Linking Programs IN THE BEGINNING

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1 Linking Programs John R. Baker Attorney at Law Beginning Farmer Center IFTN Chairman IN THE BEGINNING The Farm Debt Crisis of the 1980 s Result is that we have twice as many farmers over the age of 65 years old as are under the age of 35. Difficulty to enter farming due to Rising Farm Land Prices Inability to Identify Entry Opportunities Lack of Professional Advice and Advisors Lack of Adequate Preparation 1

2 A Generation That Wanted To Be Farmers Growth of Sustainable Agriculture Sustain the Environment Sustain the Family Sustain the Community Capable of Generational Transition Growth of By Fresh/By Local Growth of Farmers Markets Growth of Farm Land Preservation Efforts Slow Foods Movement The Response To The Challenges/Opportunities LINKING PROGRAMS What is Needed to Create a Link Program? An Organization to Administer the Program Farmers and Land Owners Qualified Beginning Farmers What is Needed to Maintain a Link Program? Stable Long Term Funding Clear Vision, Mission and Goals Clear Definition of Success Accurate Records and Evaluation 2

3 LINKING PROGRAMS What Does a Linking Program Need To Do? Marketing & Marketing & Marketing & Marketing.. Targeted Research Develop Research Based Educational Materials Educational Outreach Train Farm Succession Coordinators Referral to Qualified Consultants The Beginning Farmer Center Ag Link matching program Returning to the Farm Seminar Business Transition Seminar Consultations Research Information and Referral Recommendations to the legislature 3

4 What Do We Really Know About Farm Business Succession Planning? What does the research tell us? FARMTRANSFERS An international collaboration initiated by Professor Andrew Errington (deceased), The University of Plymouth, England and John R. Baker, Beginning Farmer Center, Iowa State University. 4

5 FARMTRANSFERS Approximately 17,000 farmers have completed the FARMTRANSFERS questionnaire. Data is collected through a postal questionnaire covering basic background information about the farm (e.g., size, tenure, and enterprise structure) and farm family demographics (e.g., age and household composition). FARMTRANSFERS Detailed information is also recorded regarding retirement plans, succession plans, estate plans, sources of advice, sources of information, and the delegation of decision making responsibility between the principal farmer and his or her successor(s). 5

6 Research Objectives Confirm the elements of farm succession plans Establish whether or not an identifiable career ladder in farm business successions exists Determine the educational needs of farm business owners Compare the patterns of succession between countries and years Create a data archive that is available for research collaborations FARMTRANSFERS Surveys Conducted England 1993 France 1997 Ontario & Quebec 1997 England 2000 Iowa 2001 Japan 2001 Virginia 2003 Germany 2003 Poland 2003 Switzerland 2003 Austria 2004 California (Humboldt Co.) 2004 Australia 2005 Pennsylvania & New Jersey 2005 N. Carolina 2006 Iowa 2006 Wisconsin 2009 Romania 2010 Tennessee 2012 New Zealand (pending) 6

7 Iowa In 2006 a mail survey was sent to 2,847 farmers throughout Iowa. There were 972 responses returned (34 percent). In ,548 surveys were mailed with 418 responses (27 percent). Iowa: 2000 and 2006 YEAR Average age of operator Farming is principal occupation 68% 54% Average size of farms (acres)

8 Percent of Farmers Who Have Identified a Successor Identification of Successor 27% 73% Yes No Age Distribution of Successors Age of Successor 35% 30% 25% 20% 15% 10% 5% 0% < Successor s Average Age Is 34 8

9 Definitions Inheritance The transfer of land and other farm business assets to a succeeding generation upon the death of the owner of those assets. Succession The transfer of managerial control of the farm business to the succeeding generation during the life of the owner of the business. Retirement The withdrawal of labor to and managerial control of the business by the owner. Anticipated Retirement Plans Retirement Will Retire Semi Retire Never Retire 0% 10% 20% 30% 40% 50% Retire: The withdrawal of all labor and management. Semi-Retire: The withdrawal of some labor and some management. Never Retire: Contributing historical labor and management. 9

10 Retirement/Semi-Retirement Age The average age of retirement/semi-retirement is 67 years old Age of Retirement <50 0% 10% 20% 30% 40% 50% 60% 70% International Retirement Comparison Australia England France Ontario Quebec Virginia Japan N. Carolina New Jersey Penn. Iowa 2000 Iowa 2006 Will Retire Semi Retire Never Retire Will Retire Semi Retire Never Retire 10

11 Source of Retirement Information Retirement Discussion Family Lawyer Accountant Banker Consultant No one Other 0% 10% 20% 30% 40% 50% 60% Sources Anticipated Retirement Income Percent of Anticipated Retirement Income by Source 25% 20% 15% 10% 5% 0% Land Sale Livestock Asset Sale Other Existing farm Social Retirement Investments Other Sale Property Security Plan Sale Semi retire Fully retire 11

12 Anticipated Method for Transfering Iowa Farmland Percent of Farmland Will to family Will to other Give to family Give to others Sell to family Sell to others Put in trust Other DK Farmers Responses to Best Plan for an Estate Plan 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Sell Put it in Trust/ Divide between all Give/Sell to Successor Corporation heirs equally No Plans Give to 1 Heir Misc/ Keep land in 1 piece Divide between all heirs w/ farming heirs getting land or more than rest Give to someone other than family member 12

13 Rank order of managerial authority retained by the owner/operator Decision Iowa 2006 Australia 2004 Virginia 2001 Japan 2001 Ontario 1997 Quebec 1997 England 1997 Decides when to pay bills Identify sources & negotiate loans & finances Negotiate sales of crops/ livestock Decide when to sell corps/ livestock Level of inputs used 3 7= 4 6= = 6= Rank order of managerial authority retained by the owner/operator Decision Iowa 2006 Australia 2004 Virginia 2001 Japan 2001 Ontario 1997 Quebec 1997 England 1997 Decide & plan capital projects Negotiate purchase of machines & equipment Plan day-to-day work Decide work method/way jobs are done

14 Rank order of managerial authority retained by the owner/operator Decision Decide long term balance & type of enterprises Decide timing of operations activities Decide type & make of machines and equipment Make annual crop/livestock plans Iowa 2006 Australia 2004 Virginia 2001 Japan 2001 Ontario 1997 Quebec 1997 England = 3 5= = 10 10= = 11 10= = What s It Worth If You Stay On The Farm? 14

15 I ve spent my entire life paying off my uncles. Now I ll spend the rest of my life paying off my brothers. English farmer, Devon, UK 2002 QUESTIONS How many times does one family have to buy the farm? What does the recapitalization every generation do to the future of the business? What does the that do to the family? 15

16 Dad and Mom have asked Sarah to come back and eventually take over the farm family business. They have offered Sarah an annual salary of $52,000 per year. Sarah has one sister and two brothers. None are interested in taking over the farm family business. Dad and Mom have always said that they will treat all their children equally. Mom and Dad have told Sarah that she will receive $250 per week and that each of her sibling will receive $250. Sarah, her sister and her brothers have been treated equally. Does this sound fair? If it is not fair during the life of the owner then what makes an equal division fair after the death of the owner? 16

17 KEY CONCEPT Compensation = Contribution Basics for compensation of the On-Farm Heir? Time Market price of labor Value Added to Farm Preserved wealth 17

18 Case Study The Miller family is a typical Iowa family who own and operate a farm family business and they want it to continue for another generation. Only one of their children is interested in farming. The Miller s Denny and Mary: Farmers in Smallville, IA. Denny farms with his father, Tom. 3 children: Chris, Kevin and Kathy. Only Kevin wants to farm. Mary and Denny love all their children and wonder how to divide assets when they are gone. 18

19 The Miller s: Part One Kevin is 21 and has a cattle herd of 10. He is in college and will finish this year. Since he hasn t contributed to the farm, no compensation is needed Equal division would be fair because Kevin hasn t done anything extra. The Miller s: Part Two Mary and Denny are 65. Kevin is 41 and is married to Grace w/ 3 children:. Denny and Kevin have been farming together for 20 years. Kevin makes some management decisions. 2,000 acres are farmed by Denny and Kevin. Their herds have grown significantly. How do we value Kevin s contribution to the farm? 19

20 Factors to Consider 1. What value has Kevin added to the farm? 2. What value has Denny added because he knows Kevin is going to take over? 3. Has Kevin built assets on Denny s land? 4. What amount should Kevin receive for management decisions? 5. Has Kevin made repairs, improvements to property? The Miller s: Part Three Denny s dad, Tom, passes away. Denny is having back problems and finds it hard to ride tractor. Kevin s daughter, Jessica, and her husband want to come back and farm. Half of cash leases have been transferred to Kevin s name. Kevin has taken over the hay operation and all management tasks. Denny is slowly phasing out of the business. How do we value Kevin s contribution to the farm? 20

21 Factors to Consider: The value has Kevin added to the farm. Kevin s assets that are on Denny s property. The physical work does Kevin do on Denny s land. Compensation for Kevin being the farm as manager for Denny and Mary. Compensation for record keeping. Wealth preserved because of Kevin s presence. (i.e. living in a farm house that would have deteriorated)? Personal services performed by Kevin and Grace The Miller s: Stage Four Denny dies; Mary s health declines rapidly Kevin and Grace help her w/ almost everything; i.e. chores, doctor visits, cooking meals, laundry, etc. Cows are gone; Kevin uses buildings, shop, grain bins, etc. on farm Kevin received all Denny s machinery. Mary now owns the entire land because her and Denny had a joint tenancy. How do we value Kevin and Grace s extra work on the farm and caring for Mary? 21

22 Factors to Consider Would the farm business still exist without Kevin? Would Mary be in a nursing home if Grace and Kevin didn t care for her? Are Kevin and Grace receiving other benefits by staying on the farm? How much value has Kevin added to the farm? Is Kevin the managing the entire business? Increased profits due to Kevin s management? Now, how do we value? There is no exact formula to do this! However, we can place values on services and increase in wealth/value/etc. Once values have been determined, we can multiply this by the number of years worked by Kevin. 22

23 Value* /hour Hrs./ Week Weeks/ Year Yearly Value On Farm Heir's Share from Distribution page Each off Farm Number of Heirs Heir's share from 3 Distribution page Total Net Worth Personal Care $ 1,253, $ 788, $ 2,830, Cooking $ $ 2, Cleaning (Washing dishes, vaccuuming, dusting, cleaning bathroom) $ $ 1, Assume the On Farm Heir is also the primary caregiver Laundry $ $ Bathing, dressing, grooming $10.00 $ - 3 Year Care Adjustment Transportation to Doctor, for Groceries, etc. $ $ 1, Caregiver/Farmer Other Heirs Pick up and delivery of pills and other supplies $ $ $ 1,306, $ 761, Other $ - Other $ - 5 Year Care Adjustment Total Personal Care $ 6, Caregiver/Farmer Other Heirs $ - $ 1,347, $ 741, Farm Maintenance $ - Farm Management $ $ 7, Year Care Adjustment Personal Financial Advisor $ $ Caregiver/Farmer Other Heirs Bookkeeping $ $ $ 1,384, $ 722, Farm Labor $ $ 2, Mechanics $15.11 $ - 10 Year Care Adjustment Lawn Mowing, Snow removal and Groundskeeping $ $ Caregiver/Farmer Other Heirs Other $ - $ 1,441, $ 694, Other $ - Total Farm Maintenance $ 11, TOTAL $ 17, Equitable Division of Property Equal is not always fair. An equitable division allows the On-Farm Heir to be compensated for the increase in the wealth they have created and protected. An equitable division also gives the On-Farm heir a greater chance of being able to maintain the farm family business. 23

24 Presented by: John R. Baker Attorney at Law