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Paying everybody on the farm

Jeff Caldwell 11/08/2011 @ 1:32pm Multimedia Editor for Agriculture.com and Successful Farming magazine.

For today's young farmers, off-farm income is typically a necessity. It's otherwise next to impossible in many cases to get started farming.

But, some younger farmers are growing increasingly frustrated by diminished opportunity to take on a larger stake in their family's farm because older family members are staying out working on the land instead of retiring as they would have a generation ago. So, how can younger farmers grow their roles on their families' farms?

"I think many people would like to farm, but either the father is not ready to give it up, nor is the farm able to support another generation," says Farmersforthefuture.com member and Almena, Kansas, farmer Michael. "Dad is not ready to scale back and we don’t have enough for all of us...so both me and my brother are working and helping to expand the farm as much as we can."

In addition to farming, Michael works as a teacher. He does so out of necessity. So does Agriculture.com Farm Business Talk contributor dschmidt1028. And, in his case, the clock is ticking.

"Without my help, Dad would be forced to reduce the size of the farm. I plan on keeping my full-time town job until we can either expand enough to support 2 families, or when/if Dad decides to sell to me," dschmidt1028 says. "Dad does not want to do hourly or salary pay, so I am running out of options. My brother has become so frustrated with the situation that he has stepped away from the farm until Dad is ready to sell."

In cases like these, there are no easy answers. But, there may be ways to keep all parties involved in the business through a thorough evaluation of everyone's contributions and compensation. There are different ways family members can contribute to the business, according to University of Nebraska ag economist Dave Goeller.

"Contributions can be made in a variety of areas: Labor can be provided by the heirs. Management for a farm business enterprise or for the overall farm may be provided by the on-farm heir," Goeller says. "Marketing may be done by heirs, and technical skills are areas in which the younger generation tend to excel."

Make those contributions the basis for compensation for each member of the farm family. "If the farming heir provides labor to the business, compensation can be provided by valuing the labor and paying a wage for the contribution. Likewise, management can be compensated by making a cash payment based on a percentage of the gross sales," Goeller adds. "If the individual brings an enterprise to the operation, a percentage of the profits earned by that enterprise can be calculated. It can be a bit more complicated when the owners decide they would have retired and sold the farm years ago had the farming heir not returned, but an estimate of that value can be determined."

Besides cash payment, farm owners can turn to these means for compensating other farm family members:

  • "Sweetheart" rental terms
    "Because cash tends to be in short supply, many operations have chosen to provide reduced rental rates of farm land or other farm assets as a way to attempt compensation for the on-farm heir," Goeller says. "It is common to see agreements that provide free or subsidized use of farm machinery in exchange for the heir's contribution.

  • "Estate Plan
    If yours is more of a "cash-poor/asset-rich" type of farm, maybe compensation through estate planning is for you. That can come in the form of joint or equal-but-separate ownership of farm assets or asset inheritance. "Some simply are not able to afford a cash payment or to reduce the income stream through a rental discount. If compensation cannot be made in any other manner, the remaining option is to try to account for unequal contributions by heirs through the estate plan," Goeller says. "Many factors influence an individual’s estate plan. Keeping the farm in the family, financial viability of the business, and control of the operation are but a few."

   

 

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