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Family members need to discuss farm succession plans

Agrivision: Before you begin transitioning a farm to the next generation, it is important that everyone is on the same page.

January 10, 2024

7 Min Read
GETTING IT RIGHT: Farm succession planning can be a daunting task that involves the transition of not only assets, but also knowledge, skills, labor, management and control. FARM PROGRESS

I have been working on my parents’ dairy farm for wages for the past five years. I’m 23 years old and I’d like to start buying into the operation. I’ve saved $25,000 and I own a 5-year-old Ford pickup truck and a John Deere 4040 tractor. My parents farm 300 acres (all owned), milk 160 cows, and raise 140 dairy heifers and 75 head of dairy-beef. They still have a mortgage of $300,000 on the farm, but the cows and machinery are paid for. Should I start buying the animals, or should I buy machinery or additional farmland? We have no immediate plans to expand. I still live at home, but I’m planning to move out this year and get married in a couple of years.

Tom Kestell: First of all, congratulations on your progress so far. Many people your age have saved very little and have done little planning for their future. To begin with, if you plan to join your parents’ farming enterprise, they are the ones to have an in-depth conversation with and a well-thought-out sharing of future mutual goals so all members of the team have similar visions. If you have a significant other, she needs to be part of the discussions too, so there are no surprises later and so everyone feels they are part of the team,

Once you have a vision plan of the future firmly in place, then concentrate on putting your assets in the area of the farm that best generates a return on your investment. This might be the beef portion of the farm, the dairy enterprise or the improvement of the different enterprises on the farm. In my opinion, buying more land would be the least profitable investment you can make, in the short term.

Always remember that a harmonious and stress-free environment within the operation must be the top priority in your future plans together. Try to evaluate what future investments will affect all team members. Be realistic as to your short-term goals financially. Remember, you are all eating the same pie, so avoid any problems that might occur by lack of communication such as what pie to cook, who cuts the pie, and who gets to choose first and last pieces. Be fair and respect one another. Good luck with your future endeavor.

Sam Miller: Congratulations on your interest in joining the family farm business. While you have outlined your interest, what plans do your parents have regarding the business? This would be a great time to sit down with them and discuss personal and business goals for each of you. You will need to be on the same page regarding your involvement in the business. This will serve as a guide as to how you can invest and participate in the business going forward.

It might be best to find a facilitator who can guide you through this exercise. Start with your Extension ag agent or contact the Wisconsin Farm Center at the Department of Agriculture, Trade and Consumer Protection for potential names. Good luck exploring your options.

Katie Wantoch: I’m excited to hear about your interest in purchasing assets from your parents. First, I want you to have a thorough conversation with your parents to ensure all of you are on the same page. Bring in another person to help facilitate this conversation if you or your parents aren’t comfortable with talking about the future. Also, have your parents shared the farm’s finances? Formulating a viable plan that meets the needs of your parents in their retirement and your needs to continue to operate the farm has become challenging in recent years. When you start to buy out assets such as cows and heifers, the income from those assets may become split as well.

Develop a plan on how this income would then be applied to farm expenses, debt or family living expenses. Farm succession can be a daunting task that involves the transition of not only assets, but also knowledge, skills, labor, management and control. Plans may take time to draft and several years to implement so that all involved can be on the same page or adjust as needed.

Whom should I rent my land to?

I have a real dilemma. I’m 67 years old. I sold my cows two years ago and just farmed the land last year. After the drought, I decided this fall to sell my machinery and rent out the land. I own 400 acres of cropland. Two of my neighbors, who are both friends of mine, each want me to rent my land to them. Both have offered me $200 an acre, which is a fair price. One of them is willing to sign a two-year lease agreement; the other one wants to rent it year to year. They are both pretty good farmers who take care of their land. I’m inclined to rent it to the neighbor who wants it for two years, but I don’t want my other neighbor mad at me. What do you think? I’ve been friends with these guys for a lot of years and I’d like to keep it that way.

Tom Kestell: It sounds like you have a nice problem, but a problem, nonetheless. This reminds me of the line from an old song by John Sebastian: “Did you ever have to make up your mind, to choose one and leave the other behind?”

Sometimes it is possible to not choose one alternative, but to accommodate both friends. In my opinion, long-term leases are always preferred but not always necessary. Maybe your friend has a very valid reason why he only wants a one-year rental agreement. I would discuss this with him, and maybe he will enlighten you on his reasons.

To keep the peace with your friends, I would offer each 200 acres at $200 per acre, and hopefully both will be satisfied. Your friend who only wants a one-year lease will maybe decide not to renew his rental agreement, so then the other friend can rent it all in the future. Good friends are more valuable and harder to find than good renters. Good luck.

Sam Miller: That is a dilemma, and one I may not have a good answer for. The good news is that you have competition to rent out the land. If it doesn’t make sense to rent each of them half of the land, you will have to decide who will become your tenant.

Evaluate this from a business standpoint. What are the terms for each of the options? While you mentioned one is a two-year lease and the other an annual lease, are the payment terms the same — usually half on March 1 and the other half Nov. 1? What about fertility needs? Will each agree to keep fertility where it currently stands? Lastly, you may need to evaluate if each has the ability to follow through on paying the rent. Once you have evaluated these factors, then decide.

If all else is equal, I would recommend the two-year option. After you have decided, inform the two parties that you based this on the terms of the lease, and it has no bearing on your friendship. Finally, make sure you have a written lease outlining the terms; this will reduce any issues in the future. Good luck with your decision.

Katie Wantoch: You are not alone in this dilemma with renting your farmland. Agricultural leases play an important role for over 22,000 farms in Wisconsin. According to the USDA Census of Agriculture, the amount of rented land in farms each year continues to rise, with a 1.5% increase in Wisconsin from 2012 to 2017.

There are many aspects to consider when renting land, though determining a fair rental rate is a top priority. A tenant should be comfortable with signing a written lease agreement, which leads to a better understanding between both parties, serves as a reminder to originally agreed-upon terms, and provides a valuable guide to either of your heirs. Will your neighbors be in favor of a written contract? Most leases are for one full year, but a tenant may request a longer lease if they have invested capital, such as irrigation, or made improvements, such as fertilizer application to adjust pH. Do you prefer maintaining soil nutrients or certain cropping systems, tillage, etc.?

A long-term lease will commit you to one tenant over the length of the lease. You want to make sure that who you select will adhere to how you would like your land taken care of.

Agrivision panel: Tom Kestell, dairy farmer, Sheboygan County, Wis.; Sam Miller, retired managing director, group head of agricultural banking, BMO Harris Bank; and Katie Wantoch, statewide Extension farm management outreach specialist/professor of practice. 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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