Agriculture 2000 and Beyond: What's Ahead for Tomorrow's Farmers?

VCE Agricultural and Applied Economics: Finance, Capital, Credit, February 1995

By David M. Kohl of the Department of Agricultural and Applied Economics, Virginia Tech

As employment opportunities, salary and quality of life diminish in non- rural areas, more young people between the ages of 25 and 40 are considering agriculture. I was asked in a recent producer seminar, "Is it possible to get started in agriculture?" Here was my response to the individuals attending that seminar.

Opportunities are excellent for making money and accelerating the quality of life for the agricultural industry and young farmers over the next 10 to 20 years. This period will bring prosperity to young producers who have the savvy to recognize new opportunities and make changes in their businesses and personal lives.

Powerful and persuasive forces are propelling the agricultural industry toward a new dimension for the 21st century. The drastic changes farmers are experiencing now and into the next century are due to the emergence of two powerful forces: revolutionary scientific developments and social and political activism. Let's examine some key trends that I believe will shape the future of agriculture and the young farmers' roles in the industry. I will also discuss strategies farmers should consider to capitalize on these trends and put the odds in their favor.

Biotechnology and Information

The biotechnology and information revolution is succeeding the mechanical and chemical revolution of the past 70 years as the keys to profit and quality of life. The technology of tomorrow will be less capital- intensive and will require less investment. Biotechnology and information will reshape agriculture in many ways, impacting livestock and crop genetics, tillage systems, crop protection, individual human health, and more. The young farmer should ask these questions before investing in and implementing a new technology:

• Do I have the knowledge and skills to adopt the technology?

• What is the investment of time and money?

• Will the technology be economical and cost-effective?

• Will the marketplace purchase the products based on the new technology (for example, BST in milk production)?

• What are the social and political implications of the new technology?

Profitability and Capital Structure

In the years to come, a smaller number of farmers will be earning more of the net profits. More and more, the size of an individual farmer's slice of income pie will be determined by managerial decision-making (i.e. finances, family, hired labor, management and marketing) rather than resources, land, labor, and capital. Tomorrow's young farmer, therefore, must assemble a business operation that is flexible and adaptable to a changing competitive condition.

The following outlines a profile of the young producers who have favorable bottom lines, yet maintain a quality personal lifestyle:

• low overhead (47 percent of all young farmers' assets are rented, leased or jointly owned);

• keeps annual debt payments less than 25 percent of net farm and non- farm revenue;

• generates a dollar's worth of sales for 65 cents or less when excluding interest and depreciation;

• keeps family living expenses under control (less than 15 percent of revenue if no non-farm income);

• is a good manager of hired and family labor (don't hire people you can't fire);

• keeps extra cash in reserve or liquidity to take advantage of purchase opportunities;

• uses support services, lenders, accountants, and Extension consultants for expertise in finance, marketing, labor, and the environment;

• takes time to get away from the business with the family to avoid burnout;

• works no more than 3,000 hours on the farm, 500 hours off-farm (equivalent to 67 hours per week).

Age Wave Opportunities for young farmers to acquire a farm are good. It's very possible that 75 percent of all farm assets will change hands in the next 20 years. Nation-wide, 34 percent of all agricultural assets are held by individuals over the age of 65.

Many young people will enter the business with their families while others will be considering the operation of a neighbor's business. In entering farming with their families, young people are more successful in agriculture if they have worked for another farmer or on a non-farm job for 3 to 5 years. This usually gives the young farmer new perspectives to bring back to the business. By doing so, both younger and older family members have more respect for the entering partner.

For those considering striking out on their own, leases, specialized livestock options, and the use of non-farm earnings may be methods for entering the industry. To acquire a farm, young people may have to negotiate control of assets with elderly producers from the ages of 70 to 100, many of whom will be elderly females looking to transfer assets to the next generation.

When dealing with older persons, a young farmer should keep in mind that they will be looking for security, convenience, a retirement income stream, and a quality of life. Matchmaker financial service programs may be a future link of these two groups and may be a "mega-trend" in agricultural finance in the decades to come.

Off-Farm Family Living Expenditures/Income/Savings and Investment

Final factors are personal expenditures, off-farm income, and savings and investment. A young farmer has to make a decision up front: Do we operate for profit, lifestyle, or a combination of both?

For many young farmers to get established, one or more sources of off- farm income may be necessary. Off-farm income is critical for those with business sales under $150,000 annually to enable them to maintain their standard of living.

Another critical element to consider is the family living cost. Currently, living costs, including allocation for home mortgage and car payment, average between $28,000 and $32,000 for a family of four; this is rising at 7 percent per year (twice the rate of inflation).

This cost is usually the fourth or fifth largest cost for an operator. If self-employment taxes and income taxes are added, this can amount to $36,000 to $40,000 annually. A young farmer with a family must consider these costs in determining the amount of farm and non-farm earnings needed.

When businesses consider adding another full-time partner with no off- farm earnings, the business must expand sales by $150,000 to $250,000 to accommodate the new partners' family living draws and meet payment and farm expenses. Those that don't expand set themselves up for conflict among partners, because the business does not have the size and scope to meet family living needs. This fighting and bickering frequently hinders management, reducing the competitiveness of the business.

Finally, young producers will look for non-agricultural investment opportunities to diversify their financial holdings. Increasingly, farmers between the ages of 25 and 45 are more receptive to setting aside money for cash flow emergencies for the family, children's educations, and their retirement. It's suggested that 2 to 6 months of family living expenses in cash or non-cash be set aside for emergencies. More young producers are setting aside 25 percent of net earnings in tax-deferred instruments such as Keoghs or retirement plans rather than plowing it all back into the farm. This will provide them with more diverse opportunities and a better lifestyle when they eventually retire.

These are just a few of the mega trends that may impact agriculture and the young farmer. Profits and a good lifestyle are on the horizon for those who use the wisdom of past generations but think unconventionally and adapt to emerging trends.

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