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Serving: IA

Put together a succession plan

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PHASING IN: It’s always a challenge to bring the next generation into a farming operation, especially when times are tough in the ag economy.
Timely Tips: What’s your vision for your farm and its future?

Editor's note: Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are Alejandro Plastina and Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Marion County Savings Bank, Knoxville; and Rob Stout, Master Farmer, Washington, Iowa.

I don’t have any members of the next generation involved in our farming operation. My daughter and son-in-law are asking questions about coming back to farm. She teaches grade school; he’s a seed company sales rep. They are 30 years old, college graduates and have one 3-year-old child. I have concerns about today’s financial climate in agriculture, COVID-19’s effect on the economy and other uncertainties in the world today. What approach should I take with them?

Stout: You need to have a frank discussion about your farming operation and the future you desire for it. If they fit into the future of the operation, then the time is now to start to develop a plan to phase them into the operation.  The timetable depends on your age and desire to slow down, and the potential for the operation to support two families. You may need to grow the operation by adding acres or livestock, or maybe having them keep their jobs and help out as much as possible, learning from you as you head to retirement. They might also have an idea to add an enterprise that could add income potential.

Agriculture has always had cycles of ups and downs, so I wouldn’t get overly concerned about this financial climate any more than any of the others you have no doubt been through. We have been though farm succession programs by ISU Extension and Farm Bureau, and there are others that are also good. Make plans for both generations to attend at least one of these to further educate yourselves on this subject.

Zhang: The first step is to have frank and open conservations with your family about your vision for the farm and its future. When do you plan to retire? Will you rely on this farm for income support when you retire? How is the solvency and liquidity of your operation? Could it support two families? Does it have potential for expansion or adding other income-generating enterprises?

Through this process, you will also learn about your daughter and son-in-law’s thoughts regarding how they could contribute to the current and future operation of the farm. Maybe they could handle a portion of the farm business, say livestock or seed corn. ISU’s Ag Decision Maker has a host of resources on succession and estate planning, and you are welcome to reach out to one of the eight ISU farm management field specialists. Your daughter and son-in-law are young and may qualify for some of the incentive programs designed to help beginning farmers. ISU has a beginning farmer center that can also help you navigate the process and develop a succession plan that fits your situation.

Miller: It’s always a challenge to bring another generation into the operation, especially when times are tough. However, a thorough examination of the physical and financial hurdles that must be conquered is needed for success. If there is more than one son or daughter, be sure to invite everyone into the discussion to avoid problems later. Don’t be afraid to develop several plans, and remember that being fair does not always mean being equal.

From the financial perspective, the Iowa Mediation Service will tell you that many of the multi-generation farming operations they see in mediation are due to unpaid debt. There are primarily two reasons for this:

  • The older generation bought additional machinery so the younger generation could rent additional crop ground (without the ability to pay for use of the equipment)
  • The family underestimated how much additional income would need to be generated to handle the additional living expenses of the younger generation.

So, if your operation currently pays the bills without much left over, it becomes very difficult to add a partner without adding another source of income. Attempting to outbid other farmers to add acres to your operation for that extra income is usually a bad strategy, and borrowing $750,000 to $1 million to put up hog facilities may make you uncomfortable. Thus, it may mean that your son-in-law needs to keep his off-farm job and plan to help after hours or weekends. Then, as opportunities arise  (farms become available to rent), he and his wife can gradually grow their share.

Will it pay to store this fall’s crop?

My son and I farm in central Iowa. Our crops were hit by derecho and drought. Our corn yields are about half what they normally are, and beans about two-thirds of our five-year average. We were lucky, only one bin blown down. We have room to store all our corn and soybeans on farm. We’ll need some operating cash for inputs for 2021 planting. Will it pay to store this fall’s crop through winter? With low interest rates, would we be better off borrowing money to plant the crop instead of selling grain to generate cash?

Stout: Prices for corn and soybeans have improved a lot in the past two months, so I would recommend taking advantage of that increase. Check out your local basis and cash bids from now until spring. At the time I write this, the market is asking for soybeans as there is a negative carry past December. So that market signal is telling you to price your soybeans now or in the near future.

Corn is a little different in that there is carry out into May, although not any more than the cost of interest and on-farm storage. You could always hold some of your corn to sell in the typical spring planting time rally we normally get.  I am assuming you’ll get a crop insurance payment, so selling most of your soybeans and some of your corn may give you enough money to cover much of the 2021 crop input costs. Don’t use low interest rates as an excuse not to make crop sales at prices that are at multiyear highs. A thoughtful marketing plan is always a good idea.

Plastina: We have seen higher corn and soybean prices recently, and storage costs are unlikely to go down for some time after the derecho destroyed so many grain bins across Iowa. Those are good reasons to consider selling at least part of the crop now, as long as prices exceed your variable costs per bushel (and even more so if you can secure a profit per bushel). Uncertainty about the speed of economic recovery in the U.S. and abroad will likely add increased volatility to commodity prices.

Crop insurance indemnities along with ad-hoc government payments will likely provide a substantial portion of your cash flow needs over winter. However, if you firmly believe that corn and soybean prices will continue to go up, and you will store part of your crop in your own bins, borrowing from the USDA Marketing Assistance Loan, your local bank, or via input financing can help you manage your cash flow needs at a historically low interest rate. Remember, borrowing has to be in line with a solid marketing plan based on reasonable price expectations (as opposed to wishful thinking).  

Miller: At this writing, corn has rallied 60 cents and beans have rallied $1.30 since early September — largely because fewer bushels of corn and beans will be produced this year. Usually, if we have a short crop, prices tend to peak early and then fall off. That would encourage you to move bushels now rather than wait. However, if the administration changes, it could change our trading strategy and then who knows what will happen!

I prefer to see people spread their sales out instead of moving everything at once. I would move at least some of the grain even if it means your bins are not completely full. Before you sell too much, check how much income you have already gotten this year from grain sales and government payments. If you are like most farmers, you’ll need the expense of 2021 inputs to lower your tax obligations. If that forces you to borrow money, it can be repaid when grain is sold later.

 

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