Rutgers New Jersey Agricultural Experiment Station [Later Life Farming]

Module 6a: Investing for Farm Families

Investing for retirement is very different for farm families than it is for others. One reason is that farm land and equipment is one of the largest, if not the largest, figures on a farm family's net worth statement. Farm-related items often show up in net worth calculations as both assets and debts, and farm assets provide diversification to compliment other types of investments such as stocks and bonds. In addition, owning farm land and running a farm business provides farmers with the ability to live a lifestyle that they love and have the flexibility to continue to work as long as they want to and/or are able to. Nobody can downsize you out of a job, or force you to retire at a certain age, if you own the business! The exception, of course, is farm bankruptcies, which can force farmers into retirement.

When comparing farm land and equipment to other investment alternatives, it is tempting to simply compare annual return on investment (ROI) figures. For example, a 15% return on a farm-related business versus, say, 7% on stocks. However, this type of comparison is misleading because it does not reflect the way most farm families view their land or plan to hold it. Participants in focus groups conducted by Rutgers Cooperative Extension frequently mentioned emotional attachments to their land and a desire to, perhaps, cut back on the scale of their farm business but to continue to farm in some capacity. Some participants also mentioned the difficulty of selling their land or transferring it to family members.

According to Dr. Jason Johnson, a specialist with Texas Cooperative Extension, the investment value of farm land has two components: its income-generating capacity (e.g., through either land rentals or profits from active farm management) and its appreciation potential. While it is common for many farmers to think of the latter as a retirement nest egg, rarely do active farming operations choose to sell their land for the purpose of harvesting capital gains. The investment value of farm land provided by capital gains is largely illiquid wealth (i.e., money that is unable to be accessed) until (and unless) the land is sold.

An exception to this is to sell your development rights. New Jersey has been one of the leaders in this trend. More and more farmers in New Jersey have decided that they want to continue farming and have had their land permanently designated as a farm. One way of making some of the value of farmland liquid is to sell the development rights and use the proceeds for investment in the farm, for retirement, or for debt reduction.

Farmers traditionally buy land to keep. As a consequence, for the purposes of retirement planning, land that is not intended to be sold (or, more precisely, land that is intended to be passed on to future generations) must be considered in an investment portfolio framework primarily on its income-generating capabilities and not its market value. The market value of farmland is not irrelevant, however: it provides significant equity for land owners and can be used as collateral for business loans.

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