Here is a question from a reader about how to wind down their farm. I have deleted the names.
Hi Andy, I’m D. My wife and I farm in Manitoba. We were at a meeting the other day and I expressed a concern about succession planning and got some unexpected responses.
We are in our 50s. Our children don’t want to farm and I want to work less. We have around 20 quarters of land and calve out over 200 cows in the spring, and sell the calves as yearlings after one summer on grass. The land is all sown to grass and about half is cut for hay so we put up about 1,400 bales in one cut and graze the regrowth in the late fall or early spring
We would like to do less and are not sure how. We don’t want to sell hay and remove nutrients from our land. We could run yearlings on our better land, but about half the land base has bush so is better for cows.
I think it would be ideal to rent or lease to someone who would like to start farming or maybe a couple of families if they wanted to start smaller and grow into the farm, similar to if one of our children wanted to start. How do I ask this question and how do I find the people who may be interested?
I was reading an article the other day and it said one of the first things to do is have a good exit strategy if it did not work. We still have a mortgage, if we sold the cows we would nearly be out of debt, but we would still need some income which I feel the farm could supply us and also allow someone else to have an opportunity to farm.
A lot of farmers are going to retire in the next 10 years. Is this a way to start the next generation? I am not sure. — D.
Okay D, you asked for ideas so here goes. I’ve been working with young and old farmers at both ends of their careers for 40 years and have been fortunate enough to live long enough to see how things turned out. I have also seen how things worked out for some others, but of course I know “my farmers” better than the others.
First, some assumptions. It sounds like you and your wife are healthy. It also sounds like you will have equity after cows, but I don’t know if you’ve developed a budget with a range of scenarios. Start with a bare-bones budget. This might be, for example, based on an annual income of $21,000 (roughly the amount you’ll pay no income tax on).
Since retiring, I’ve found our monthly living expenses are about $3,000 — although we’re not aiming to get by on a bare-bones
budget. Still, it is amazing how easy it is to spend $100 a day on average month after month.
Part of it goes to fixed costs such as property taxes, insurance, utilities or medical costs — in our case, that works out to about $21 a day, or $630 a month. Discretionary spending is harder to track — it ranges from gas for the car and furnace filters to a dinner out or Halloween candy. Without buying anything special, these variable costs easily hit $50 a day. Already we’re up to $71 a day or nearly $26,000 annually, and we haven’t bought anything significant. You might think you can cut that in half, but don’t kid yourself.
Bear in mind that the personal exception for taxes is over $10,000 per year for you and
your wife. So in Manitoba (it varies by province) you can make about $21,000 per year between the two of you and pay no taxes. (There are some additional personal deductions for those over age 65.) Once your spending goes above that amount, you have to take income tax into account.
The next thing is to think about protecting two parts of your farm business.
I don’t know when you started farming but any land you bought AFTER 1987 is not grandfathered for capital gains exemption. You will need to keep farming it in some fashion to preserve that capital gain exemption. Any land you owned before 1987 is grandfathered so you and your direct-line descendants will always have the rollover and exemption on that land whether or not you’re actually farming it. If you have a choice when selling land, consider selling the land you bought after 1987 while it still qualifies for the exemption.
The other point I’d stress is that if you can, keep your farming status as long as you can. That means running your farm in such a way that you can file a farm income and expense statement. This could mean you might have to run some cattle or crop some land. Either could be managed so you don’t have to do the work, as long as you are taking some of the risk and have some say in how and when you sell cattle and/or grain.
There could be a way for you to keep your faming status and bring a new farmer into the business, as you mentioned in your note. This could let you be involved in the business without being a full-time farmer.
You say that if you sold the cattle you could pay off your debts, however selling your 200 cows now could bring in a bunch of money, say $200,000. Unless you have some way to manage that lump sum, income tax could take a chunk of that cash.
If you have a huge inventory provision, your farm might be able to handle $200,000 of lump sum income, so do check that out. If you don’t have an inventory provision built up, you could build it over the next few years by raising your cash income year by year, paying some tax at the lower rates as well as some extra CPP and thereby creating more room for contributing to an RRSP. You should consult your accountant if you’re considering this route.
You also could rent out your cows but again, consider some sort of calf share so you keep your farmer status.
KEEP THE LAND
Farmland will likely be a good asset to own in the years ahead. China is now buying soybeans 100,000 tonnes at a time, and as its population starts to move into the middle class, people will want better food, including more meat. Raising meat takes either grass or grain or some of both and so I think farmland will be in demand in the years ahead and likely have a buyer somewhere nearby if or when you decide to sell the land.
Renting the land you owned before 1987 could bring in some income while preserving the capital gains exemption. Again your accountant should be able to explain this stuff so you can plan ahead.
FIND A NEW FARMER
You asked for ideas on how to find a new aspiring would-be farmer or two. This article will go across Canada to nearly 40,000 farmers and could easily help you find someone. And by the way, dear reader, if you want to talk to D, email me at [email protected] or editor Lyndsey Smith at [email protected]
Another way is to just ask around. It might take a year to find one but there likely is no big rush. Then the two of you need to interview each other to see if this idea would work. As you mentioned, an exit plan needs to be part of the overall plan in case this idea doesn’t work out. Draw up a business agreement, and work with your accountant and lawyer so the details are well documented and understood.
LEARN TO EARN
At age 52, it would be a good idea to start learning how to make money with money. Bank interest rates on deposits are low and although the future is unclear, they could stay low for years to come, even if loan rates go up.
Some fear the return of hyper inflation, and we could see a split in the years to come too — with food and energy prices going up steeply while the cost of other goods stays flat.
Since I retired fromGrainews I have spent considerable time studying some of this stuff and figuring out how to deal with the future. IF we have inflation, then holding farmland and assets related to commodities would be the right thing to do. If we don’t, then interest rates would stay low and money in the bank wouldn’t earn much.
In the meantime, cash flow is important at any stage in life but especially when a person is retired. There is a lot of money out there to be had but it will take some new skills to learn how to get some of it, keep it and put it to work. I write about this all the time here in Grainewsand in my newsletter StocksTalk.
If you don’t want to learn from me, no problem, but do learn. A lot of the money we make with our investment strategy is taxed as capital gains which really does let us keep more of the money than if we earned it as income from interest or wages.
A lot of our readers have started Tax Free Savings Accounts and all the money they make in there is tax free. You can put in $5,000 annually and if you miss a contribution you carry it forward. After about four years there could be around $30,000 in that account earning $350 to $500 a month.
Whether you take that earned money out or leave it in the TFSA, the income will be tax free. So with a good investment strategy, after four or five years these accounts could make as much money as, say, the monthly Old Age Pension. But it will take some knowledge and some work.
Some are afraid of the word WORK. Well, don’t be. Your day is going to go by whether you sit around all day, golf all day, trim the hedge or spend an hour or so a day managing your investments.
I run hundreds of thousands of dollars’ worth of stocks and I might do two trades a week. Yes, you will need to spend time learning but the actual work is quite small and flexible. Many readers tell me they do most of their trades on their coffee break.
I know people who retired and sat around and died a year or two later. I also know people who retired and worried about being short of money. And I know people who retired, got busy learning new skills, are making some money, and generally have a very nice outlook on life. Which one do you want to be?
I don’t know your net worth or level of knowledge. I would suggest you do a budget to see how much money you will need when you retire or partially retire. I would also suggest you manage your land base to get as much tax-free capital gain as possible. And finally I would hope you take some time to learn how to make money with investments. I know some healthy ex-farmers who have learned this skill and they love it.
Plus many people who learn this skill leave a legacy — their children learn how to invest wisely. It can certainly improve their lives, too.
Since1970Andyhasworkedwithfarmersin extension,withGrainewsandwithhistax business.Henowismostlyretiredbutmanages hisinvestmentsandpublishesanewsletter calledStocksTalkwhereheexplainshow heinvestsandwhy.Ifyouwanttoreadhis newsletterfreeforamonthgotoGoogle,type in StocksTalk.net, clickonfreemonth,clickon forms,filloutfourlinesandclicksubmit
Keep your farming status as long as you can. That means running your farm
in such a way that you can file a farm income and expense statement.