Creative Farm and Ranch Transfers
Ranching was just a dream for Frank and Linda until they started working for Robert (names have been changed for privacy purposes), a rancher aiming to retire. The three worked out a way for Robert’s ownership to eventually transfer into the hands of the beginners, who had no equity.
To begin, the young couple gained experience while working as Robert’s employees. Next, they took out a bank loan to buy Robert’s home. Robert then sold a piece of the ranch to Frank and Linda with a 30-year contract for deed. For the first 10 years of the contract, they paid interest only while building their cow-calf operation. After 10 years, they began paying on the principal. Frank and Linda managed the remaining acres of the ranch under a crop-share lease with a long-range plan for purchase.
Helping senior and beginning farmers and ranchers imagine and implement similarly creative farm- or ranch-transfer strategies has been Wyatt Fraas’ work for the past 25 years. As assistant director of farm and community programs for Nebraska’s Center for Rural Affairs, he’s seen firsthand the struggles of both seniors and beginners as they work toward farm and ranch transfers that can succeed.
“These arrangements take creativity, discipline, and the setting of goals that are well thought out,” Fraas says. “Both parties need to be willing to learn from each other and be committed to building a relationship of trust.”
For farm and ranch owners hoping to find and develop a successor to their operation, Fraas offers these suggestions.
• Be proactive in searching for a successor. “One farmer looked for two years, then found the perfect new farmer sitting beside him in church,” says Fraas. “Look around your community to see which families are not welcoming adult children home to the farm business, or where only one of several children may fit into the family farm.”
Check the land-matching programs operating around the country. Also check with the agricultural internship programs at colleges and universities for likely candidates.
• Get to know the person. “To make a farm or ranch transition work, people have to agree on their goals and the direction in which they want to go,” says Fraas. “They need to agree on the tools or the route that’s going to be used to achieve their goals.”
Discuss attitudes about experiencing setbacks or difficulties. Talk about expectations around working hours and conditions, as well as financial expectations, and stewardship of natural resources. Discuss, too, each other’s expectations and understanding of the gradual shifting of management.
• Set up a trial employment period of six months to a year. “A trial period when the prospective successor is paid for labor can be the first step to enter into a phased transition plan,” says Fraas. “You can assess how well you work together, how your daily priorities match up, and whether or not you share a common commitment to quality of work. This time lets you see how each of you deals with setbacks.”
• Consider an expansion or diversification of enterprises. This offers the opportunity to create the additional farm or ranch income needed to support two families throughout the time of transitioning farm or ranch assets. However, such an expansion is most effectively accomplished when the senior operator is still years away from retirement.
“The late Allan Nation, former editor of Stockman Grassfarmer magazine, observed that farmers and ranchers are at their financial peak and entrepreneurial drive in their 50s, when their physical capacity is waning,” says Fraas. “That’s an ideal time to bring fresh legs into the operation to maintain and grow enterprises that take more physical effort and energy, and that can also take advantage of the senior farmer’s financial and market acumen. These additional enterprises offer the chance to grow the management that could sustain the business for another generation.”
• Write a succession plan. If the trial employment period points to a continuation of the relationship between beginner and senior, put a plan on paper. A written agreement should lay out work requirements, responsibilities, decision making processes, time off, specifics of continuing pay, as well as the timing of any changes, transitions, or transfers of assets.
“The transition plan should move beyond simple employment quickly and make substantial progress toward transferring management and ownership to the beginning farmer or rancher within five years,” says Fraas.
The plan might also outline the possible continuing role of the senior farmer as an adviser. “No one will have the senior farmer’s experience with his or her land, so anyone would need training – or trial and error – to make best use of the farm’s resources,” says Fraas. “Ongoing training for a certain period by working alongside the senior farmer decreases the learning period and increases the chances of success for a new farmer.”
• Adopt a creative, generous spirit. Aside from shaping a successor for a single farm, the actions and decisions of generous individual farmers and landowners go a long way toward helping young farmers get started. For instance, beginners could benefit from senior farmers’ help with accessing land and equipment.
“Some folks are willing to help a young farmer get started by being a shepherd to that individual and, thus, contributing to the continuation of right stewardship of land and rural communities,” says Fraas.
TWO TRANSFERS THAT WORKED
The creative strategies that can result in a retiring farmer transitioning a farm to a beginner are limited only by imagination. Following are two such strategies recorded by Nebraska’s Center for Rural Affairs.
1. Senior farmer Ed hired aspiring rancher Mark (names have been changed) for three months, essentially a training period. Next, the two worked out a rental arrangement for machinery valued at $75,000 with an 8% rate of return, including an option for Mark to buy the machinery later.
Mark brought his 30 head of cows to the ranch, and he and Ed worked out a 60/40 crop-share arrangement that would allow for transition of Ed’s herd to Mark’s ownership. As the older cows were culled, replacement heifers came from Mark’s share, resulting in a turnover of the herd within 10 years.
2. Senior farmer John and beginning farmer Chris (names have been changed) worked out a 50/50 partnership. They bought cattle together and borrowed all operating capital on an annual basis, including a cost of living allowance for Chris. All expenses were paid with crop and livestock income. Proceeds were split 50/50. John supplied all equipment.
Chris repaid cost-of-living draws. He applied remaining proceeds from his share toward buying farm equipment from John, one piece at a time. After all equipment had been purchased by Chris, John was to continue receiving half of the farm proceeds for an additional two years. In the future, Chris would apply proceeds to land purchase.