Strategic Insights: Transitioning America’s Farmland

According to the USDA's 2012 Agricultural Census*, the average age of the American farmer was 58.3 years and the fastest-growing age segment was 65+. Consider these additional supporting data:

• 33% of American farmers were 65 and older, while another 29% were between ages 55 and 64.
  
  
• 62% of America's farmers are age 55 or older.
  
  
• The number of farmers age 75+ grew by 5.8% between 2007 and 2012.
  

It's clear that over the next decade or so, much of America's farmland – now held or farmed by an aging generation – will need to be transitioned. How this will happen is not easily answered due to a number of factors and changes that have occurred over the last two to three decades.

While granular data are not so easy to come by, I can speak to this matter as an aging baby boomer who grew up as the son of an agricultural implement dealer in western Texas (who also farmed on the side).

Technology

A key trend over the last 10 to 15 years has been the tremendous advances in agricultural technology. The tractors and equipment used to be much smaller. When I was growing up, I remember a lot of four-row equipment. As I moved through high school, four-row quickly gave way to six- and eight-row. Word had it that twelve-row was on the way. Tractors began to come with cabs, featuring both heating and air conditioning, almost like cars. I still remember my dad scratching his head after visiting some of the Agricultural Implement Factories and wondering how much further things would go.

We have come a long way since those days of the early 70s. We now have 48-row planters and tractors have on-board GPS capabilities, computers and monitors. We have variable application rate technology utilizing downloadable soils maps, which enable constant monitoring of inputs and outputs. Many farmers have laptops in their trucks, as well as systems back at the farm. They can use their data to provide financial analysis, production modeling and much more.

Indeed, farming has moved into the modern age. I have watched it grow from a trade to a true profession with all of the sophistication and specialization of many other industries. New technology in seeds – including genetic modifications to help with weed and pest control, drought tolerance, lower water and fertilizer needs – has emerged, as have new and more sophisticated agricultural chemicals.    

Education

No surprise, the knowledge a farmer must possess today is much different than it was in the past. When I graduated high school, many in my class began their farming careers with their dads. Most had been helping for several years anyway, and it was very similar to an advanced apprenticeship. What we see today is that younger farmers typically have some college education. A growing number have agricultural degrees, and many have taken some business courses as well.

We have directly observed this trend over the past 10 years as the tenants to whom we lease much of the farmland we manage to fit into this category. Young farmers embrace the new technology and seem to be pushing it as well. Gone are the days of note pads in the shirt pocket and pencil calculations of application per acre, yields and inputs. Instead, tablets, laptops and an increasing number of smart phone apps crunch data from many sophisticated systems that are now crucial components of much of the farming equipment today.

Economics And Scale

Tractors that used to cost $35,000 are now $250,000 and up. Combines may well be $300,000 or more. Add in planters and other implements, and you quickly have more than $1,000,000 worth of sophisticated equipment that will allow farmers to tend much more acreage than they could have 20 years ago. But those higher equipment costs have also enabled a notable increase in scale.

According to the USDA Agricultural Census data regarding Harvested Cropland Farms, in 1974 there were 32,752 farms of 1,000 acres or more. By 2012, the number of Harvested Cropland Farms of 1,000 acres or more had more than doubled to 76,535 farms. This increase in the number of larger farms is not really surprising, given what we have already discussed.

The amount of acreage a modern tractor with a 24-, 32- or 48-row planter and a combine can handle is much different from the equipment of yester year. I often find it surprising when I hear about the disappearance of "small family farms." What most people don't understand is that with the cost of equipment today farmers can, and must, farm larger blocks of acreage to pay for that equipment and make a profit. There are still many family farms. They're just a lot bigger than they used to be. Unfortunately the smaller farms of days gone by simply cannot be operated economically and support a family without an additional source of income.

It appears this aggregation of farm acreage has actually helped transition some smaller farms over the last decade or so. Those farmers who had enough scale and capacity to invest in newer equipment and technology either bought or leased additional acres to add to their farming enterprises. This further explains how the number of farmers in America has decreased. We have moved to fewer farmers using better equipment to scale up their operations and become more efficient.

But, as we noted at the start, many of these farmers are now in their 60s and beyond. The question remains, "How will this land be transitioned to the next generation of American farmers?"

Old Model vs. New Model

Looking again at some high-level survey data from the USDA – as well as what we see from the farmers we work with across the nation each day – the general rule in the past seemed to be that most farmers owned the majority of the land they farmed. According to the USDA 2012 Agricultural Census, 72% of farmers 65 and older owned all of the land they farmed. In contrast, only 42% of farmers 45 and younger owned all of their land. We also see fewer children coming back to take over or join the family farm operation. Clearly some still do, and there has been an increasing awareness the last few years about transitioning land to future generations. However, for those farmers whose children decided to pursue other careers, transition is a concern that we believe will intensify in time.

No one can argue that farmland has seen tremendous appreciation over the past 10 years. We believe much of this is attributable to an overall increase in demand brought about by increased world population and – more importantly – per capita GDP growth in many emerging economies, such as China, India and other regions of Asia. This has allowed a large segment – often referred to as the emerging middle class – to consume more grains, as well as more protein in the form of meat from livestock, which in most cases uses grain as the precursor feed stock. This increased demand for grains and other food has driven up prices, which in turn drives up the gross income a farmer can make per acre. That of course ultimately results in an increased price per acre of farmland that produces more gross income than in the past.

With increased land values, what a farmer owns today may well represent the bulk of his or her net worth and estate. The old model of owning land and the equipment needed to work the land no longer seems to fit. One of the lessons learned from the crash of farm prices in the 1980s was that a lot of leverage is never a good thing. The result is that we are seeing a new model emerge in which farmers tend to own less of the acreage they farm. As we noted above, the high costs of equipment required to provide a reasonable quality of life for their families means that farmers need to farm more acreage with lower overhead costs than in the past. Similar to businesses that do not own – but lease – the buildings they occupy, it may be that farmers also choose to invest their capital in equipment and technology rather than in land ownership. We believe more and more they may choose to lease the land so they can farm at a scale that allows them to be profitable and not have escalated debt levels.    

One Solution — Based On Observations From The Past Few Years

Over the past six years or so, we have seen an increasing appetite for farmland as an investment; and we offer this asset class as a portfolio diversification strategy to our clients. In a number of cases, we have purchased land from farmers who were selling and retiring for our clients. We then leased that land to many of the next-generation farmers we mentioned above, allowing them to grow their operations without saddling themselves with huge amounts of debt, while providing a net return to the investor buying the land.

In other cases we've purchased land for clients from farmers looking to transition into retirement and then leased the land back to the farmers who we purchased it from. This is a win-win; because it allows the farmer to take advantage of increased land values, monetize the value of the farm and begin some estate planning. It also gives the farmer more control, facilitating additional years of income with lower overhead and more asset liquidity, securing retirement funds and enabling more choice of when to retire.

Of course, each situation is unique; but the facts are clear. American farmers are getting older, and many don't have a succession plan in effect for when they're ready to retire. It is vital to our nation that educated, professional farmers and agricultural investors work together to keep America's agricultural industry stable and strong. By connecting investment capital, farmland and this next generation of young farmers, we believe America can continue its historic role as the leader in world agriculture.