Each month in Wallaces Farmer magazine, the Timely Tips panel answers questions sent by readers. Members of the Timely Tips panel are: Alejandro Plastina, Wendong Zhang, Extension economists, Iowa State University; Leslie Miller, Iowa State Savings Bank, Knoxville; Rob Stout, Master Farmer, Washington, Iowa. Following are the questions they are answering this month.
Our son began farming with us in 2008 when crop prices were high. He bought some machinery, and we bought 200 acres nearby. We owned 450 acres and rented an additional 600 acres. Last winter, our son decided he could make more money working a full-time job, so he sold his equipment and quit farming. We decided to sell 100 acres from the nearby 200-acre farm to a neighbor to pay off our debt. My wife and I let the rented land go, but we are farming the 350 acres we own this year. We are trying to decide if we would be better off selling our equipment this fall and renting the land to the neighbor or retiring, selling the whole farm and buying a house in town. We will both turn 65 this December.
Miller: To answer this question, you may need to decide where you want to live. If you want to move to town today, then it may make sense to sell the land. However, if you want to delay the move to town, and don’t have debt, then rent to someone that you trust. If you have 350 acres to rent out, it could provide you with a nice income.Another advantage to renting is that if your son ever changes his mind and decides he wants to farm again, there is a good base for him to start with: either to purchase at a fair price or rent at a fair rate.
Stout: You should lay this out with your tax accountant before you sell your equipment. If you have already depreciated your equipment, you might owe a big capital gains tax bill upon the sale. If you make the decision to sell the equipment, you might want to sell it over at least two tax years to lower the potentially large tax bill. As far as selling the farm, again check out potential gains if you purchased the original 250 acres at a substantially lower price. Owning a farm and renting it out can supply a nice income for your retirement years, so consider that when deciding whether or not to sell. There are also some tax credits available if you would rent to a beginning farmer.
Zhang: The standard answer is: It depends. Specifically, it depends on why you own a farm. The 2012 Iowa Farmland Ownership and Tenure Survey shows land is often owned for current income, or long-term investment, or for family or sentimental reasons. Before you make the decision, see whether there are other family members to consult, and especially decide with your wife and son what you want, whether you will be happy with the new arrangement, and whether you have the financial ability to do it.
Once you are clear about your goals for your farm through consultation with your family, you could evaluate the trade-off among the two options. Conduct a mini-benefit-cost analysis. Selling your equipment and renting out the land to your neighbor will likely generate a decent annual rental income of $80,000. But farming only 350 acres might be a nice part-time job for you after retirement.
Selling off the whole farm will help you sell the farm at a decent price, especially given current land supply, potential downside risk and a dwindling farm economy. Consult with an appraiser regarding how the market is doing in your local area.
Of course, 350 acres might be too big to sell in a single transaction and could limit the number of interested buyers. And there will be a choice of sale through a broker or having an auction, which likely depends on your land quality.
In summary, think about what you and your wife likely need for post-retirement life, what you like or want to do, and the purpose of owning a farm to you.
which ideas will add value
My son has more ideas than our farm can afford. He wants to take over someday. How can I make sure he doesn’t break the farm in the meantime (or in the future) with all these costly ideas he wants to try? He is really into the new digital technology.
Miller: I see these dynamics a lot. No matter how long the son or daughter has been farming with the parents, there is a fear that the cost of their new idea or technology may hurt the financial strength of the farm.
First, it’s important to let them know you worry about the impact of every change, whether it’s your idea or theirs. Then, work together through a list of the ideas, prioritizing the ones that save the most money or generate the most income. Do as much research as possible and take that information to your lender — together. If it is truly an idea that will hurt your financial stability, the lender will tell you. Then the bad news won’t come from you. If it is a good idea, your lender should tell you that as well. That may help you feel better about undergoing the change.
Stout: You should put it on him to justify any major new capital expenses. Have him prepare a cash flow budget showing an expected return on investment and then only make a new investment based on that return. New digital technology is nice, but in this era of tight margins, one still has to show a consistent profit.
Zhang: As a Chinese native, I think how China approached its economic reform could be informative for your situation. In particular, for every major reform, the Chinese government would pick several places to try out as an experiment. In your case, it might be useful to talk with your son and see which two or three of the new digital technology tools appeal to him most. Start the communication, try to understand and appreciate his reasoning, especially how this might change the production cost and profitability. Ask him to present a business feasibility plan to you on why and how a particular digital technology will work for your farm, and rather than fully adopting it on all of the farm, let him experiment with a small field of yours. That will reveal its true cost-effectiveness.