, hope and fear.
Solutions
- Know your role as a landowner, producer or interested third party. Bohr talks about a century match, leasing agreements, advisory role and non-operating landowners. He is skilled at helping match retiring farmers to the next generation of landowners. This is your chance to tell your story often and build relationships with bachelor farmers or farmowners who have no successor to create new non-related partnerships.
- Partner for economics of scale. Share equipment, use input buying groups and gain financial benchmarking data with peer networking groups. Terry Betker of Backswath and Rob Saik of Powerfarm have used these groups well in western Canada to help farmers grow with group coaching.
- Understand how to use the tools in your toolbox: In the U.S., this includes basis setup, corporation shareholder agreements, beginning farmer programs, investment strategies for buying land and other resources.
- Understand tax brackets, bonus depreciation and lease-to-own lease agreements. (Ask good questions of your accountant and ask for clarification when you don’t understand.)
- Understand the marketplace and options for the land with farmer ownership, division of land, corporate land, trusts and a combination of options. Give heirs a reason to want to own land, and let siblings “row the boat together” to have skin in the game with the success of the farmland ownership. Discuss the different approaches and outcomes with fair market value versus family market value. What are workable options for keeping the land together?
- Be prepared for understanding the consequences of your transition decisions (e.g., will probate).
- Prepare to compete with farmers who have the financial resources to buy land. Are you developing land acquisition strategies with neighbourhood relationships and well-written leases? Landowners are looking for stewardship and care of the land. They want to share similar philosophies for farming and work with nice people. Producers want a long-term relationship and a way to learn and carry on their legacy while providing a great way of life for their family.
- Farm without the bank and have working capital totaling more than 100% of your income. Dr. David Kohl from Virginia Tech would love this recommendation. How much are you protecting and building working capital?
- Understand the difference between an exit strategy, when the farmer spends down the business over time with the intention of liquidation, versus the entrance strategy, where you are growing into the operation to earn respect and trust. In Canada, we call this the “successor effect,” where the young farmer’s passion to farm drives the growth of the farm to support more than one family. Bohr also visualizes an entrance strategy where young farmers approach a mature landowner with a business plan. Whatever approach you take, ask for help. Network with key people and find a way to partner with a mentor.
- Identify what matters and what you can control. Does your family serve the business or does the business serve the family? Be clear about what you are focused on and then execute.
