Friday, July 3, 2015

Bet on family farms

March 1997

Despite repeated and often near-hysterical warnings of imminent extinction, the family farm seems to be thriving. I realize that the term “family farm” is loaded with personal meaning. Moreover, “family” is now a code word linked to policies, products, and anything else that needs to be sold.

Because the concept of family is interpreted individually, we may think we agree on something when actually our ideas are miles apart. For agriculture, unfortunately, “family” is often substituted for “small”, or for a type of farming that some feel embodies certain desirable aspects - simplicity, for example.

For the sake of clarity, I define a family farm to be any farm operation conducted by a family. I have friends who have incorporated their farming operation, but it is a transparently artificial entity. The same people still do the same work, only the tax form is different. Since many of such “corporate” farms are larger than average (making a tax advantage more attractive), they are frequently not what comes to mind when family farms are mentioned.

This seems to me to be an unfortunate way of denigrating family farm successes. It also can imply that some ethical or moral quality is, by definition, forfeited when a farm grows past some point. What is often lost in this thinking is that strong families - families that function well together because of the respect and love shared by the members - are very likely to be successful, and hence, expand.

Several reasons cause this. First, family farms can achieve through family ties what many other business entities struggle to accomplish - long term strategic goals. In contemporary American business, the inordinate pressure for immediate profit, coupled with the increased use of stock options as compensation, forces an extremely short-term mindset in those driving the bus. In order to keep share prices high, earnings must be maximized - now! Closely held businesses, like family farms are able to postpone some gains to accomplish a longer term objective, like a major expansion, because the interest of the grandfather (stockholder) is the same as the grandchild (employee), and vice versa.

Second, family farms, as a rule, have an “investment plan” in action and it doesn’t require removing cash from the business. To the contrary, this “asset recycling” through inheritance and cooperative action keeps wealth involved for all. While such an undiversified portfolio has its definite disadvantages, such as lower returns and ag sector economic vulnerability, minimizing the drain of cash to other competing investments leaves a solid pool of resources to stabilize and grow the business. Farmers, like other family businesses have been unconsciously doing this for centuries.

One aspect of this asset structure that both stabilizes and frustrates family members is that most of the assets tend to accumulate in the older generation, who, by virtue of experience, tend to be markedly more risk averse than younger members. This is a healthy tension, especially when all members view family assets (land, improvements, money, etc.) to be a long term trust, preserved for generations yet unborn. 

For this to occur, frank discussions about control and responsibility of assets must be common and moderately flexible. The trust that can grow from such discussions is the most valuable investment for the older members. Many of us will live longer than we expect, and some of us longer than we wish, and to have even one family member you trust absolutely when you no longer trust yourself is a great comfort.

Third, solid family connections can enormously increase the effectiveness of a family team in business competition. By utilizing all the resources of separate members the sum can be larger than the whole. The community connections of the father helps keep the enthusiasm and ingenuity of the son fully employed. The experience of the grandparent can balance the ambition of a granddaughter. By using particular skills and advantages of each member to best advantage, all members prosper. Again, this is possible when everyone involved shares common goals, which should be more likely when they share common bonds.

For example, the social group of the retired grandmother may include many friends who own land. It is my observation that who you are is still a critical factor in renting, and even buying land. While this may seem unfair to community outsiders, a solid reputation can only be built on consistently honorable actions, which the world has always rewarded. Similarly, the go-getter attitude of a younger family member can effectively counterbalance the tendency to “coast down” at the end of a career. The tendency to minimize even needed investment and improvement in the later years of a career can both decrease efficiency and degrade the farm.

Finally, as has been demonstrated countless times before, family farms endure because they are tenacious. Long after prudent boards of directors have made the sound business decision to cut their losses, family farms hang tough, weathering the bottom of the cycles. They pull together because the farm is an integral part of who they are, inseparable from the way they want to live. In doing so they frequently escape the consequences of the old saw, “Very few people are defeated, most simply give up”.  A surprising number of adversities can be outlived, even if never actually overcome.

One of the highest compliments someone can make about their place of work is that it is “just like family”. Given the desirability of this type of business structure, and the demonstrated vitality of small businesses, it may be more accurate to speculate how long the corporate farming structure can endure.

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