Iowa Farmers’ Business and Farm Transfer Plans: A Comparison between 2019 and 2006

Contributed by Beatrice Maule, undergraduate research assistant, Wendong Zhang, assistant professor and extension economist, David Baker, Director, Iowa State University Beginning Farmer Center

The loss of farmers that Iowa has witnessed in the past 70 years is strongly linked to the attitudes and mindsets towards farm succession. The number of farms has decreased and their sizes increased. On top of that, the average age of farmers has increased and they progressively started to keep more and more responsibility in the farm, even though their successor was well into adulthood and consistently helped on the farm. This, together with low incentives, has kept young farmers away from the land. However, Iowa’s economy needs young farmers to remain competitive and strong. This article is a short synthesis of a longer policy brief published in December 2020 that examines Iowa farmers’ business and farm transfer plans, retirement plans as well as successors.

Background

In 2019, a survey of family farms in Iowa was conducted with the main scope of comparing dynamics and attitudes behind farm succession. The focus was mostly on intangible assets and one of the key components of the survey was the comparison with the 2006 Iowa Farm Transfer Project. The population of the study consisted of 739 farmers, age 18 and older, who operated the farm in 2019.

The average age of farmers who responded to the survey was 61 and they indicated that they have been responsible for their farm for 40 to 50 years. The average age has increased since 2006, when the average was 56.

Sixty-five percent of respondents indicated that they grow corn and/or soybeans in their farm, and 60% consider farming their primary occupation, a moderate change since 2006, when 54% indicated the same answer. On average, they indicated that they mostly are not first generation farmers and that the farm has been in the family since 1927.

It is interesting to note that the majority of respondents acquired their farm by purchasing it from family members. However, 79% of respondents indicated that they receive some sort of off-farm income. Almost as many respondents acquired their farm in other ways, including by purchasing it from non-relatives. Most farms are largely a sole proprietorship, with a partnership with a spouse the second most common response. It is important to note, however, that the number of farms that are in a partnership are almost half that of sole proprietorships.

Eighty-seven percent of respondents indicated they have a will, a slight increase since 2006, and 28% have a trust. Overall, 57% also stated that they have considered estate taxes when making a decision about succession, and a little less than 35% consider estate taxes extremely important.

When asked about their highest education level achieved, 41% of respondents indicated that they have a high school degree, 25% had a 4-year college degree and 26% had a technical degree. These have all seen a significant increase since 2006.

Lastly, farmers mostly get their succession information from their banker or accountant, followed by ISU Extension and Outreach and from their attorney. Not extremely significant but well-worth noting, there is also a number of respondents that stated they get most of their information from magazines and articles.

Retirement Plan Analysis

When asked about retirement plans, 56% of respondents indicated that they will semi-retire, 23% stating that they will completely retire and 20% that they will never retire. It is important to note that, when comparing these responses with the 2006 Farm Transfer Project, the number of farmers who will retire has remained unchanged, while the number of those who indicated they will never retire decreased significantly. On average, farmers plan to retire at 67 years old. When asked the main reason why they would retire, respondents indicated that it would be because they are “getting too old.” A further analysis indicated that, among those who indicated “getting too old” as a reason for retiring, the majority indicated they would retire between 70 and 79 years old. When asked what type of involvement on the farm they would have upon retirement, 25% indicated they would have the same as now, just less intense, followed by “helping out during busy times only.” Close to 7% indicated they would have no involvement on the farm in retirement. The majority also stated that they wouldn’t move from their current residence upon retirement.

Figure 1. Source of income for farmers who plan to retire or semi-retire, 2019 (percent)
Figure 1. Source of income for farmers who plan to retire or semi-retire, 2019 (percent)

When asked how they plan to finance their retirement, Figure 1 shows that almost 58% indicated that they will rely on Social Security and 52% on income from the farm. It is important to highlight that in both 2006 and 2019, the sale of property, farmland, livestock and other farm assets was the least common answer. The majority of respondents indicated that they will rely on income from the farm to support between 50% and 75% of their total retirement income, immediately followed by 25% to 50%. This shows that the majority of farmers plan on relying heavily on this source of income which results being mostly in the form of a formal cash rent farming agreement.

When asked what they will miss the most about farming once retired, 76% of respondents said that they would miss the “way of life.” Additionally, 36% indicated that they will be pleased to give up the long hours on the farm and 34% were happy to give up the manual work that their profession requires.

It is important to note that 66% of farmers do not have a formal succession plan and 40% have identified a successor. Sixty-two percent of respondents have discussed succession with their spouse and 48% with their children. Around 22% haven’t discussed plans with anyone and 31% haven’t identified a successor. Among the respondents who have not identified a successor, the majority are confident that a family member will inherit and keep the farm; very few indicated that it will be sold. When it comes to identifying a successor, Figure 2 shows that a little under 58% of respondents indicated their son or sons will take over the farming operation and 8% indicated their daughter or daughters will. The latter has been a decrease compared to 2006, when 16% indicated their daughters. Other common answers are niece/nephew(s) and non-relatives. The average age of the identified successor is 33. The majority of respondents indicated that the successor already works on the farm, either part-time or full-time; however, 63% of respondents stated that they have family members who will inherit part of the farm but will not run it.

Figure 2. Who is the successor of the farm business, 2019 (percent)

Decision making and the role of the successor on the farm           

When it comes to making decisions on how to run the farm and the business, 59% of farmers responded that they make decisions alone, without any successor input, an increase since 2006. Nothing stood out as being run by the successor alone, and, on average, only 18% indicated that they make decisions with some successor input. Both have seen a decrease from 2006.

Decisions taken by farmer alone (percent)20062019Farmer > 70, 2019Successor > 35, 2019
Plan day-to-day work18%54%32%41%
Make annual crop/livestock plans19543842
Decide long-run mix and type of enterprises16543641
Decide input level use25584247
Decide the timing of operations15543442
Decide when to sell crop/livestock27644549
Negotiate sales of crops/livestock31644649
Decide when to pay bills44715559
Decide type and make of machinery and equipment16523940
Negotiate purchase of machinery and equipment23583844
Decide when to hire more help21594546
Recruit and select employees24604645
Decide amount and quality of work24594244
Supervise employees25574343
Decide work method/way jobs are done18503237
Decide and plan capital projects24554344
Identify sources and negotiate loans47664751
Livestock management19564750
Keeping farm records45655353
Decide whether to participate in conservation programs (and, if so, which options to take)614246

Table 1 indicates the percent of respondents that make their decisions alone without successor input. In the first column there is a list of decision-making areas, the second and third column are a comparison between 2006 and 2019 on the percent of farmers that make decisions alone. Lastly, the final two columns show farmers get less involved in solo decision making when either they are over 70 years of age or when they have a successor who is 35 or older. Even in these cases, the farmers are making decisions and not necessarily involving their next-generation successors 40% of the time in the farm business activities. It is also important to note that the number of successors that are employed on the farm rose from 21% in 2006 to 28% in 2019.

Only 35% of respondents said that their successors had total responsibility for the farm. Among those who said their successor had total responsibility of an enterprise, it is indicated that the majority owns or rents their own farm, sometimes from their parent. Other activities include daily or seasonal jobs and responsibility for cattle and livestock. Furthermore, the percentage of successors that had at least a college degree increased significantly from 2006, as well as the number of those who have a postdoctoral degree. The number of successors who left high school before graduating has significantly decreased.

Future plans for the farm

When asked what their plans for the farm are, most respondents agreed that it is best to keep it in the family no matter what. However, the majority indicate that the inheritance should be fair to the successors, but not equal. In particular, the vast majority suggested that they’ll give most, if not all, the property to the farming heir. More specifically, some respondents suggested that they’ll give most shares to the farming heir and give cash, life insurance or rental payments to non-farming heirs. Other stated that they do not want the farm to be sold or rented out, and suggested that they will split equally among heirs and let the farming heir buy or rent-out the land from non-farming heirs. Another possible solution that has been suggested is to put the farm in a trust and clearly state in their will that their land shall not be sold, only possibly rented out.

Some also believe that renting the farm out for cash, both as a whole or by splitting it, would be a good investment and a great additional source of income, regardless of whether the heirs farm or not, and allowing the family to retain ownership.

Respondents also indicated feeling the need to give the whole farm to only one successor because of the very high land values and rental rates—they feel the heir will not succeed otherwise. Another solution suggested is to put the farm in a corporation and gift shares to the heirs. Few, but definitely present farmers said that they have no choice but to sell the farm; either because none of their heirs would farm or because it wouldn’t be a great source of income, but they are heartbroken about it. It is important to note that it is not uncommon to see comments such as: “Waiting to see if daughter marry [sic] someone who might want to farm (plenty of people to rent to)”, or some stating that the daughters would end up renting the farm out. One comment particularly stood out: “A leading factor in the decline of rural communities is absentee landowners with no interest in the farm other than the income from cash rent. Farm management companies and outside investors exacerbate the problem.”

In conclusion, it is safe to say that farmers and farming families, differ somewhat from other professions, are very attached to their land and their way of life, to the point of working the land for their entire lives. Often this makes it harder for a newcomer to start their own farming business, this is an important aspect to take into consideration when creating new policies and solutions that target inheritance and beginning farmers.

See the Center for Agricultural and Rural Development paper for additional details on the survey.

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Ten tactics to face farm financial issues

Melissa O'Rourke image

Contributed by Melissa O’Rourke, B.S., M.A., J.D. Farm and Agribusiness Management Specialist, Iowa State University Extension and Outreach, morourke@iastate.edu

The farm economy is cyclical in nature, and in recent years has been impacted by one crisis after another. Agricultural credit conditions are described as having an overall decline which deepened in the first quarter of 2020 after some signs of improvement in the fourth quarter of last year. On the ISU Extension and Outreach Farm Management team, we hear from farmers and agricultural lenders about rising debt levels, cash flow issues and farm financial stress. 

Farm financial stress can generally be thought of as an inability to meet debt service payments – both principal and interest. The severity of the financial stress depends on the debt level, interest rates (cost of the debt), and the farm income available for debt service. In recent years, low interest rates and sufficient farm income have kept financial stress at bay for many operations. Nevertheless, we continue to hear from producers and lenders about elevated levels of financial stress on the farm.

Confronting a tough financial situation is a challenge for anyone. It’s not unusual for producers to procrastinate and avoid facing the problem. Just hoping things will get better is not a solution – but many folks do not know where to start.

Following are several suggested actions to get started in figuring out how to proceed. This list of tactics to consider are not necessarily in a particular order – but presented as possible approaches to move forward and address the problems, depending on the farm business and family circumstances.

Tactic One: Seek support for stress management

Financial difficulties can cause significant emotional stress. Start by talking to someone. Do not be embarrassed to reach out to family members, friends, or professionals who can just listen. A good place to start may be the Iowa Concern Hotline via the website (which includes e-mail or chat) or the toll-free number: 1-800-447-1985. Since 1985, the Iowa Concern Hotline has been available 24/7 with trained counselors who can provide access to an attorney for legal education, stress counselors, information and referral services for a wide variety of topics.

Tactic Two: Gather debt and income information. 

While good accounting would direct us all to have current financial documents – starting with a balance sheet (or net worth statement) and income statement – folks who are facing strained finances may have avoided record-keeping tasks. Start by gathering all debt information – both for the farm as well as personal debt (vehicles, credit cards, personal spending). It’s useful to have an online or computer-based accounting system, but do not hesitate to get back on track with a pad of paper or the back of a pizza box. Write it down – balance owed, to whom, and when the next payment is due (monthly, quarterly, annually) and the payment amount. After starting this process, explore the financial planning resources available on the Ag Decision Maker website. Guidance is available on how to build financial statements, including information on understanding and building net worth statements (the balance sheet) and farm income statements

Next, estimate available expected income during the next twelve-month period. Again, include all possible income from on-farm and off-farm sources.

Part of this information gathering should include collecting any written communication or notices that may have been received from lenders. The act of compiling this financial data is a first step in facing the extent of the problems faced. Defining the problem may help stimulate ideas for solutions. And, to get help from advisors, a fairly-accurate picture will be necessary. 

Tactic Three: Evaluate the assets

Again, an updated balance sheet would enumerate and place values on current, intermediate and long-term assets. But think about assets that may not appear on the balance sheet. Go over the most current balance sheet available, and add any assets that might not appear there. Include farm and personal assets. Are there items of equipment no longer needed? Is there a motor home no longer in use? Is there a land parcel that is no longer an essential part of the farm operation? Make conservative, best estimates of the value, and consider whether the asset could be used to generate cash.

Tactic Four: Outline possible plans, identify advisors

Have a personal brainstorming session. This is not intended to be a final, detailed plan, but an outline of possible strategies going forward. To assist, think about who might be able to help identify strategies. This might be the farm bookkeeper, accountant, tax or other financial advisor, a personal lawyer, an insurance professional – someone that can help with financial troubleshooting to focus on where solutions may lie. There may be other respected people with good judgment and a set of clear eyes who could give a fresh perspective on the operation. These are the kinds of people to sit down with, talk things through, and see what ideas might arise. 

Tactic Five: Cash generation and belt tightening

Basically, financial problems arise when income exceeds expenses – due to an assortment of causes. Contemplate assets which could be used to generate cash, either through sale or lease—but remember there may be tax consequences of selling depreciated assets. Is there custom work or other services that would raise some income? Explore off-farm employment of one or more household members. Consider both farm business and personal or family-living expenses. Eliminate or reduce discretionary spending. Medical insurance is a significant expense which may be decreased via off-farm employment. Ideas on how to stretch cash flow can be found on the Ag Decision Maker website.

Tactic Six: In-depth farm financial analysis

Iowa State University Extension and Outreach offers a free farm financial planning and analysis program. This service consists of confidential financial counseling, a computerized analysis of the farm business, and possible referral to other useful programs or services. The program uses FINPACK software to provide a more complete picture of the farm’s financial situation. An in-depth plan with options helps a farm operator work with lenders to make decisions for the future. Trained extension associates meet with farm operators to discuss the results of the analysis as well as the impacts of possible changes. The service is offered at no charge. 

Tactic Seven: Communicate with bankers, lenders, creditors

Avoidance is not a winning strategy, and it’s common for those facing financial stress to sidestep those to whom money is owed. Make a list of set times to visit in-person about the situation. Bring along the data that has been gathered – accompanied by an outline of proposals to address the problems. Before the meeting, review guidelines of good communication skills. If communication has become strained, consider bringing along one of the other advisors or professionals that may have assisted in brainstorming or analyzing the situation. A third party may be able to serve in a facilitation role, at least to take some of the stress out of the conversation. As part of the communication process, openly share ideas for cash generation or expense reduction. There is the possibility some aspects of the farm operations have become unprofitable and should be eliminated. Talk about ideas for debt restructure – perhaps debts that could be consolidated, or stretched out to reduce payments.  In this regard, it may be worthwhile to talk to other lenders who might have a different view of the future potential of the farm business.

Tactic Eight: Professional advice on debt restructure or bankruptcy

Depending on a wide range of factors, it may be wise to seek professional advice on the need for debt restructuring. Iowa State University’s Center for Ag Law and Taxation (CALT) provides a number of resources and articles that can facilitate the thought process. In particular, there is an article on how to find an attorney who has expertise in this field and can provide solid advice on next steps.  

Tactic Nine: Explore mediation services

Mediation is a process where parties meet with a neutral third-party who assists in identifying solutions to a problem or dispute. Information is available about agricultural mediation services at the CALT website, including a video about how mediation works. In Iowa, mediation may be a voluntary process – but it may also be mandatory. Iowa Mediation Service is a non-profit organization founded in 1985 and dedicated to solutions for farmers, families, and anyone who may find themselves in need of a dispute resolution expert. There is even a short video that explains agricultural mediation services. If the farm’s financial situation has reached a point where professional mediation services are needed, this is an excellent resource available to Iowa farmers.

Tactic Ten:  Contemplate retirement or liquidation

For some folks – depending on age, health, family situation, and many other circumstances – it may be time to consider retirement or partial to full liquidation. Retirement from farming can lead to a new phase of life which could result in new accomplishments. Lessons learned in farming can be a basis for new experiences. While some approach retirement or liquidation with apprehension and a sense of uncertainty, many later report a feeling of relief and freedom to move on to other opportunities and interests. Of course, it is important to consult with a range of advisors regarding tax consequences and obtain guidance on managing future life plans.

In summary, these tactics are offered to provide possible actions for farm families facing financial issues. Consider each action and move forward. Most importantly, avoid isolation at times of stress and work to surround yourself with people who can listen and perhaps provide encouragement or assistance.

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COVID-19 Resources for Agriculture

While in-person events remain on hold, ISU Extension and Outreach, including Ag Decision Maker, remains committed to serving Iowans. A few resources are included below, and more will be added as needed

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Ag Decision Maker – September updates

Ag Decision Maker

Business Solutions for Farms and Agribusiness from Iowa State University Extension and Outreach

September Newsletter (pdf)

New and Updated Files


Iowa Farm Outlook

Livestock — Fall 2017 Calf Marketing Considerations
Crops — Another Year with the Same Issues


Ag Marketing Resource Center Renewable Energy Report


Choices


Ag Decision Maker (AgDM)

An agricultural economics and business website.

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Ag Decision Maker – August 2017 Updates

Ag Decision Maker

Business Solutions for Farms and Agribusiness from Iowa State University Extension and Outreach

August Newsletter (pdf)

New and Updated Files


Iowa Farm Outlook

Livestock — More Cattle Mid-Year, Lightweight Placements Up
Crops — The Market Is Still Not Sure About Crop Production


Ag Marketing Resource Center Renewable Energy  Report


Ag Decision Maker (AgDM)

An agricultural economics and business website.

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