What’s next for the family farm business?

Some 75-80 percent of the food grown in the U.S. comes from family-owned farm businesses, some of them very large and many incorporated. In fact, according to agribusiness professor Ashok Mishra, family farms are the backbone of American agriculture. That’s why succession planning is so important.

First published in the W. P. Carey magazine, Spring 2016. 

Research by Ashok Mishra, Kemper and Ethel Marley Foundation Chair in Food Management

It is a common misperception that behemoth global corporations produce most of our food. In reality, 75-80 percent of the food grown in the U.S. comes from family-owned farm businesses, some of them very large and many incorporated. In fact, according to agribusiness professor Ashok Mishra, family farms are the backbone of American agriculture.

“Their impact stretches far beyond the limits of their farms,” Ashok says. “America’s food systems link farming business with a variety of other enterprises, input providers, retail chains and restaurants and stewardship of rural landscape and environment, sustainability and water quality.”

Understanding the economics of the family-owned farm business has been one of Mishra’s lifelong research interests. Throughout his career, which includes a stint at the U.S. Department of Agriculture, Mishra has focused broadly on how farm owners become more productive. One stream of research has examined succession planning. “That is the process by which the ownership, income and management of the family business is transferred to the succeeding operator or the next generation,” he explains.

“Succession is the most important issue that most family firms face,” says Ashok Mishra, a professor of agribusiness. In a paper on the topic, he wrote “If the senior owner/operator wishes to continue the farm business beyond his/her retirement, sustained planning must be undertaken to avoid numerous risks that can reduce the chances that the business will succeed under new management.”

Those risks include “inadequate management training, critical asset diffusion due to a poor estate plan, limited retirement planning requiring liquidation of farm assets and unsolvable disagreements between the parties.” In addition, “Failure to plan can cause significant business problems, such as the sale of farming business assets to settle estates and family disharmony.”

Succession planning allows the farm business owner to anticipate and prepare for future events that may adversely affect farm business management. Yet less than one-third of family-owned farms have a written succession plan, Mishra says.

How farm business owners think about ‘what’s next’

Farm business owners are less likely than other business owners to plan for life after they’re no longer running the business. “It is engrained in the farming culture that you live poor and die rich,” Mishra explains. “Farmers typically invest all their money back into the farm in an effort to become more efficient and productive, and thereby increase farm profits. Their aim is to build up the farming business to pass on as a valuable income-producing asset for the next generation.”

On average, 70 percent of a farm business household’s wealth comes from the farmland and is directly related to farm size, Mishra explains. So where the owner of a dry cleaning business might save money in a 401(k) or IRA with plans to buy a condo in Florida when he retires, the farm business owner might not save at all, planning instead to continue living on the farmstead in retirement and imparting land-based experiences to the next generation of farm business owners.

In addition, divesting a non-farm business is relatively easier than divesting a farming business, Mishra says. “If I own a dry cleaning business and my kids don’t want to take it over when I’m ready to retire, it’s fairly easy to sell to someone else, take the profits from the sale and my retirement savings and move to Florida. But the hurdles are often higher for farm business owners.” Much of the value of a farm business is in the land, and land prices can be a barrier for new entrants — getting a bank loan to buy a farm can be difficult for new entrants. An intra-family transfer overcomes borrowing constraints, and lowers taxes.

Public policy does impact succession planning

So whether or not a business owner has a succession plan is one determinant of the survival of the business. Why most farm business owners don’t have a succession plan is largely conjecture, but it is possible to know the factors that make a farm business owner more likely to have one.

“An understanding of the factors that influence succession plan is important as it allows policy makers to develop policies related to succession planning and prevent or promote structural changes, depending on the prevailing social and economic goals,” explains Mishra.

To uncover those factors that influence succession planning, Mishra looked to the 2001 Agricultural Resource Management Survey. The survey is conducted annually by the Economic Research Service and the National Agricultural Statistics Service, but in 2001 it included a question about whether the farm owner had developed a succession plan for the farming business.

The succession planning question was introduced, Mishra explains, because in the late 2000s policymakers, economists and researchers were particularly interested in assessing the impact of public policy payments on the growth and survival of farm businesses. Since 1933 the U.S. government has subsidized farm income in one way or another. Today, eligible farms (which grow mostly corn, wheat, cotton and soybean, also known as program crops) get direct payments from the government, regardless of market conditions or crop yields. Recent farm bill amendments change the mode of delivery of these government payments, but the fact remains that government support for agriculture remains steady.

Mishra found that if a farmer expects government payments to continue, they are more likely to have a written succession plan. “Based on the continuity of government payments, about 34 percent of farm business owners are likely to have a succession plan.” In contrast, only 28 percent of farm business owners who do not expect government payments are likely to have a succession plan.

Other factors influence succession decisions as well

In their 2010 study, Mishra and his co-authors found that expected household wealth, the farmer’s age and educational attainment, off-farm income and farm location also influenced the likelihood that a farm business owner would have a succession plan.

Farm success, as measured by expected household wealth, substantially increases the likelihood of having a succession plan. “If you have higher wealth, you want to protect it, and pass it on to your family in the future,” Mishra explains. The best way to ensure that wealth is passed on within the family according to one’s wishes is to have a succession plan.

The age of the farm business owner is also a factor. Mishra explains, “As the farm owner gets older, he starts thinking more about what is going to happen to the business when he can’t run it anymore, and then he’s more likely to write a succession plan. Also, wealth accumulation is positively correlated with age.”

When the farm operator and/or the operator’s spouse works off the farm, the likelihood of having a succession plan is higher. “The probability of having a written succession plan increases by nearly 12 percent if only the operator works off the farm, and by about 13 percent if both farm operator and spouse work off the farm.”

That might be because owners who work off the farm, or whose spouses work off the farm, may be operating a business that qualifies as a farm, but their main job is off the farm, Mishra explains. The enterprise may be simply a tax write-off, or may not be viewed as the sole source of income. “The households of these operators might be expected to have a weaker tie to their farm than farm business households who are actively engaged in the business of farming.”

The regional location of the farm also influences the likelihood that a farm business owner will have a succession plan. “In particular, farms located in the heartland, northern Great Plains, prairie gateway, eastern upland and southern seaboard regions are more likely to have a succession plan,” says Mishra. “The types of crops most commonly farmed in those regions require large capital investments in land and machinery and farms in these regions are more likely to grow program crops, which may explain why those farm business owners are more likely to have a succession plan.”

Are government payments necessary?

Government payments may help keep farms in the business of farming but they also distort incentives. “One can argue that by reducing market risk, government farm programs create a disincentive for farmers to leave the industry,” Mishra wrote. “Increased farmland values and rental rates are impediments to entry and exit and give rise to absentee ownership. This issue is becoming more relevant as farm size and absentee ownership continue to increase and the number of family farms dwindles.”

But there are other ways to help family farm businesses survive. “It is important that economists, financial planners and business consultants facilitate the process to enable family farm business owners to gain access to their services, thereby fostering their ability to make better succession decisions,” Mishra wrote.

To assist family farm businesses with formal succession plans, Mishra recommends three strategies: 1) develop and conduct educational sessions regarding succession planning for family farm business owners and their families; 2) develop procedures that clearly identify the steps that need to be taken to successfully complete the succession planning process and 3) provide helpful examples of the types of succession plans other family farm business owners have implemented.

Without government payments, the structure of the U.S. farm industry might be quite different. Certainly many farming communities would be changed, and food prices would likely increase. So there may be social and economic reasons to continue government payments, Mishra says, but they are not necessary to keep the American family farm alive. — Molly Castelazo

 

Based on two papers: “Effect of agricultural policy on succession decisions of farm households,” by Ashok Mishra, W. P. Carey School of Business, and Hisham El-Osta, economist, U.S. Department of Agriculture, published in Review of Economics of the Household, April 2008; and “Succession Decisions in U.S. Family Farm Businesses” by Mishra, El-Osta and Saleem Shaik, associate professor, North Dakota University, published in the Journal of Agricultural and Resource Economics in April 2010.