Passing Down the Farm: The OTHER Farm Crisis.
Donald J. Jonovic, Ph.D., Wayne D. Messick
Buy Online Now!
Today's family farms - and the people who own them - are survivors. Unprecedented financial stresses swept agriculture at the beginning of the 80s, spelling doom for many family farms.
But not for all. Not even for most. As early as 1983, survivors were digging their way out of staggering upheavals in land values, commodity prices, and the farm credit system. In truth, it's a confusing picture. Some would say the "farm crisis" is over. Others aren't so sure. Consider these seemingly contradictory facts:
1) Farm population is declining. There were 2,068,240 farms in the U.S. in 1993, 1.2% fewer than in 1992, and 1.7% fewer than 1991. In human terms, that was a loss of 36,820 farms between 1991 and 1993.
2) But the farm population loss rate has declined. The average annual loss of farms between 1961 and 1963 was 123,000 farms. In 1984 we lost 43,000 farms.
3) Farmers have seen their net farm income rise in some periods. Income rose 30% between 1983 and 1984, for example, and 21.5% between 1991 and 1992.
4) Yet the average change in net farm income has been negative. Between 1989 and 1992, net farm income in the U.S. decreased an average 1.2% annually.
5) Debt-ridden farms are relatively rare. By the late 80s, more than 80% of all farms had debt/asset ratios less than 40%, with 10% or less being very common. These are manageable ratios.
6) Yet net farm income per operation declined 3.6% between 1983 ($24,090) and 1992 ($23,233).
Clearly, the statistics tell a confused story. The emergency seems over, yet the overall picture is not particularly cheering. Farms continue to disappear, and farm income, in inflation-adjusted dollars, is declining. The huge crisis of the 80s seems to be over, but, as our subtitle implies, family farms are definitely not out of the woods. They are facing, in fact, an "other" farm crisis.
"Today's Problems are Limited"
Part of the ongoing stress comes from a continuing lack of
cash and financial flexibility. Farm prices are uncertain, discouraging, and generally out of the farmer's control. Borrowing on the assets has become more difficult. Land values, which used to rival those vast black pools of oil under foreign deserts, have followed a similar roller coaster of value. There was a time people described the farmer as land rich and money poor. Today's farmer defies simple categorization. Some family farms, suffering under low market prices, high interest rates, and a steady decline in supports and subsidies have become little more than a pipeline, carrying cash between the banks and the suppliers. What cash remains in the cookie jar comes often from off-farm income. Still, it's a small percentage of our farms that are actually facing the auction block. Certainly, for those in such distress, the situation is grim and their suffering is real. Still, there is another aspect to these statistics implying that we should stop panicking for a moment and take a careful look at the other 90% or so, to see how things are going for them. That's exactly what we've chosen to do in this book - to look at the future of the successful operations, the farm operations so critical to America's future, to see what crises they face.
"Tomorrow's Problems Are Serious"
The situation has improved for today's farm owners and their heirs, but the horizon is also clouded by the question of long-term survival: Will the majority of today's farms, which are solvent, successfully pass down to tomorrow's farmers? Statistics from the U.S. Census Bureau indicate that the percentage of farmers over the age of 65 has gone from 17% in 1964 to 25% in 1993. This steady aging of the farm population is a clear indicator of the increasing problem farm families face as they try to pass the farm to the next generation.
As John Deere Life Insurance Co. noted, "a generation ago, passing on the family farm was a simple process. Profit margins were higher, land values were far lower, farm size was smaller, and tax rates were not significant. More often than not, a farmer could draft a simple will to transfer ownership to his children." This, then, is the other farm crisis we refer to - a less visible problem, perhaps, than the financial crisis of the 80s, but just as critical and urgent. We are facing serious questions whether the family farm can, in fact, be passed down from today's owners to the next generation. To understand the nature of this problem, it's necessary to understand the uniqueness of the family farm as a business, a business that's different even from the family farm of just a generation ago. Farming has always followed its own set of business standards. It is, in fact, a different breed of business with a unique four-phase history as an industry.
The first phase was the era of the strong back. During these years, the farmer and his mule worked the fields by hand. Back then, a farmer's success was often determined by how long he could walk behind a plow and how many straight 20-hour days he could work without dropping into the furrows.
Then came the second phase, with the development of the steel-bottomed plow, the mechanical threshing machines and the like. This was the era of machinery. Well, at least agriculture, as an industry, entered the machinery era. Not all farmers did the same. Many just couldn't make the transition, because . . . well, you just couldn't talk to a tractor the way you could to the mules.
Some people just couldn't get used to machinery. Those farmers are now gone, as are their farms, absorbed by those who mechanized.
The third phase arrived with the introduction of chemicals and biology into farming, introductions which created a revolution in productivity. Chemicals allowed for the control of diseases and weeds while, at the same time, the botanists and agricultural biologists were creating stronger animal breeds and varieties of plants which ripened quicker, could be harvested more economically, and withstood more unusual or extreme conditions. This combination resulted in tremendous productivity. This was a good thing. With the traditionally low level of farm prices, the only way to be profitable was to be more productive using this new technology. Again, many farmers couldn't make the transition. Those farmers are now gone, their farms absorbed by their neighbors who could adapt to scientific agriculture.
"Farming Has Become a Business"
And now agriculture is entering a fourth phase, perhaps the most revolutionary of all. To succeed in the 90s and into the next century, today's farmers must increasingly manage their farms more and more like the complex businesses they are. No matter how romantic are the images called up by "the family farm," today's successful farm is, first and foremost, a business - often a big business.
But, to repeat ourselves, the family farm, as a business, is unique. The net worth of the typical farm is usually very high, for example, but the gross income that net worth supports is typically very low. It's not unusual for a net worth of $1 million to generate a pitiful cash flow - income barely covering one family's needs.
Cash income, generally low and uncertain, makes cash problems the most commonly recognized source of stress on family farms, but poor cash flow isn't the only difficulty. Far more family farms are affected by the "other crisis" that this book is about. It's a crisis rooted in a combination of difficulties, part family and part business.
Think about the realities for the family. The return on investment of a farm is typically so limited that no non-operator would want to own it. Owner-operators at least get a range of non-cash "perks" that help make it worthwhile, but this tends to render the operating farm almost worthless to off-farm heirs.
Why? Because there's nothing in it for them. A family farm's balance sheet and income statements are almost reversed from what most people accept as normal for a business. A machine tool company in Chicago might be able to afford unemployed heirs in St. Louis, because it's using $2 million of assets to develop $50 million in sales. That can provide a source of cash to compensate the outsiders through buy-out or dividends. Not so the family farm, where there's usually much investment and not much cash return. The off-farm owners (or potential owners) are as smart as the operators. They get (or will get) little for their shares, and they know it. Sure, the typical in-town business has cash problems, too, but the problem is usually much more severe on the family farm - causing troubles within the farm family that go far beyond money worries.
These concerns define the other farm crisis - the great financial and personal difficulties involved with passing it all down from generation to generation.
Farming, long valued as a way of life, has now gone far beyond simply a way of making a living. Today's financial realities have turned the farm into an investment, and new questions are arising. Is it a business? If so, how should it be managed? How will it survive? Under whose direction and to whose benefit?
There's an even more fundamental question: Can the family survive a serious investment in the family farm?
The Answer: A Plan for Passing It Down
We don't pretend to have all the answers. Anyone who does is outright foolish or a downright fraud. But we do know that thousands of family farms have done the job right - farms owned by people like the Mackeys, the Pauls, the Leberts and the Grangers described in the beginning of this book. From them, and people like them, can be learned some of the approaches and techniques that work financially, but also work personally, in ways everyone can accept as just and fair. The solutions to farm transition problems - be they family or financial - are essentially simple in concept. They require understanding the true nature of the situation, then doing some thorough and practical planning.
These are the subjects of this book.
We've developed a list of the essential components of a working plan for passing down the farm. In every farm family where succession was handled smoothly and positively, each of these components was carefully thought through, developed, and successfully carried out. If any one of them is missing or poorly handled, the dream of smooth transition is almost sure to become a nagging nightmare.
If a family farm is going to be truly successful - growing, profitable, and, above all, a happy place to work, year after year, generation after generation - this is what must happen:
1) Because children of successful people will have more assets than their parents did, these "rich" kids (as the folks in-town see them) will have to be taught how to survive their dangerous opportunity.
2) Their spouses have to be integrated into the family as they arrive - a sometimes painful, but necessary, process.
3) A long-range plan must be developed - "long-range" meaning farther ahead than next weekend.
4) The plan must be followed - but it must allow enough flexibility to change as theworld changes.
5) Farm heirs have to be brought into the ownership process in ways more formal thanchance and more practical than probate.
6) A plan and funding vehicle for management and ownership transition must beavailable - in writing (uncomfortably concrete though that might be for the present owners).
7) The present owner(s) must have realistic and acceptable things to do when the plan inevitably calls for them to let go.
8) Some outside body, call it an advisory council, an outside board, a management "cabinet," or what you will, must be given responsibility for all of the above - and its members must have the talent, energy, commitment, and courage to do the job.
This kind of planning, not liquidation, or mega-farming, or a separation of family and business, is the real road to success as a farm-owning family. Management and ownership of a successful family farm is often difficult and sometimes unpleasant, but like growing old, it's infinitely preferable to the alternative.
It's true that sometimes the stresses of farming lead to alcoholism, abuse, divorce, or desertion. It's true that the dawn-to-dusk (and beyond) work schedule can lead to the neglect of our children, crippling accidents, and sickness. It's also possible that disagreements will result in brothers who don't talk, parents and children who are frustrated with each other, in-laws who feel cut off and cut out, and sometimes even down-and-out courtroom battles. Still, these disasters don't have to occur. They aren't inevitable.
There are ways we can learn to talk to each other without explosions. There are ways to recognize the difference between disagreements about facts and disagreements about values - and to react reasonably to each. There are ways to get along with daughters-in-law and sons-in-law. There are ways to plan for liquidity, to be fair to farm and off-farm heirs alike, to organize for growth, and to get quality help and advice. There are ways to separate labor and management, and to differentiate ownership from control.
There are ways to pass it down without giving it away. There are ways for the owner to teach, to stay in control while passing on equity and dividing the labor of working the farm. There are ways to put together an integrated financial plan.
There are ways to be fair with the kids. Ownership can be discussed in different terms with different offspring. There are many ways to divide it up so ownership and control are different issues. Classes of ownership can be created so the farm can be given, willed, or sold to farm heirs, or bought by them from the off-farm heirs so that years of effort by the new generation will be recognized in their form of ownership.
There are ways, and they must be followed.
We believe that a successful family farm provides one of the most exciting economic opportunities one can have in our society, and we know from experience that it is, in fact, possible to benefit from that opportunity.
1. U.S. Dept. of Agriculture Economic Research Service, Economic Indicators of the Farm Sector, 1994.
2. John Deere Life Insurance Co., "The Survival of the Family Farm in America", November 1992.