Most farm households control a substantial amount of wealth. In 2001, U.S. farm households had an average net worth of

$545,869, compared with $395,500 for nonfarm households (Mishra, et al.). Failure to plan carefully for retirement and

transfer of the estate can result in serious problems such as financial insecurity, personal and family dissatisfaction, and

unanticipated capital losses. In family farms, the farm itself constitutes a physical asset that is highly illiquid, indivisible to a

large extent, and in most cases constitutes a large fraction if not all of family wealth. According to Pesquin, et al., the family

farm sector relies heavily on intergenerational succession.

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Abstract

Succession planning is a component of a household’s risk management strategy for its farm business in as much as it is

aimed at continuity of the business' management team. The family farm sector relies heavily on intergenerational

succession. Succession and retirement are inter-linked and are reflective of the life cycles of the farm household and the

farm business. This study uses Agricultural Resource Management Survey (ARMS) of the USDA to examine farm,

operator, and family characteristics that affect farm succession within the family. Results indicate that large farms

are more likely to be transferred within families. Level of farm debt, education, and being

engaged in farm enterprises like other crops and dairy, affect within-family transfers of the farm business.

Gale points out that entry into farming by the “next generation” holds a place of central importance in the determination of

industry structure and total number of farmers and farm families. Empirical studies indicate that the importance of

family firms and family succession differs between economies as well as between different sectors within an economy. By

studying occupations of different family members (grandfathers, fathers, and sons), Laband and Lentz find that occupational

inheritance is particularly strong among farmers and to a lesser extent among other groups such as lawyers and self-

employed proprietors. The family farm is more than a profit maximizing enterprise. It is an asset whose productive life

expectancy may extend well beyond that of its operator, and whose future value depends crucially on its continuous

functioning; it is a place of residence for the farmer in old age; and it is attached to land, whose symbolic importance

exceeds its economic value in many societies. Moreover, the market value of a farm is often well below its value as a “going

concern” and this illustrates the fact that retirement and succession cannot be disentangled from dayto-day farm

management decisions (Dunaway). Gasson and Errington looked at the development cycle of the farm family and the growth

and decay cycle of the farm business, and concluded that “synchronizing these two cycles may itself be crucial for the

continuance of the farm family business.” Ownership and managerial control of the family farm are

combined in the hand of the farmer’s family and handed down within the family. Clearly, intergenerational succession is one

of the important links between those two cycles. The issue of farm retirement and succession has been of increasing

interest to both researchers and practitioners in recent years. This interest arises in part because of the aging farm

population, many of whom will be faced with decisions about the transfer of their farms in the next decades. Yet to others

the wealth embedded in farm ownership will provide, upon liquidation of the asset base, a stream of income for post-

retirement living expenditures. There have been limited studies that have investigated farm transfers (Kimhi and Nachlieli;

Weiss; Glauben, Tietje and Weiss; Stiglbauer and Weiss). However, it should be noted that these studies are from Israel or

European countries (Austria and Germany) where farms are quite different in terms of production and financial structure, and

agriculture’s contribution to the total economy is very small compared to the farms in the U.S. For example, in Israel most

farms are cooperative farms with small holdings and grow several commodities, whereas farms in Europe are small,

diversified, and receive government payments (both related to commodities and agro-tourism). Further, many farm operator

and spouses work off the farm. Unlike farms in Israel and Europe, farm in the U.S. are private farms that specialize in one or

two commodities and are big sector in the total economy. Many of these farms receive commodity payments and/or

conserve reserve program payments. The phenomenon of predominant intrafamily succession is observed in many

economies (Bryden, et al.). Kotlikoff and Spivak argue that intrafamily succession enables the extended family to enjoy the

benefits of intergenerational risk-sharing when annuity markets are imperfect. Pesquin, et al., mention additional advantages

of intrafamily farm succession such as “smooth” transition, reduction in transfer cost, and lower transfer taxes. Additionally,

Tweeten and Zulauf point out that intrafamily farm succession allows entering farmers to overcome borrowing constraints, at

least in commercial farms. Investing in agriculture or withdrawing from agriculture are two options that result from

increasingly competitive commodity markets and reduced government subsidies for agriculture. These two options are

closely tied to the family life cycle and especially related to the availability of a successor. Although there has been some

discussion of farm transfer and succession in the sociology literature, there have been only few studies, mainly from Europe

and Israel, in agricultural economics literature. In contrast to the limited existing literature, the present paper is devoted to

analyzing the factors that are likely to influence family succession on U.S. family farms. Farm, operator, and family

characteristics that may contribute to family succession will be identified. The analysis is conducted on a national farm-level

basis with the unique feature of a larger sample, comprising farms of different economic sizes, and in different regions of the

United States. An understanding of the factors that influence succession is important as it allows policymakers to alter

these factors to prevent or promote structural changes, depending on the prevailing social, political, and economic goals.

Further, examination of family succession decisions facilitates strategic planning as well as guiding educational and

business programs.

Literature Review

Succession planning is a component of a household’s risk management strategy for its farm business in as much as it is

aimed at continuity of the business management team. A unique feature of the farming sector, as opposed to most other

sectors of the economy, is that businesses are traditionally passed on within the family. The study of farm succession

already has a long tradition in the Rural Sociology literature (e.g., Gasson and Errington; Blanc and Perrier-Cornet; Carroll

and Salamon; Coughenour and Kowlaski; Friedberger). However, these studies lack rigorous economic analysis of factors

affecting farm succession decisions. Only a few studies have investigated the reasons and factors affecting the

predominance of intergenerational succession within the farm sector (e.g., Kimhi and Nachlieli; Weiss; Glauben, Tietje and

Weiss; Stiglbauer and Weiss). Some studies cited in the literature relate to farm succession and farm investment. For

example, Potter and Lobley show that onfarm investment behavior of farmers without successors was radically different from

that of those where a successor has been already identified. Blanc and Perrier-Cornet report that in France, the Netherlands,

and Belgium, farm modernization is associated with intergenerational succession. However, farms located in the United

Kingdom, Greece, and Italy did not show any significant relationship. Kimhi and Nachlieli, using panel data of Israeli farms,

found that during the 1970s succession contributed tremendously to farm expansion (both in terms of farm size and intensity

of production). However, due to a widespread farm financial crisis in the 1980s, the expansionary phase did not continue. On

the contrary, the farm financial crisis forced many successors to seek off-farm employment. Phimister argues that financial

pressures arising from intergenerational farm asset transfers may have a negative impact on subsequent farm investment.

Kimhi and Nachlieli studied the likelihood of intra-family intergenerational succession on Israeli family farms. They found that

age of the operator, level of schooling of the operator, and the age of the oldest child as significant factors in having an intra-

family successor. Further, number of children and off-farm work did not have any impact on the probability of having an intra-

family successor. The authors also found that farms with more land have lower probability of intrafamily succession.

Using panel data of Austrian farms, Weiss found a strongly significant effect of intra-family succession on farm survival.

Analyzing actual farm succession on the basis of census data for Upper Austria, Stiglbauer, and Weiss find the probability

of succession to be significantly influenced by far, as well as personal characteristics. Their results suggest that an increase

in farm size, family size, and degree of farm diversification raises the probability of farm succession within the family. They

also found a significant life-cycle pattern in the farmers’ succession behavior. In a recent study Glauben, Tietje, and Weiss

examined farm and family characteristics affecting the choice and timing of intergenerational farm transfers. Using survey

data from Northern Germany and a competing risk approach model they find that farm characteristics significantly influence

succession decisions since farm characteristics affect the value of the farm for the potential successor

Data

Data for the analysis are from the 2001 Agricultural Resource Management Survey (ARMS). ARMS is conducted annually

by the Economic Research Service and the National Agricultural Statistics Service. The survey collects data to

measure the financial condition (farm income, expenses, assets, and debts) and operating characteristics of farm

businesses, the cost of producing agricultural commodities, and the well-being of farm operator households. The target

population of the survey is operators associated with farm businesses representing agricultural production in the 48

contiguous states. A farm is defined as an establishment that sold or normally would have sold at least $1,000 of agricultural

products during the year. Farms can be organized as proprietorships, partnerships, family corporations, non-family

corporations, or cooperatives. Data are collected from one operator per farm, the senior farm operator. A senior farm

operator is the operator who makes most of the day-to-day management decisions. For the purpose of this study, operator

households organized as non-family corporations or cooperatives and farms run by hired managers were excluded.

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The 2001 ARMS collected information on farm households in addition to farm economic data collected through the regular

survey. It also collected detailed information on off-farm hours worked by spouses and farm operators, the amount of income

received from off-farm work, net cash income from operating another farm/ranch, net cash income from operating another

business, and net income from share renting. Furthermore, income received from other sources, such as disability, social

security, and unemployment payments, and gross income from interest and dividends was also counted. Specifically, our

analysis will focus on married farm couples. The issue of retirement and succession is central to the family

decisionmaking process and the literature points to the fact that a majority of farms are passed on directly to children of farm

operators and owners. Secondly, the altruistic motive of parents (farm family in this case) is basic to the theory of

intergenerational transfers.

In 2001 ARMS, farmers were also queried about whether they had developed a succession plan for their farming operation.

The issue of retirement and succession is especially pertinent for farmers who are ready to retire in the next five years. Their

retirement will have implications for farm wealth, industry structure, and the supply of food and fiber. Using the 2001

ARMS we have classified farm operators based on succession plans into two categories: (1) no succession plan (base

group); and (2) family based succession. About 34 percent of farm operators who indicated that they will

retire within the next 5 years had a succession plan and about 80 percent of these households have a family member taking

over the farm. Farm operators who are over 65 years of age and have no retirement plans appear to be a little more organized

in terms of having a succession plan than other groups of households, with about 40 percent of these households having

succession plans. As with other groups, most of the successors are family members. But, while a large share of these

farms reported a succession plan, a smaller share of these actually involved their successor in operation of the business

than did farms in general. All of the variables used and summary statistics are presented in Table 1.

Results

The results of the logit model and corresponding marginal effects are presented in Table 2. Table 2 provides information

on the overall fit of the model. Since an R2 does not accurately measure the fit of a logit model, a pseudo-R2, the likelihood

ratio, is calculated. The pseudo-R2 of 0.43 represents a relatively good fit for a logit model (Hensher and Johnson). In

our model the base group is farmers with no succession plan. Farm households are unique in the ways they accumulate

wealth (Mishra, et al.). Farm households have land, buildings and other facilities, machinery, and other equipment that are

part of farm net worth. On the other hand, farm households accumulate non-farm wealth (such as savings, investments, and

real estate property) that adds to the net worth of the household (Mishra, et al.). As described earlier, the intergenerational

transfer of wealth has been an important aspect of farm succession. In this study household net worth is a measure of

financial well-being of the farm family. Mishra, et al. indicate that at least 70 percent of farm household wealth comes from

the farm and is directly related to farm size. A higher level of expected household wealth increases the probability of family

succession by four-tenths of a percent (0.38%). The probability of having a succession plan is significantly

influenced by an operator’s education. Literature (Tweeten; Goddard, et al.) provides evidence that an operator’s education

level is an important factor that determines structural change in the farm sector. The probability of having a succession plan

that includes a family member decreases with the educational level of the farm operator by 1.1 percent. The findings may

reflect the notion that parents with a higher level of educational attainment may process information, allocate resources, and

evaluate new technologies more effectively and thereby raise the current farm’s earning capacity and delaying farm transfer.

Another plausible explanation is that more educated farm operators can negotiate a later succession time with their

potential successors and in the process have extra time to make informed decisions on the identity of the successor. Our

results contrast with the findings of Kimhi and Nachlieli and Stiglbauer and Weiss, but are consistent with Kimhi. Presence

of children between ages 13-18 increases the probability of family based succession by seven-tenths of a percent (0.72 %).

Farms organized as sole proprietorships are likely to have family succession. Results indicate that the probability of family

succession increases by approximately 4.4 percent if the farm is organized as a sole proprietorship (Table 2). Farm

succession is significantly influenced by farm characteristics such as size, farm growth (acres), farm income growth, and

farm type. Two dummy variables (SIZE 100_250 and SIZE_250) were included in the model to assess the impact of farm

size on succession plans.1 Size100_250 represents intermediate farms, with farm sales between $100,000-$249,999 and

SIZE_250 represents commercial or large farms, with farm sales $250,000 or more.

Results indicate that the probability of family succession increases by almost 16 percent for intermediate farms and about

41 percent for commercial or large farms (Table 2). This finding further strengthens the argument that compared to small

farms, intermediate and large farms hold out the best prospects of providing a potential successor with reasonable and

secure income. These results are consistent with the findings by other studies (e.g., Stiglbauer and Weiss; Glauben, Tietje,

and Weiss). Farm debt could also have potential impact on succession decisions. The 2001 ARMS survey asked farm

operators about their farm debt. In particular, they were asked if farm debt in 2001 was greater, less, or same as in 1996. A

dummy variable, FDEBT_01, was created and coded as 1 if debt levels were greater in 2001 than in 1996. Results indicate

that the probability of family-based succession increases by about 4.1 percent with size of farm debt. A possible explanation

is that larger farms generally have higher amounts of farm debt and these are the farms that are more likely to have a family

successor. Further, higher farm debt loads between 1996 and 2001 could be an indicator that farmers were willing to take

more risk and finance on-farm investment through increased debt. Taking on debt may also be an indication that upkeep,

maintenance, expansion, or retooling of the farm’s capital structure is likely needed to keep the business a competitive

enterprise for future generations. Succession may differ among types of farm businesses. Pesquin, et al., point out that a

successor is more common on dairy farms since work can be divided easily between two people. Additionally, dairy farms

(and others such as nursery, green house, etc.) may have more stable and reliable sources of income and dairy producers

are more attuned to record keeping and financial management than other producers. Further, the successor and the operator

may specialize in different phases of the farm operation. For example, recent data show that many farms, particularly larger

operations, may have two or three people who participate in machinery work, production,

accounting and budget, and management of the farm. Results show the probability of family succession increases if farms

are specialized in the production of other crops and dairy. One thing that stands out here is that each of these commodities

(other crops and dairy) produce high value outputs and require large capital investments. Further, dairy farms require a

steady supply of family labor and are perceived as a relatively stable source of income compared to some other farm types.

The probability of having developed a succession plan (family) is highest for dairy farms (about 10%), followed by other crops

farms (approximately 6%). Our findings are consistent with Kimhi and Nachieli who found that fruits, vegetable, and other

crop farms are likely to have successors.

Summary and Conclusions

Succession planning is a part of the development of a complete business plan for a farm operation. Succession plans

specify when, how, and under what circumstances management of the business will pass from the current operator to

another individual. In one sense, succession plans are a road map for use in deciding how to handle management of the

business as the household enters the retirement or transfer stage of the family life cycle, or incurs an unexpected

circumstance such as the incapacitation or death of the operator. Succession and retirement are inter-linked and are

reflective of the life cycles of the farm household and the farm business. Growth, consolidation, and exit phases of a

business may overlap with the retirement and transfer phases of a household. Despite the important role that family

succession may play in the continuity of farm businesses, little theoretical or empirical work has been devoted to this issue.

The present study remedies this shortcoming by including a direct measure of succession basedon information that was

collected in a survey of farmers in the U.S. Empirical investigation of the presence of a formal family succession plan

utilizing a logit model revealed the importance of farm, operator, financial, and household attributes. Factors found to

significantly influence having a known family successor included education, expected household wealth, taking on higher

debt loads in the past five years, and being engaged in farm businesses like other crops and dairying that require relatively

large amounts of capital expenditures and managerial oversight. Further, sole proprietorship farms and

intermediate and large farms are likely to have family succession. The likelihood of having a succession plan rises

with expected household wealth, indicating that larger businesses may be better positioned to support multiple

households. Operators with smaller businesses and expected household wealth may depend on their farm assets to support

income needs in later life. This could likely mean leasing, selling, or making other use of farmland or other business

assets. Large farms are more likely to be transferred within the family. This strengthens the argument that large farms hold

out the best prospects of providing a potential successor with reasonable and secure income. As with many family

businesses, one of the prime objectives of family farms is to pass on control of a sound and often improved business to the

next generation. Farm families themselves are also concerned about the future of their operations. Succession can have a

powerful influence on the development trajectory of a farm business. Farms lacking a successor would be less likely to be

managed intensively, and that “the production cycle declines closer to a subsistence mode in old age than at any other point

in the life cycle”. On the other hand, the identification of a successor can act as a trigger for business development, and

existence of a successor can provide a powerful motivation for ongoing investment in the business even into the old age of

the retiring farmer. Further, the existence of a successor within the family farm business is a key variable in determining the

course of future structural change.

This investigation has highlighted the most significant factors affecting farm succession decisions. Based on the literature,

farm-arm subsidies are capitalized into land values; with land being a significant part of farm balance sheet and wealth,

farmers tend to rely on government subsidies and approach retirement slowly. However, wealth and indirectly government

subsidies are influential in farm transfers to family members. If policies are more market oriented (reduced government

intervention), transfer of family farms may be altered. This study also highlights the importance of continued structural

change in the succession decisions of farm operators. Finally, extension agents/economists and financial counselors who

encounter family farm businesses need to take into consideration the unique challenges of each business and

perhaps uncover how family farm business owners have developed the types of succession planning they have or are

considering. In addition, extension agents/economists and financial counselors need to give family farm business owners

help in solving business problems or other issues inherent in the family business, so the owners would be able to make

decisions regarding succession more easily. Finally, it is important that economists, financial planners, and business

consultants encourage family farm business owners to utilize their services. To assist family farm businesses with formal

succession plans, the following strategies can be used: (1) develop and conduct educational sessions regarding succession

planning for family farm business owners and their families; (2) develop procedures that clearly identify the steps that need to

be taken to successfully complete the succession planning process; and (3) provide examples of types of succession plans

that other family farm business owners have implemented.

References

Amemiya, T. “Qualitative Response Models: A Survey,”Journal of Economic Literature, 19, (1981): 1483-1536.

Blanc, M., and P. Perrier-Cornet. “Farm Transfer and Farm Entry in the EC.” Sociologia Ruralis, 33 (1993): 319-35.

Bryden, J., C. Bell, J. Gilliatt, E. Hawkins, and N. MacKinnon. Farm Household Adjustment in Western Europe 1987-91.

Commission of European Communities, Brussels, 1992. Carroll, E., and S. Salamon. “Share and Share Alike:

Inheritance Patterns in Two Illinois Farm Communities.” Journal of Family History, 13 (1988): 219-32. Coughenour, C., and

G. Kowalski. “Status and Role of Fathers and Sons on Partnership Farms.” Rural Sociology, 42 (Summer 1977): 180-205.

Dunaway, R. “Transferring Resources: Helping a Child Farm, Retirement, and Inheritance Shaped This Plan.” Farm Journal,

115 (Dec. 1991). 26-29.

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Friedberger, M. “The Family Farm and the Inheritance Process: Evidence from the Corn Belt, 1870-1950.” Agricultural History, 57 (January 1983): 1-13. Gale, H. “Longitudinal Analysis of Farm Size Over the Farmer’s Life Cycle.” Review of Agricultural Economics 16 (Jan. 1994): 484-87.

Gardner, B.L. American Agriculture in the Twentieth Century Harvard University Press , Cambridge, MA. 2002.

Gasson, R., and A. Errington. The Farm Family Business. Wallingford, CAB International, London, 1993.

Glauben, T., H. Tietje, and C. Weiss. “Succession in Agriculture: A Probit and Competing Risk Analysis.” Selected

paper, presented at the 2004 Annual AAEA meetings, Aug. 1-4, 2004, Denver, Co. Goddard, E., A. Weersink, K. Chen, and

C. Turvey. “Economics of Structural Change in Agriculture.” Canadian Journal of Agricultural Economics, 41(Dec. 1993). Pp.

475-89. Greene, W.H. Econometric Analysis. Third edition. Englwood Cliffs, NJ: Prentice-Hall, 1997. Hensher, D. A. and

L.W. Johnson. Applied Discrete Choice Modelling, (1981) Croom Helm, London. Kimhi, A. and N. Nachlieli.

“Intergenerational Succession on Israeli Family Farms.” Journal of Agricultural Economics Vol. 52 (May 2001): 42-58. Kimhi,

A. “Differential Human Capital Investments and the Choice of Successor in Family Farms.” American Journal of Agricultural

Economics, 77, Aug. 1995: 719-24. Kotlikoff, L., and A. Spivak. “The Family as an Incomplete Annuities Market.” Journal of

Political Economy, 89 (April 1981): 372-91. Laband, D.N. and Lentz, B.F. “Occupational Inheritance in Agriculture”,

American Journal of Agricultural Economics, 36(2) 1983: 311-314. Mishra, A.K., M.J. Morehart, Hisham S. El-Osta, James

D. Johnson, and Jeffery W. Hopkins. “Income, Wealth, and Well-Being of Farm Operator Households.” Agricultural

Economics Report # 812, Economic Research Service, U.S. Department of Agriculture, Washington, D.C. Sept. 2002.

Pesquin, C., A. Kimhi, Y. Kislev. “Old Age Security and Inter-Generational Transfer of Family Farms.” European Review of

Agricultural Economics, 26 (1), 1999: 19-37. Phimister, E. (1994) ‘The Impact of Intergenerational Farm Asset Transfer

Mechanisms: An Application of a Life Cycle Model with Borrowing Constraints and Adjustment Costs’, chapter (pages 169-

189) in eds. F.Caillavet, H.Guyomard and R.Lifran Agricultural Household Modelling and Family Economics, Developments in

Agricultural Economics Volume 10. Amsterdam: Elsevier. Pindyck, R. S., and D. L. Rubinfeld. Econometric Models

andEconomic Forecasts, Third Edition McGraw-Hill, New York,1991.

Potter, C., and M. Lobley. “Ageing and Succession on Family Farms: The Impact of Decision Making and Land Use.”

Sociologia Ruralis, 32(2/3), 1992: 317-334. Stiglbauer, A., and C. Weiss. “Family and Non-family

Succession in the Upper Austria Farm Sector.” Cahiers D’économie et Sociologie Rurales, 54 (2000): 5-26.

Tweeten, L., and C. Zulauf. “Is Farm Operator Succession a Problem?” Choices, (Second Quarter 1994): 33-35.

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Appendix

Model and Estimation Procedure

Qualitative response models, which are strongly linked to utility theory, have been widely used in economics to investigate

factors affecting an individual’s choice from among two or more alternatives (Amemiya; Greene). In this study farmers

were queried if they had a family succession plan or not, indicating logistic model. Maximum likelihood logistic regression

(LOGIT) was used to analyze farmers’ decision to have a family succession plan rather than Ordinary Least Squares (OLS)

because the dependent variable is binary (0,1) (see Pindyck and Rubenfeld). Specifically, the logit is defined as the natural

logarithmic value of the odds in favor of a positive response (in this case having a succession plan that is

within the family), that is: An empirical representation of the succession plan (Yi) model by farm operator i to observable

explanatory variables, is given by, where Xi is a vector of explanatory variables, Pi is the probability that the ith farm operator

has a family succession plan, ?B is a vector of unknown parameters, and i is a residual error assumed normally distributed

with a zero mean and constant variance. In a binary logit model, the marginal effect of a variable Xj on the response

probability is: Where f(.) is the normal marginal density function. For dummy variables, the marginal effect with respect to

variable Xj is found by taking the difference in the predicted probabilities calculated at Xj = 1 and Xj = 0, holding other

variables constant at their means. Independent variables are included for farmer characteristics such as education level,

number of children, and household wealth (on-farm and off-farm). Additionally, past research indicates that farm size,

specialization, work choice of operators and spouses, and regional location of farms are important considerations affecting

farm succession decisions.

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Table 1. Definition and weighted means of variables used in the succession decision of family farms, 2001

1 The coefficients of variation (CVs) of all non-binary estimates are below 10 percent.

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Table 2. Logit estimates of factors affecting family based succession by farm households, 2001

Note: Regression parameters are estimated using the Jackknife variance estimation method.

* Significant at 10%. ** Significant at 5%. *** Significant at 1%