Running Out of Time

Transition planning takes a long time and for the next generation, most farms are waiting too long, if not ignoring the topic altogether.

Next year, the agriculture census will be happening again. Inevitably, we will hear about how the average age of farmers increased again, and we have fewer farmers. We might not, but those are my predictions. Farms are consolidating, and there’s more sales than transfers. The farm operator population is aging, made possible by the technological advances in agriculture in the past 50 years. There will be headlines again about the age, the decrease, and consolidation.

The part that will be ignored is how the industry itself, and the attitudes of the current farm operators, contributed to the situation. Agriculture is going to have to adapt to the next generation because they’re not going to adapt to it. It'll have to offer career trajectories and more creative ownership structures than in the past. The industry and current generation of farmers will need to step up and make agriculture attract for the next generation. They'll have to want to take action about transition and stop avoiding it.

Today’s Young Aspiring Farmers

There’s currently three generations actively farming and one just getting started. Over 60% of current farm operators are over the age of 55, and the vast majority of them have no transition plans for their eventual exit. Elder Millennials are turning 45 this year, they’re not young farmers anymore. And the eldest of Gen Z are turning 28. For the purposes of this article, when referring to the next generation, it will mean people under the age of 40; which is mostly Millennials and Gen Z. The older generation in this article typically means farm operators over the age of 55.

The next generation wants a decent standard of living, which includes vacations, fair wages and opportunities to make choices. It’s about more than just money; they want recognition, career development opportunities, work-life balance, flexible working arrangements, and well-being initiatives. They aren’t going to take on the risks of ownership without getting at a minimum the same benefits they would get being an employee. This is something agriculture struggles with a great deal because it’s not part of the culture to acknowledge that rest and fair compensation matter. The industry can no longer compete in today’s labour market without fixing that, let alone solve the demand for owner-operators.

Now, before you jump in my comments going “nobody wants to work anymore,” please retire that 100-year-old saying from your vocabulary. It’s been running around since the 1920s. See, the issue is that “nobody wants to work anymore in a toxic workplace for unliveable wages.” The next generation is aware of the burnout, and the cost of social labour; they’re not going to voluntarily sign up for it. You can read about it in detail.

All the Programs, Grants, and Promises

There are lots of different young farmer programs out there, trying to encourage the next generation to get involved. They have existed in various forms for decades¹. Manitoba has had specific programs for young farmers since the 1990s. The current FCC Young Farmer Loan has been in existence since 2012. Quebec has been funding the Aspiring Farmers Grant since 1997. Despite all of these initiatives and organizations, those programs are having minimal impact.

The only province with some success at keeping a higher percentage of young farmers is Quebec. Quebec has numerous agricultural support programs. Access to certain programs requires that there be one shareholder under the age of 40 holding at least 20% of the shares. That means the older generation can’t keep the next generation on empty promises if they want the benefits of those programs. There’s a lot of empty promises floating around when only 12%² of Canadian farms have a written succession plan in place. The reluctance to transfer management from the owning generation to the successor generation in agriculture has been well documented by numerous academic studies.

Commercial agriculture relies on social labour, outside funding and inherited wealth to function. It always has, someone had to take a financial hit to pass down the farm, or get money from relatives and other careers, young people were never buying a farm without any help. Meaning, all those programs are just feel-good attempts at solving a much larger issue that has been going on forever. The current generation of farmers have no interest in making serious plans to transferring their operations. This is in stark contrast to other family-owned and run enterprises, where over 40% have solid transition plans in place³.

It’s Not Simple

Historically, options like Lifetime Capital Gains Exemption (LCGE) allowed farmers to operate without having to really treat the production side of agriculture like a business. They could rely on the land investment to help them out in a pinch, through either using it as collateral in lending or selling it. Land has always appreciated in value, but it didn’t cross the LCGE threshold until around 2012 (or later in some regions). Overall, values have 1000% in just the last 27 years alone, much of that increase recently.

Land is now valuable enough that it’s a tax problem, which is a big problem for an industry that doesn’t generally have surplus cash reserves. Even if the older generation transfers the farm as a gift without expecting payment, they will be paying taxes on the capital gain associated with the fair market value, as that’s the current tax legislation. It is no longer possible to transfer farms for $1 as was frequently done in the past⁴. Those are the farms now facing a significant tax liability on top of existing debt loads. Additionally, production now has to be profitable to get the kind of lending necessary to pay for the land.

Transition planning is complex and, most importantly, takes time. It takes 10 years on average to fully plan out and execute a good succession plan. Like bookkeeping, this task gets shoved aside to deal with whatever production challenges are currently going on at the farm, and by the time anyone gets around to the conversation again, it’s too late. The older generation has also intertwined their farm into their identity, and many don’t consider exiting as long as they can physically handle the work. Waiting until that point makes transition even more complex and often removes some of the best planning options, resulting in negative financial consequences.

Waiting until the main owners of a farm like this physically can’t do the work anymore is too late to make the best choices for a successful transition plan. Photo by Sigmund on Unsplash

Unfortunately, the current majority of farmers refuse to accept that things have changed. Despite all the programs, training sessions and countless articles, succession planning is still rarely done, and often ignored. They don’t have a plan for getting out, leaving their farms to be sold to the highest bidder with the funds to pay for it. That means massive consequences are coming to Canadian agriculture.

Return of the Tenant Farmers

None of the existing programs have made much of a difference. Grants, loans, and funding don’t’t work when the land is being treated as an investment, not a productive asset. That means we will probably continue to see leased land grow in terms of acres operated as farming and land owning gets divorced. It is likely that we will have to differentiate between landowners and farm operators in the future. The landowners could be the sons and daughters of farmers; however, the operators will most likely not be or vice versa. The farms that take the production side seriously and treat it as a business are the ones surviving and making successful transition plans.

Tenant farming coming with different risks and rewards. There’s structured leases for tenant farmers, and the landowners themselves are generally not farmers. This is fairly common in Europe, where much of the land is concentrated in the hands of a few. There’s already consolidation happening in Canada, but for the most part, it’s still bigger farms buying up smaller farms. There are land investors though who do own significant and expanding amounts of farmland.

One of the largest farmland owners is a former real estate developer who entered the farmland market relatively recently, precisely because of this issue between land values and profit potential from agricultural revenue⁵. The owner has given multiple interviews and stresses that he is typically purchasing larger operations (2,000 acres or more) that can’t find other buyers easily. He repeatedly stated that he wants tenants who follow progressive farming practices, and he regularly checks on the land. He has no intention to do the farming himself.

These farmland owner-investors, rather than owner-operators, will bring change to the entire industry. They want to be paid on time and for farmers to follow industry best practices, not their grandparents’ old habits. The aforementioned investor has taken the time to learn about agriculture. There’s another pool of investors that buy farmland using investment funds⁶. These are more problematic as they are intentionally designed to resell the land at a profit, regardless of the social cost. They have detailed campaigns sharing how this investment model is here to help farmers grow, but really they’re profiting from the agricultural sector’s lack of long-term planning.

Missed Opportunities

Agriculture isn’t the only dirty, hard-working industry, but it pays considerably less than many others. The biggest hurdle is that the type of entrepreneur needed by agriculture is also in demand in other industries, where they could easily be more successful. Knowing and understanding financial statements, marketing, accounting and human resources are necessary skills now. The next generation doesn’t want to come back to the farm if it’s not a profitable, functional enterprise. In every farm succession study out there, the operations that manage a successful transition were already larger and profitable farming businesses.

A person that can take calculated risk for opportunities offered, understand financials and business management is in demand in many places. And those other businesses are light-years ahead of agriculture when it comes to good business behaviour. They often have tax planning, liveable wages and vacation time. Taking over as an owner-operator is already prohibitively expensive. It’s highly likely the next generation of farmers will be tenants or joint ventures. They probably won’t own the land they are farming, as it’s going to be too costly to own all the capital assets needed to run a farm.

In the current state of agriculture, being an employee could easily leave a young person in a better position than being an owner-operator of a farm. Agribusiness, and support services all pay better on average than agriculture itself at the scale most young people could get in at. That’s the big issue; the people who want to do the long hours, and the hard work, are better rewarded elsewhere. Career development has been greatly overlooked as agriculture has in the past focused more on inheritance and survival. The next generation doesn’t have to be a blood relative. It’s far more important that they have the business skills to succeed rather than the right family relationship.

All the programs, grants and training sessions will not help when the generation making the decisions doesn’t show up at the table. The current older generation’s reluctance to participate in transition planning and actually follow through will be the end of the small family farm. The small farms will get sold on to other lifestyle farmers who rely on off-farm income to pay the bills. Those who love agriculture will probably become the managers, tenants and operators of the larger farm that bought out their family farm.

Selling is Not Failure

While this whole article focused on the need to transition, simply selling the farm one day is not a failure, it’s a choice. Not all farms are set up or capable of going through a transition as an ongoing operation to another generation. Lots of farms exit the industry, especially the small ones generating less than $250,000 in revenue. It’s just as important to be realistic about the farm business’s future. Looking at the financials and all the tax legislation around exiting is necessary and it’s why waiting so damaging. Ignoring the issues doesn’t mean they will magically be solved and not all issues can be solved. However, with enough of a time horizon, lots of tricky farm transitions can be sorted out.

Expecting the next generation to take over failing operations is inane. The real failure is not planning to exit. Maybe instead of worrying about tax legislation, the outgoing generation should be thinking about how to sell their operation to the next generation and making agriculture attractive. They’re not coming back to the farm for a worse quality of life than they have without a farm. Agriculture is full of opportunities but it’s doing a poor job selling them. If we want new farmers, we have to convince them that farming is a worthwhile career and business. And we have to plan for it years in advance.

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Thanks for reading! At this point, my thoughts on succession planning are “if they wanted to, they would.” If you’re over the age of 60 and reading this and you don’t have a documented plan, your plan is to sell and cash out. Several studies in multiple countries that have determined if farmers have no established transition plan by 60, it’s unlikely to be successful. And if you’re the next generation that’s been hanging on because you’ve been promised something, if it ain’t on paper, I don’t like your odds. On that note, maybe instead of pushing off transition planning one more year, think about it while you sit in the tractor this summer.

1. Junior Farmers clubs have been around in Ontario since 1914, and 4-H came to Canada in 1913. Canadian Young Farmers' Forum is a national, not-for-profit organization established in 1997. Canada’s Outstanding Young Farmers Program has existed since 1980.

2. Yes, technically, an additional 21% have a verbal succession plan in place; however, unless it is written down and has some kind of legal binding, it means absolutely nothing to the next generation. There’s far too many young people on farms being promised they will “get the farm” who find out years later they’re walking away with debt and nothing to show for it.

3. The range varies from 38% to 59% depending on the study. A leading Canadian firm specializing in family enterprise succession planning says its 43%. They do not consider verbal agreements to be a plan, just a good starting point.

4. Yes, this happened, mostly up to the mid-1990s. This is why staying up to date on tax changes and having a frequently updated tax plan is a necessity, not a suggestion.

5. Andjelic Land Inc. owns more than 248,000 acres and has over 200 tenant farmers. It’s hard to verify if they are the largest farmland owner in Canada as they claim. They’re definitely among the largest private owners. The owner says investors currently make up 3% of farmland ownership in Canada.

6. These also want tenant farmers but generally, they want existing tenants or operators and take a more hands-off approach since the primary goal is to make a profit on reselling the land at a later date. An example of this is Assiniboia Capital who started buying land in 2010. In 2014 it sold all 128,000 acres to the Canada Pension Plan Investment Board. The CPPIB sold that land again several years later.