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.

2007 JOURNAL OF THE A|S|F|M|R|A1

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