Transition brings uncertainty
Opening up the lines of communication is critical to the successful transition of the farm to the next generation.
Courtesy of University of Missouri, Columbia
In a family farm business, there’s often the hope or expectation that the next generation will return to work on the farm. But young people who are thinking of returning to the family business today face greater uncertainties than at any time before, says Kevin Moore, agricultural economist at the University of Missouri, Columbia.
Bringing in the new generation exposes the business to more financial risk and vulnerability because it’s often necessary to grow the business to generate income to support the extended family.
Farmers are living longer, and the farm might have to cover health-care costs and retirement income for the generation leaving the business as well as salaries for the generations still involved.
“At any point in time, the farm might be supporting three or more generations of that family,” Moore said.
The keys to successfully transitioning a farm to the next generation are good communication and planning, Moore says. During the farm financial crisis of the late 1980s, the university launched an extension class called “Returning to the Farm” to help students and their families decide if and when college graduates would go back to the farm and help them make the transition successfully—if that’s what they decided to do.
At the time, land values had plummeted, and many farms—orchards included—faced foreclosure or bankruptcy. It was a time when farmers could barely survive, let alone try to bring a younger generation into the business.
Just as challenging
UMC still offers the class, but as an upper-level undergraduate class. Moore said transitioning a farm to the next generation is just as challenging today, though for different reasons.
“To me, the uncertainty we face today is almost greater than at any period of time I’ve ever seen,” he said.
Now, land values are high, which can create cash-flow problems. Farms have become more sophisticated technologically, and machinery is increasingly expensive. No one can predict where oil prices will be over the next five or ten years.
“We have very low interest rates, which make some of the financial plans look a little bit better, but how long can they stay this low?” he asked. “There’s only one direction they have to go, and that would be up. There are so many ways that the farm’s bottom line is being affected, and I think it makes it very difficult to plan,” he said.
“Returning to the Farm” is an upper-level class taken by students who are mostly not ag economics majors. Typically, they’ve taken an introductory economics class but then gone on to study production agriculture of various types.
“They’ve learned a lot about becoming better production scientists, but haven’t learned how to treat the farm as a business,” Moore said. “The class really helps the students get exposed to some of the business and financial planning skills that are important for them to be able to evaluate the potential success of going back to the farm.”
During weekly classroom sessions, students develop and evaluate a financial plan, looking into the feasibility and profitability of returning to the farm. Family members and business partners take part in weekend workshops with the students to cover topics that need input from all involved.
Most valuable part
“What the students would probably say is the most valuable part is opening up the doors of communication with family, because they have to talk about goals, and look at the compatibility between the goals of the different generations, and about estate planning,” Moore said. “It’s hard to talk about when mom and dad are going to pass on, but it’s an important thing to discuss. The class gives them a reason to talk about the things that everyone’s wondering and worrying about, but are hard to bring up. It provides a forum to do that.”
Moore said the older generation often find it difficult to be totally open about the financial picture, especially on the liability side of the balance sheet.
“Kids have seen the income, and they’re familiar with what’s produced on the farm, and what its value is,” he said. “They have an idea of the productive capacity and the income capacity, but the information they’re not exposed to is how much debt exists on the farm.
“We’ve had some parents who’ve declined to share that with their children, and that usually results in the kids saying, ‘I can’t go back and put my future on the line without knowing what the actual financial structure of the farm looks like and how much debt there is.’ It makes it a very scary thing to go back to.”
Where the parents do share that information, it helps the students understand how well the farm could support new debt and evaluate how much of a financial drain that would be.
Developing a written farm plan is a major part of the “Returning to the Farm” course. Older generations tend to have pieces of a plan (particularly as bankers nowadays are requiring updated financial statements each year), but very few have what Moore considers to be a complete business plan that includes goals and a vision for the future. They have a production plan in their heads, but they might not have written it down. It’s the forward-looking part that tends to be missing,” he said.
“Farmers and producers enjoy the producing part of things, but the planning part is a little more mundane—not as much fun,” he said. “It’s not something a lot of farmers do on their own.”
During the class, the students and families work on a business plan and try to develop a mission statement or something that describes the long-term mission of the farm.
Whether it’s planned for or not, farm succession will happen eventually when the older generation passes away. Moore said he’s trying to help families be more proactive and develop a plan to increase the likelihood of a successful outcome.
“We give them the tools and help them through the process of trying to plan for the future, rather than just let the future happen to them.”
Part of the plan might be for the student to work elsewhere for a time before returning to the farm. Parents want their children to love and value the fact that they’re working on the farm, and sometimes having them go out and try an off-farm job to get a feel for what their life would be if they didn’t go back to the farm accomplishes that, he said. It might also make them less likely to give up too soon when things aren’t going well on the farm.
“If they’ve had the experience of having a job that’s not in farming, sometimes it makes them value the good times and the bad times when they’re farming,” he said. “For that reason alone, I think it’s valuable.”
In addition, a few years of drawing a salary off the farm help a young person just coming out of college to build equity, improve their own financial situation, and have the ability to go to the bank for a loan.
In addition, experience in the business world can help them later when they’re managing the farm.
Some students who go through the “Returning to the Farm” class decide not to go back.
“I don’t measure success of the class on how many kids go back,” Moore said. “The idea is to help them make the best decision to ensure the success of the farm.”
There are valid reasons why students decide not to go back to the farm or delay going back, he said. They might question whether the farm can generate the income that would be required, or they might feel there’s too much debt and involving more family members would put the business in financial peril.
Some might have been considering going back to the farm just because their parents expected them to. Sometimes there’s pressure from the community, as rural communities need farms and need young people to support their schools and businesses. The class gives families an opportunity to talk through some of these issues and might help students realize it’s not what they want to do, especially if they don’t share the same goals as their parents.
“Sometimes, it’s just a matter of deciding they’re not going to get along well enough to make a go of it. We help them make the best decision and avoid a situation that would not be successful in the long run.”