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Serving: WI

Farm expansion, succession planning take time

Farm Progress Dairy cows in pen with barn in background
SUCCESSION PLAN: Develop a plan for succession and implement the plan. Your succession will be different from other farms because elements and characteristics will vary.
Agrivision: Make sure all parties are on board with the plans for the farm’s future.

We own 400 acres and milk 130 cows in northeastern Wisconsin. Our daughter graduated from college last May and came home to farm. My wife and I are 55 years old. We owe $140,000 on our farm. Our daughter would like us to build a freestall barn, put a flat barn parlor in our tiestall barn and milk 40 more cows. The field rep at the milk plant gave us the thumbs up on adding 40 more cows. We have $50,000 to put toward the project, but our banker thinks we should talk to our attorney, form an LLC, and have our daughter take out a loan so she can start building equity. She is our youngest child. Her brother is working as an agronomist in the northwestern part of the state and has no plans to farm. We are grateful she has decided to farm, and we want to do whatever we can to make her glad she is making the farm her future. What are your thoughts?

Tom Kestell: Congratulations on your children’s successful education and their continued interest in an agricultural career. You asked questions that are hard to answer with limited information. A few questions that pop into my mind are the following:

  • What is your daughter’s marital status?
  • What was her major in college?
  • What is her attitude toward debt, risk management and other variables in the dairy industry?

I think it is a bit premature to make life-changing decisions in your operation until your new working relationship with your daughter has been given some time to find a comfort zone and a solid working relationship. I think a certain amount of time needs to be spent in your present situation to see how solid a commitment your daughter has to the dairy industry.

I would then look at all the possibilities for the future. Is investing in a flat barn parlor a temporary or long-term situation? Look at all the possibilities of milking the cows in the short- and long-term future. What would the added investment be to add a more efficient parlor rather than the flat barn parlor? Labor is always going to be a huge issue on dairy farms and always has to be considered. Take the time to talk to other dairy producers and see what works for them. If you build a new freestall barn, would investing in robotic milking be a viable option? Anything you do should take into account the labor efficiencies and cow comfort needs that a successful dairy farm will need to survive in today’s world.

Give this matter a complete investigation and discussion, and then involve your daughter in the planning, construction and financing of this venture. This new venture should last a lifetime, so a few extra months or a few extra years will pay long-term dividends. Anything you do will impact your and your daughter’s lives.

I would form a well-designed limited liability company after this planning stage is done, but before major changes are started. This will give you and your daughter a solid platform from which to grow together. I always remember what Vince Lombardi said: “Failing to plan is planning to fail.” Take your time, plan well and good luck.

Sam Miller: Farm succession is a challenge facing many farmers, so you have an advantage with your daughter interested in taking over the farm. This is a time for planning for both the business and personally for you and your wife. Setting up an entity to bring your daughter into the business can allow her to build equity, ownership and responsibility.

Work with a dairy business consultant, Extension ag agent or farm technical college instructor to assist with planning the expansion and entity formation. Work with your attorney and/or accountant to address your estate plan to make an equitable decision on your estate with one child in the business and the other not. This may also include a conversation with a life insurance agent. Finally, even though the field rep gave you a thumbs up on the added milk, request written confirmation that your processor will buy the additional production. Good luck with your plans.

Katie Wantoch: Farm succession planning would be a great first step before you invest in this expansion. Succession planning is a process with multiple steps that should be reviewed along the way. The success of the process depends on a number of factors. First, you, your wife and your daughter should determine whether succession is a viable alternative. Your daughter has brought forward some new ideas. Are you and your wife on board with her proposed plans? Talk with your wife and your daughter to ensure everyone’s goals and objectives for the farm are in harmony. The next step would be to develop a plan for succession and implement this plan. Your succession will be different from other farms since elements and characteristics will vary.

Here are a few things to consider: Has your daughter developed the skills to run the farm? She might not have yet, but develop a plan to improve her skills in operating and management of the farm. Set a clear timetable for what will be expected and when things are going to happen. You may need to seek outside advice to assist in this step. Everyone should be involved and be aware of the intentions of the plan, including your son who is not involved with the farm. Communication with all parties goes a long way to maintaining relationships.

Finally, you will be ready to implement your succession plan by talking with your attorney and accountant about transferring the ownership of your farm business. It’s a slow process, but you and your wife will be ready for that expansion and your daughter’s future in the farm.

Farming solo

My brother and I have farmed together our entire lives. He is 65 and is planning to retire next year. I am 63 and want to keep farming until I am 70. We milk 200 cows and farm 500 owned acres, and we rent 400 additional acres in central Wisconsin. My brother thinks this is a good time to sell the cows. I’m not sure about that — is this a good time to sell cows? He would like me to buy his half of the machinery, and he will lease me his half of the land until I retire. We have no debt. I don’t know if it would be a wise decision to keep our 100 heifers and sell them as they freshen or sell everything all together. My son, who has a full-time off-farm job, says he will help me after work and on weekends. I feel like I have some good years left, and I still want to farm. Please advise.

Tom Kestell: To start with, congratulations on a long and successful career with you brother. To arrive at this point in your career debt-free is a testament to a job well done. To your first question — is now a good time to sell the cows? This depends on many factors:

  • How good of a herd do you have?
  • What is your feed situation?
  • Where is the feed stored?
  • What are the conditions of your facility?
  • Would someone be interested in buying your cows, renting your facilities and buying the feed from you?

There is a peculiar situation right now where farms that want to expand have to acquire a milk base from existing farms that ship to the same processor. Is this a possible way out for you? If you could sell your cows and your base to someone who needs to expand, this would maximize your dairy herd sale potential. I would not keep heifers until they freshen unless you have feed to use up. Herd dispersals work best if all cattle are sold together as a group. Look at all the options. Get advice from local cattle dealers, and then pick the best option. Make the transition enjoyable because you’ve earned it.

Sam Miller: Your last statement said you want to continue to farm. In what capacity — as a dairy operator, feeding heifers or steers, or cash cropping? The answer to this question should guide your decisions about whether to sell the cows and/or the heifers, and whether you need to buy your brother’s half of the machinery or if you can sell some of the dairy-related equipment as a way to pay for the rest of the equipment. In either case, you will need to spend some time putting together a forecast for how you will operate the farm. Today you have no debt, but you will if you buy out your brother, and you will have increased costs due to servicing the debt plus renting his half of the owned land. Work with an ag Extension agent or farm technical college instructor to put together this forecast. This will allow you to make a more informed decision.

Katie Wantoch: The COVID-19 pandemic and the continued volatility of commodity prices has increased stress levels for farmers. Farmers have many reasons for choosing to exit the business. Regardless, liquidation of assets does generally trigger significant tax liability unless some planning is done in advance of sales. You mention that you and your brother have farmed together, but I’m not sure if you own the assets together (in partnership or corporation) or individually.

Knowing how the assets are owned and titled, what percentage is owned by each person, and the original purchase price will be needed to calculate initial basis and the taxation of gains or losses when the asset is sold. You and your brother should consult with your accountant on tax planning strategies to reduce the tax liability on the sale of assets.

In the meantime, you should consider what your future farming plans are. It sounds like you are planning to sell the milk cows and crop farm. If you decided to retain the heifers until freshening, how many acres will you need for feeding these animals? How many other crop acres will you need to afford the purchase of your brother’s machinery over the next few years? Consider these questions and your goals to determine your farming plans.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis; Sam Miller, managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, Extension agricultural agent specializing in economic development, Dunn County, Wis. If you have questions you would like the panel to answer, send them to: Wisconsin Agriculturist, P.O. Box 236, Brandon, WI 53919; or email [email protected].

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