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Serving: WI

Take one step at a time in farm transition

Ron and Patty Thomas/GETTY IMAGEs Red barn silos and corn fields
FARMING FUTURE: You should consider your own goals and the decisions that need to be made today or in the near future, one of our experts advises. When and if your son is ready to join you on the farm, you can tackle the conversation about his goals and your goals for the future of the farm.
Agrivision: Deal with what is most important first

My dad and I farm 800 acres (600 acres are owned) and we milk 150 cows in south central Wisconsin. My uncle sold his cows last year and rented his land to us. His farm is 5 miles from ours. In December, I bought 160 acres from him and paid $6,000 an acre. It is good land. That is the only debt I have.

Last week, my uncle asked me if I plan to buy any more land from him. He wants to keep the buildings and 160 acres, but he would like to sell another 160 acres to me in a couple of years. I told him I would have to think about it.

My dad is 66 and plans to retire in two years. My son is 16 and is graduating from high school next year. He plans to go to short course and start farming with me when Dad retires. I am 45. In the past 25 years, my wife and I paid my dad for the cows, machinery and the land on our farm.

My original plan was to sell the cows in seven years and finish paying off my mortgage on the land I bought from my uncle with the sale of the cows and heifers. My son wants to farm with me, but he doesn’t want to milk cows. Should I buy more land in two years? What are your thoughts?

Tom Kestell: To begin with congratulations on the progress you and your wife had made over the past 25 years! This is an accomplishment few people realize in just 25 years. Now is the time to look to the future of both your son’s career and your own. In my opinion, there are several key components to your future farming enterprise that should be addressed. First of all, available land that is close to your own operation that can be purchased at a reasonable rate only presents itself once in a while. The most important thing with land purchases is the percent of interest you must pay on the purchase price is what makes land feasible or not. With a purchase price of $6,000/acre and a 3% interest rate, your cost is $180 annually plus real estate taxes. At 6% interest it becomes $360/acre; at 7% interest it becomes $420 per acre. So, I’m sure you can see the interest rate quickly dictates the future of land acquisitions. I would talk to your uncle and tell him “yes” you would be interested in the next 160 acres when he is ready to sell. Keep a close eye on interest rates and other costs of ownership so that opportunities are not lost. Everyone involved in the transfer of land can and should be a winner.

You would like to milk cows for seven more years until you are 52. Is your son willing to milk cows with you for five years after your dad retires? This would give you a feel for his overall commitment to your farming enterprise and let him earn a solid stake in your operation. Maybe something could be worked out on the next 160 acres so that your son could take ownership of this land. This will give him a vested interest in the farm’s success, too. I would talk to an experienced lawyer who is familiar with the tax laws so that your future plans can be coordinated in such a way to minimize your tax liabilities. I would have your son involved so he is fully aware of the opportunities and the challenges ahead.

Sam Miller: First, congratulations on being in a good financial position to be able to purchase the land by having no debt prior to this acquisition. As for your question, fortunately, you have some time to pay down on the land you have purchased and the start of a plan for retiring the rest of the debt by selling off the cows in a few years. This is the time for some scenario planning. Start by forecasting what your debt is likely to be at the point you plan to sell the livestock. Next, put together your crop budget to determine what earnings and cash flow will look like on a go-forward basis. Then, complete a partial budget by adding in the additional land to be purchased in two years. Finally, start to compare the profitability and cash flow of the farming enterprise by operating the 960 to 1,120-acre operation with both you and your son. Does the operation provide the ability for both families to live off the business? What would it look like if you didn’t buy the added 160 acres? Spend the time planning now for this possibility. If, after this analysis, you may purchase the added land, consider an option to purchase with your uncle, which may or may not include setting the price or an offer of first refusal. Good luck evaluating your options.

Katie Wantoch: It sounds like there are a lot of moving parts in your farm business. I would encourage you to focus on the items that you have control over. Here’s what you know today: you and your dad farm together and you have purchased the farm assets from your dad. Congratulations on the transition of your farm to the second generation! There are lots of unknowns at this time so I can understand why you are unsure about your next steps. It sounds like you aren’t planning to milk cows for very long. What are your plans after you sell the cows? Will you transition to another livestock enterprise or cropping only? This decision may impact whether you decide to purchase additional farmland. Will this land be needed for your future plans? While I am excited to hear that your son would like to farm with you, you should consider your own goals and the decisions that need to be made today or in the near future. When and if your son is ready to join you, you can tackle the conversation about his goals and your goals for the future of the farm. Try to deal with what’s most important first before other things.  

Buying a chopper

My son and I farm 300 owned and 200 rented acres and milk 125 cows in east central Wisconsin. We also custom harvest 200 acres of corn silage for two neighboring dairy farms. We do all our own fieldwork, planting and chopping, but we don’t own a combine. We hire another neighbor to custom harvest our soybeans and high moisture corn. We currently own a pull-type chopper. I would like to buy a newer self-propelled chopper. The dealer will take my chopper on a trade and I would owe an additional $160,000.

I know we could put up haylage and corn silage a lot faster with a self-propelled chopper. I’m also worried about breakdowns with our current chopper. We currently owe $150,000 on our equipment and $250,000 for land. Please advise.

Tom Kestell: In my opinion you have a solid financial base and from a financial perspective you should be able to pursue your plan. However, make sure you plan for the additional equipment you will probably want and need once you switch to a self-propelled chopper. Will you need additional hauling equipment — trucks, wagons, etc.? These are expensive items to purchase. Is your hay cutting and merging equipment ready to keep up to a larger chopper? Are your current and prospective clients ready for this change of operation? Are they filling silos, bunkers or both? The support system is just as important as the chopper itself because each depends on the other for efficient operation. I would talk to several different custom operators to see what makes their business prosper and where the problems arise. I would then make up a game plan on how to avoid the pitfalls and the unexpected costs and investments you did not anticipate. There are enough surprises in our lives, we do not need them in our business decisions. Plan well and I think this can be a successful venture for your farm.

Sam Miller: This is a perfect case for the use of a partial budget analysis. Start by completing the financial analysis with a focus on the operational cost of your current pull-type vs. a self-propelled chopper. This would include the fuel, repairs, labor, insurance, interest expense and depreciation costs of running each system — don’t forget the costs to operate the tractor pulling the chopper. Also, complete a comparison analysis of the non-financial costs — time differences, ease of use, skill set required to operate the equipment, potential difference in feed quality from operating at a faster pace, etc. Compare the tangible vs. intangible advantages and drawbacks to help guide your decision. An Extension ag agent, farm technical college instructor or your banker can assist in completing these analyses. Good luck with your decision.

Katie Wantoch: Machinery and equipment can be major expenses for your farm business. New technology, increased repair parts and labor costs, and reduced inventory have all resulted in a farmer’s need to review their existing equipment and considerations for the future. To assist you in purchasing this new piece of equipment, you need to consider the annual ownership costs and the operating costs of owned equipment. The ownership (or fixed) costs occur regardless if machine is used, such as depreciation (cost from wear, age of machine), interest, taxes, insurance, and housing/storage expenses. The operating (or variable) costs vary directly with the amount that the machine is used and include repairs and maintenance, fuel, lubrication, and operator labor. In your situation, tractor costs should be added to the pull-type chopper costs to provide for an adequate comparison to the costs of the self-propelled chopper that you are considering purchasing.

However, the chopper could be split into costs for the self-propelled unit as the “tractor” and the harvesting head as the “chopper” to also provide a cost comparison. How does the cost of the pull-type chopper compare to costs of the self-propelled chopper? You can also compare your calculated costs to peers by reviewing the Wisconsin Custom Rate Guide 2017, compiled by Wisconsin Department of Agriculture, Trade and Consumer Protection, Extension and University of Wisconsin-Madison College of Ag and Life Sciences (nass.usda.gov/Statistics_by_State/Wisconsin/Publications/WI-CRate17.pdf). Are you operating at a lower or higher cost? Making smart decisions about controlling your machinery costs — purchasing and trading in equipment, how much to invest for repairs — can add or subtract from your bottom line.

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

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