Many farmers and ranchers spend decades learning the business and trade, accumulating assets, and building an operation, all with the hope of transferring the farm or ranch to the next generation. Approaching succession planning and retirement in financially sound condition is important for producers to be able to pass on a viable operation to the next generation.
In this article, we review the average age of producers1 in the Ninth Federal Reserve District using the U.S. Department of Agriculture’s National Agricultural Statistics Service (NASS) 2017 Census of Agriculture data.2 We evaluate the results of the fourth-quarter 2019 agricultural credit conditions survey,3 and we discuss how both of them factor into the financial plans of producers.
Banks and producers will benefit by incorporating these factors into realistic succession plans.
Table 1 — Average Age of the Primary Producer in the Ninth District
Source: 2017 USDA NASS Census of Agriculture
The aging of producers
The 2017 NASS census indicates that the trend in producer age has clearly increased over the past two decades. The NASS includes detailed information on producers throughout the U.S., including county-level data. As shown in Table 1, the average age of producers in Ninth District states is nearing typical retirement age. In addition, the average age of producers has increased from the 2012 census, and the trend goes back to at least the 2002 census (the limit of this analysis). Chart 1 shows the age composition of producers over the past four NASS censuses.
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Chart 1 shows that in 2017, one-third of the producers in the district were 65 and over—an increase of 54.5 percent since 2002 for this group. The next-largest group, ages 55 to 64, accounts for 30 percent of producers, an increase of 36.4 percent since 2002. The percentage of producers aged 55 and over has grown considerably and now accounts for almost two-thirds of the producers in the district, compared with 44 percent in 2002. Interestingly, the 35-54 age group shows the opposite trend. The overall share of this group has declined 40.8 percent from 2002 and is now less than one-third of producers in the district.
Planning for the transition
We now explore survey data related to retirement and succession planning for some Ninth District agricultural producers.
The 2019 fourth-quarter ag credit survey included four questions related to agricultural borrowers at district state member banks. The questions focused on estimates regarding succession planning, retirement, and carryover debt when transitioning into retirement.
As shown in Table 2, ag credit survey respondents estimated that 23 percent of agricultural borrowers had a formal succession plan. They estimated that only 12 percent of their customers plan to retire soon and that 29 percent of borrowers would be selling off some or all of their land as they transition into retirement. Finally, respondents estimated that 36 percent of their borrowers would have carryover debt at retirement.
The answers to these questions are significant as producers approach retirement. The financial strength of a producer prior to retirement is an important part of this transition. In some cases, producers use equity in the operation to help with the financial and capital transitions as the next generation takes over the operation.
Table 2 — Additional Ag Credit Survey Questions
Source: Fourth-Quarter 2019 Agricultural Credit Conditions Survey
|What percent of your agricultural customers
have a formal succession plan?
|What percentage of your agricultural customers
plan to retire in the next 2-3 years?
|Of those who plan to retire and do not have
a succession plan, what percent plan to sell
all or a percentage of their farmland vs lease
a percentage of the farmland?
|Of those who plan to retire and do not have
a succession plan, what percent do you expect to
have carryover debt from prior production years
at the time of retirement?
Finally, we discuss the financial measures of strength that allow producers nearing retirement to quantify and analyze past performance and current standing, and estimate future strength using realistic projections.
Overall, the agricultural sector is facing weak income, and some producers are taking in less cash than they are paying out. In these circumstances, some producers are borrowing against their equity to raise cash and extend borrowings.
Two financial measures affected by this conversion are liquidity and solvency.4 Using actual producer financial data, we review how producer financial measures change.
We used average producer financial performance for the years 2010-2019 from the FINBIN database,5 which is managed by the Center for Farm Financial Management at the University of Minnesota.
Table 3 includes FINBIN data for the most recent 10 years of liquidity and solvency financial measures for producers over age 60.6 The high-profit years of 2010-2012 strengthened liquidity and solvency measures. However, the liquidity measures started to weaken in 2013, with solvency measures starting to weaken a year later, and both continued to weaken through 2019. To some degree, it’s not surprising to see weakening financial measures as the entire sector experiences more realistic profit levels after historically high levels of profit in 2010-2012. However, it is important for producers to consider the value and feasibility of converting solvency into liquidity. The analysis is especially important as producers approach retirement age and when there is a limited number of operating cycles to rebuild equity.
Table 3 — Producer Statistics — Over Age 60
*All figures are averages and include row crop, livestock, and dairy operations.
**Profitability measure added for context related to high-income years.
Source: FINBIN Database, Center for Farm Financial Management, University of Minnesota
|Working Capital to
The goal of this article is to highlight how average producer age, select financial measures, and economic cycles (profit levels) can indicate the ability to successfully transition into retirement or implement succession plans.
When monitoring your data, pay attention to producer segments because we see negative trends affecting certain producers more than others. This topic is especially valuable because the majority of producers in the Ninth District are approaching or have passed traditional retirement age.
Monitoring the strength of the financial measures discussed here is important because these factors affect the viability of the operation after it passes to the next generation.