Many farm families are wrestling with farm succession planning, which includes transfer of the farm assets and business to the next generation. The federal estate tax provisions have forced that to emergency status for many farming operations. But in addition to the farm assets and transferring that value is also transferring the management of the farming operation, which is a different question. Good farm managers and asset heirs are not always one in the same.
Eighty years ago the US hit a peak in the number of farms, and since the early 1930’s that number has been declining as the number of farms declines and their average size increases. One factor contributing to that is the lack of a direct heir to manage the farm. In many cases non-farming heirs will sell the family farmland and someone else farms it, but in others an heir will take over management, helped by on the job training and a good asset base. Those issues were all studied by Purdue ag economists and published in the April edition of the Purdue Agricultural Economics Report. They report that expansion of on-going operations is a function of another family’s exit from farming.
They report that for most operations management succession takes place over time, in which individuals from different generations jointly manage the farm. Such an apprenticeship program combines an impending retirement and the ability of the younger generation to take over managerial responsibility. The economists indicate the process many involve few or many years with increasing responsibility of the young generation and decreasing responsibility of the senior generation. Timing of the change will differ due to characteristics and goals that are unique to each farm family. Their research focused on multiple generation farms, separated by at least 20 years or more. Using USDA data, 72% of the farms indicated the older operator was the primary manager on multi-generational farms.
The researchers found that increasing age of the senior generation increased the chance the farm had passed the majority of managerial duties to the younger generation. They report that plays out in a number of ways as authority is given to the most active person on the farm and the senior generation takes on an advisory role, “farm operators achieve peak productivity at middle age due to both physical and human capital accumulation. Beyond this peak, farm productivity gains tend to wane for a variety of reasons, including the process of an older generation establishing a set of standard practices. Younger generations may then bring innovative technologies or strategies that help keep productivity gains high.”
But what characteristics are more likely to be exhibited by members of the younger generation as they take over? The Purdue researchers report that those with college degrees are more likely to be serving as the primary manager on the home farm, because, “the complexity of modern agricultural markets, policies, and technology are also factors driving those who choose farming as a career to invest in higher education. “
The decline in the number of farms in the early 1930’s was a function of the introduction of mechanization to the farm, and that is still having an impact on family farm management. The researchers report “an increase in the number of individuals living in the seniors’ household decreases the chance that management has transferred to the younger generation. Perhaps older generation operators are less likely to retire if they still have dependents living in the household who rely on their income.”
They also found that if the younger generation had more children in the household, there was a stronger likelihood the management transition had occurred. That was a signal that income demands of the younger household had required that younger person to have more responsibility and be able to manage the farm capital and family labor resources to adopt new enterprises.
The researchers found the only significant financial factor was labor expenses for the farm, and farms with higher labor expenses relative to gross income are more labor intensive and use the younger generation in the management role. More labor means more management to oversee employees and that hastens the transition to the younger generation as the manager.
The researchers concluded, “Knowledge and productivity embodied in the skill and experience of the two generations are much more critical to the design of a successful transition. Similarly, family demands for income and earnings shares may be strong drivers of the succession process and distribution of farm returns to the different generations’ management resources. This and the importance of family household demands on timing of succession mean that in addition to the apprentice effects (e.g., gained experience, farm specific training) that occur during the period of joint management, it is critical for both generations to use this period to discuss their expectations for planning and implementing a profitable management transition on the farm.”