January 4, 2024

By Ben Palen, Ag Management Partners

Much has been written about the rising average age of farmers. Per the USDA’s periodic Census of Agriculture, the average age increased from 56.3 years to 57.5 years from 2012-2017. In reality, the difference is likely even greater due to the Census’s definition of “farms” as enterprises with just $1,000 in sales of agricultural products, which masks the fact that the “typical” farm is much larger. Similarly, concerns have been expressed about the “brain drain” from rural areas as younger people leave to attend college, and do not return after completing their studies. A third related trend is the increasing size of farms. While the number of “farms” has changed very little in the last 10 years — per the USDA’s Farms and Land in Farms report — we must keep in mind the above-noted reality of the USDA’s definition of a “farm”. No one would dispute that that benchmark fails to reflect the economic reality of today’s agriculture. On the other side of the coin, it is a fact that, per the USDA, 3.9 percent of the U.S. farms operate 26 percent of America’s farmland and have sales of $1,000,000 or more annually. That percentage of land operated by the larger farms is up 6 percent in the last decade. With the increased use of technology, and the diminished use of labor, that size trend is likely to continue. 

One of the key overlays for the above trends is the increased role of “non-farm capital” in agriculture. Simply stated, I define that term as capital that comes from sources outside of agriculture. There is a plethora of funds involved in all aspects of U.S. farmland ownership and operation. While the vast majority of U.S. farms and ranches are owned and operated by individuals and families with direct ties to the land, there is no doubt that the percentage of non-farm capital in this sector has increased several fold over the past 10 years. Illustrating this trend were land auctions in eastern Colorado over the past four months. About 50 percent of the land in each instance was purchased by an out-of-state institutional investor. While the statistic regarding the overall percentage of U.S. farmland that is owned by investors is often cited as evidence that farmers are by far the most significant buyers of U.S. farmland, the reality is that the number that makes the headlines is the sheer dollar volume of non-farm capital that has been invested in U.S. agriculture in the past decade. In other words, perceptions matter. 

There is increasing chatter about non-farm capital in the context of driving up the price of farmland, and in some instances there are expressions of concern about foreign ownership of American land. All of that being said, there are valid reasons for concern about structural changes in an economic sector that is at the core of our society. Agriculture represents more than a business venture, it’s not all about robots, drones, and satellites. It is also a way of life for a segment of our population, and those traditions must be respected by others who are newcomers to the sector.   

There is an important social issue that is woven into the shifts in agriculture over the past 10-20 years. It is not unreasonable to say that, for a variety of reasons including the increased factor of non-farm capital, the “price of entry” into agriculture for a young farmer is beyond the reach of most people unless there are special circumstances, such as family support. Even in those cases, there can be tensions when off-farm heirs have interests (in other words, wanting cash-in-hand) that diverge from those of relatives who wish to remain on the land. Failure to address the price of entry issues is likely to have serious consequences for agriculture, and not just at the farm level, but also with respect to the thousands of small communities in America’s agricultural areas that are economically and socially dependent upon a sufficient local agricultural population.  

There are some trends in this business that have garnered widespread interest because they align with the most often stated ESG goals of investors and others in the various sectors of agriculture. Those trends include regenerative agriculture, sustainable practices, and the like. Unfortunately, the issue of keeping the next generation on the farm has taken a backseat. I believe that this issue is of fundamental importance to the health of the U.S. agricultural sector, and that it fits squarely within the “S” of ESG.

While I am aware of some limited government programs for “beginning” farmers, those do not approach being a solution to this issue. A couple of ideas have come to mind. The first has its roots in an item of personal importance, and that is mentoring. My firmly held view is that those of us who have been in agriculture for a long while owe a duty to those coming after us. We must recall those who helped us get started, and carry that forward. That mentoring can include renting “X” acres to a young farmer, along with selling some acres to that same farmer on terms that are more favorable than those available through normal commercial channels.    

Similarly, it is my view that non-farm investors who truly want to “walk the walk” when it comes to ESG goals should make available to young farmers some debt capital on terms designed to help those farmers acquire land. That could be in conjunction with leasing some land to that same farmer. Those terms would include some below market interest rates and long repayment terms. While I fully realize that investors are driven by returns, ESG cannot be all about dollars, and it would be very short-sighted to think otherwise. If one looks at the big picture, it is of fundamental importance to all involved in agriculture to help with this issue of putting the next generation on terra firma.   

I am not a fan of problem-solving being attempted simply by throwing government dollars at an issue.  That said, one thoughtful approach to the issue under discussion could be adjustments in federal and state tax regulations to give favorable treatment, i.e., tax exemptions, on interest earned from below market rate loans provided to young farmers. The analogy is to municipal bonds, where a public purpose (building or refurbishing infrastructure) is served at the same time as some incentive is in place for investors to buy the bonds. A variation on this theme that is already in use in Minnesota is a program that provides tax credits to sellers of land to beginning and emerging farmers. In Iowa there is a similar tax credit program that encourages landowners to lease land to beginning farmers. As one might imagine, this has been very popular. 

There have been suggestions floated by various politicians about prohibiting various types of ownership of U.S. agricultural land. Those are mostly misguided efforts rooted in the increased role of certain aspects of populism in our political realm. That said, participants who fit within the notion of non-farm capital would be wise to keep abreast of these developments. There are legitimate concerns about the social impacts of the changes that we have seen in the ag sector. Anyone who thinks otherwise ought to take a drive down Main Street in virtually any rural community. The better approach is to think about ways to encourage mentoring and to make changes in financial and social policies so that the next generation can carry on the grand traditions of this industry and help to build new ones.    

ABOUT THE AUTHOR:

Ben Palen is a fifth generation farmer with experience in many aspects of agriculture, including projects in the United States, Africa, and the Middle East.  The focus on all projects is sustainable practices based on a mix of boots on the ground work and selected use of agtech tools.

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