FARM AND RANCH SUCCESSION

FARM AND RANCH SUCCESSION Deborah Giraud, UC Cooperative Extension Farm Advisor

Farm Succession Planning Farm succession planning is preparation to ensure that farm management and assets are transferred in such a way that it remains at least as viable an operation for the next generation as it is currently, while meeting needs of the retiring farmers.

Succession is multi-staged process that may take many years. Succession begins before heirs enter the business with the socialization of children into farming and in some cases is completed through inheritance when the younger generation is middle aged. This prolonged period of intergenerational involvement may pose problems for family relationships, the farm business, and the completion of succession. (Anderson and Rosenblatt 1981, 1985; Salamon et al. 1986)

A farm is five times more likely to be passed from generation to generation than a non-farm business. This makes succession critical to the economic viability of the farm business and the continuation of the family farm. (Laband and Lentz 1983). (Russell et al. 1985; Weigel et al. 1987).

Land Ownership 1997 Census of Agriculture Percent of Farmland

Aging of the Farmer Population • Number of California farmers (owner-operators) dropped 11% between 1987-1997 • Number of 25-34 year old farm operators declined 51% between 1987 and 1997 statewide • Approximately 23% of Humboldt County farmers are over 65 years old, 18.8% are between 55 and 65, so about 42% are 55 or older • In the state, 17.7% are over 65.

Changed stratification system—access and ownership of land is one of the key factors in understanding rural stratification system throughout the world. • What can be done to prevent the formation of a two-class system—landowners vs tenants?

What can or should be done to create opportunities for the next generation • Highly mobile, energetic, well-educated young people will migrate to areas to where there are better opportunities. • It is critical that we think in terms of creating opportunities for the future. • Aspiring Farmers or beginning farmers are discouraged to even try.

Why should we be concerned about the structure of local ag businesses? • Population retention and quality of life reflects opportunities • The life blood of many of rural communities depends upon farming and rural population • The viability of social institutions depends upon opportunity structure

Why we need farmers • Support of local economies and communities • Natural resource protection • Food security • Agriculture is source of food, fuel, fiber, feed and industrial components

Farming is increasingly about: • Reading the market • Financial management • Marketing • Producing for a market segment • Negotiation of contracts

Why do young people choose to farm? • Be your own boss • Produce food and fiber for people • A good place to raise children • Being able to work outdoors • Living in the country • Family tradition • Enjoy working with and protecting nature • Freedom and independence

The social values vs economic reality • Decision to farm must reflect both the social values of wanting to farm with the economic realities of the marketplace. • “Good place to live, if you don’t have to make your living from it.”

Don’t discount part-time farming • Of the 90,792 farms reporting in 1997 • 56,256 (62%) reported farming was their principal occupation • 40,767 (45%) were full-time farmers (no off-farm employment) • 45,408 (50%) reported some off-farm work • 28,673 (31%) reported working off the farm 200+ days

Don’t discount part-time farming: Humboldt County Of the 792 Humboldt County farms reporting in 1997 • 417 (53%) reported farming was their principal occupation • 375(47%) principal occupation was not farming • 445 (56%) reported some off-farm work • 274 (36%) reported working off the farm 200+ days

Competing visions of rural • Family farm vision • Large number of small to mid-sized units, none with sufficient volume to influence the market • Resulting in dispersed production • Dispersed ownership of land • Rural culture of small towns, farmers, and economic democracy

An alternative vision • Large-scale production • Plantation system in the Southern States producing export sensitive crops, eg cotton, tobacco, rice • Hacienda system—a descendent of Mexican land grants throughout much of the Southwest, including much of California Land extensive agriculture--

Now we have a very mixed structure—dual agriculture—composed of a few, large-scale farms (industrial, vertically-integrated) along side of large number of small farms. • Left to market forces, without public intervention, either to assist new beginning farmers, or to regulate size and scale of existing farms, what type of structure will emerge?

Current Research and Outreach on Farm Succession • Increasing research interest by sociologists and economists • Increasing Extension outreach by Cooperative Extension and non-profits • My research project: the FARMTRANSFERS project, collaborating by use of survey instrument.

FARMTRANSFER PROJECT Professor Andrew Errington Research Chair, Rural Development University of Plymouth UK with Dr Tomohiro Uchiyama Visiting Research Fellow University of Plymouth UK

Is this an area you could add to your Extension program? • I am pursuing the idea that it is, and that it is a useful and valid Extension program • Some state have much more efforts in this area than others • I have a 20% Community and Economic Development assignment in addition to my Plant Science assignment.

What I did during my sabbatical • Conducted the FARMTRANSFER survey in my county. • Looked at Extension materials nationwide - web site • Asking the research question “What are the barriers for farmers to create succession and estate plans? • Wrote up some case studies of successful FarmLinks • Prepared a directory for my county of professionals • Held workshops for farm and ranch families • Attended National Farm Transition Network conference

Also….. • Offered my services to families • to help them get organized and set their goals • to facilitate family meetings • to act as a “personal coach” to help them meet their goal of getting their Succession and Estate Plan Started

WHY? • To help agricultural land stay in production • To help the next generation inherit or buy land that they can afford • To help our county’s agricultural future • To honor and respect our retiring farmers

California FarmLink, a non-profit based in Sebastopol • Linking Aspiring and Retiring Farmers • Services to Farmers • Information on resources, workshops • Technical assistance • Structuring deals to facilitate farm transfers

California FarmLink Farm Transition Services • Retiring farmers with heirs • Whether children want to continue farming or not • Retiring farmers and unrelated parties • Individual technical assistance

One Model of a FarmLink • Beginning farmer leases portion of farm with agreement to share equipment • Beginning farmer leases with option to buy • Retired farmer lives on farm • Conservation easement sold • Installment sale at appropriate time

The next slides are part of a succession presentation for clientele

Issues That Effect Farm Succession 1. Communication and interpersonal skills. 2. The state of the agricultural economy 3. Economic stability of the farm 4. Family indecision regarding succession

KEYS TO SUCCESS • Early planning • Professional assistance where and when appropriate • Vision – creating a “mental picture” of a successful transition for your family

Motivations For Timely, Successful Transition • Desire to see the next generation enter and succeed in farming • Desire to see the land stay in agricultural production

Three Farm Transition Dilemmas Every Family Must Resolve • Retaining an adequate retirement income • Being “fair” to all children/heirs • Managing succession so that successors and the farm business are not burdened with unreasonable debt.

FAIR DOES NOT MEAN EQUAL What is fair treatment of a beginning farmer in relation to non-farm children and heirs? The answer can result in bitter feelings among family members and failed farm businesses.

Risk Management for Succession • Identify and train successor • Plan for changes in ownership structure • Plan for changes in control (decision-making) structure • Involve family in plans (At very least - communicate with them!)

Farm Transition Process • Assess Current Situation • Financial and production analysis - BUSINESS PLANNING • Communicate Vision, Values, and Goals • Future potential of the farm, family communication • Develop the Transition Plan • Form a transition “team”

Farm Transition Process 4. Implement the Transition Plan • Legal and financial contracts 5. Revisit the Transition Plan • Make room for changes and an “out” 6. Update the new Transition Plan • Begin again, this time with plenty of time to spare.

Three Parts of a Farm Transfer: • Financial Framework • Current Business Analysis; Future Business Potential • Taxes & Retirement considerations • Legal Framework • Choosing the Proper Business Entity • Creating a Buy-Sell Agreement or Sales Contract • Creating a Will or Estate Plan • Relationship Management • Family Business Expectations • Communication of Goals and Plans • Picking a Transfer Team

Tools that are often used in estate planning and succession planning Life Insurance can help surviving spouse with expenses can give beneficiaries cash for farm repairs etc. can provide cash for non-farming heirs Agricultural Conservation Easements donated or sold Trusts - many forms Gifts of land, equipment, livestock, cash, IRAs Installment sales Buy - sell agreements

A Farm Transition Team May Include: • Family • Extension Service and other free agency advisor • Accountant • Financial/Estate Planner • Attorney • Mediator • Land-use Planner, Appraisers, Foresters etc.

Retiring Farmers’ Potential Goals • Turn over business to adult child/beginning farmer • Maintain some involvement in the business • Protect against the breakup of the business • Treat all children equitably

Retiring Farmers’ Potential Goalscontinued • Receive adequate retirement income • Retain sufficient business assets as security • for unexpected retirement expenses • Minimize estate and income taxes • Slow down: devote more time to travel and leisure

Beginning Farmer’s Potential Goals • Receive adequate income • Buy into the business • Participate in the management • Gain some control of the business over time • Increase the size/profitability of the business • Incorporate new technology • Build personal equity

Non-farm Children/Heirs’ Potential Goals • Inherit an equitable share of the parents’ estate • Receive an equitable return on investment by remaining involved in the farm business • Participate in management if still involved in the business • Sell equity in the farm business to get money for other uses

How do Agricultural Conservation Easements Fit into Farm Transitions? • A donated easement can offset taxes due to lease income • Sale of an easement can lower the cost of the property at the time of sale in order to help ensure someone can qualify for a loan • Sale of an easement can help an aspiring farmer get a down payment

Sources: • Much of the information on succession presented here is based on information provided with permission from: FARMTRANSFER Project, John Baker, Iowa State Beginning Farm Center, Pennsylvania FarmLink, Dr.Paul Lasley (Dept. of Sociology, Iowa State), Iowa Farm-on, NY FarmLink, California FarmLink and the New England Small Farm Institute.

THANK YOU A new web site for sharing Powerpoint slide shows is being created by Communication services, ready in January.

FARM AND RANCH SUCCESSION