Our nephew has been helping out on weekends on our farm for five years. He saves his vacation from his town job to help me in the fall and winter. He seems to have learned a lot, and I want to ease back. My wife thinks we should begin working to turn our operation over to him. He has about $50,000 in cash and another $75,000 in his 401K savings account. That's about 25% of what our machinery is worth. I don't think he is well enough capitalized to buy our machinery and pay the going cash rent here. My position is we should liquidate our machinery, pay the tax on that liquidation, cash-rent our land to the highest bidder and move to Arizona. Thoughts? — J.D., Indiana
Timing is everything in farming, and it's simply an uneconomical time to be entering the grain production side of agriculture.
The business world calls this a "high barrier to entry." For a quick reality check, we need to look no further than FAPRI'S and USDA's grain price projections for the next few years, or add up the capital requirements to buy even a modest line of farm machinery.
Since your nephew dedicates so much of his spare time to the farm, we'll run with the assumption that he wants to someday assume your management role. In most cases, a transition plan over a period of time works best all-around, so if you have five to seven years to slowly transfer your equipment to your nephew via a charitable buyout, he'll have the greatest chance to build up enough equity. But to completely consume his existing cash for capital purchases makes having enough working capital to secure an operating line improbable.
Your nephew is likely going to need your land rent and machinery line buyout to be charitable, unless input costs suddenly drop or grain prices increase significantly.
Though you only value your machinery at $500,000, your nephew's $125,000 is not a very big drop in the bucket. To borrow today's common phrase in crop farming for the speed of depleting one's cash cushion, his "burn rate" could easily be less than one year.
For now, he needs to keep his job in town for financial security. Your wife's intentions are admirable, especially if she realizes the magnitude of the subsidy needed to give your nephew a fighting chance. It could be closer to $250,000 or more, vs. a few thousand.
Bottom line, you and your wife must first get on the same page on what you care most about:
1. Continuing to farm for any amount of time
2. Rewarding your nephew's contributions with the chance to farm
3. Securing the highest financial return when you exit farming
Jerry and Jason Moss operate Moss Family Farms Inc. Send questions, hypothetical or real, to email@example.com. All published questions will be printed//published online as confidential.