You’re Not Rich – Why the next generation of farms may not live like the last one.

I hate basketball. In fact, if it comes on Sportscenter I won’t even watch the highlights before changing the channel. But I do love Shaquille O’Neal; not for what he has done on the court but for the soundbites and philanthropy he has done off of it. I often utilize his quotes when discussing agriculture and what I see coming for the next generation.

 

“We ain’t rich, I’m rich” – Shaquille O’Neal

 

Primary producer agriculture changed overnight. Okay, it took closer to a decade, but those who were lucky enough to be part of agriculture over the last decade or so have reaped its rewards. Some of the wealth was built on operations, with a few years here and there where commodities took off, but most of the wealth and equity in agriculture was built on real estate. Land appreciation has been constant over the last ten years and may be the closest thing most farms get to having a 10X investment.

 

Prior to this time, there was no money in farming. I still remember the year I bought my first quarter it was $60K and was still overpriced. Land within a ten-kilometre radius was rented for property taxes and went unrented year after year. My entire career in accounting was built on the foundation that “there was no future in farming”. This was when farming was a lifestyle and to live it you needed to suffer. I watched my parents, and many neighbours suffer through this and even though I never realized it until later in life, they gave up a lot to make us as kids believe we were never in trouble. But now I know the truth, every year we were in trouble.

 

So, what happened? Land happened. On most farms today, the return on equity most years is ultimately subsidized by land appreciation. In fact, when operating companies are split from the land companies and a fair market rent is paid on the real estate most farms lose money. Discounting the last couple of years of high commodity prices that will not last, farming even during the good years was not based on farming, it was based on real estate gains.

 

This is why I find Shaq’s quote so relevant. We have entered a time now where the high cost of production, and the volatility in both land prices and commodity prices is taking us back down to the norm. The only difference is that the new generation has never experienced this and believes that the equity and land value of the past generation will ultimately be there’s. They see the cabins, the boats, the new machinery lines, and they see the dollar signs. Who wouldn’t love farming, life looks good.

 

This is why we try to focus on splitting real estate, investment, and operations when looking at succession. This is the only way we can get the next generation to see the actual truth behind the farming venture. It is the only way we can limit the statistics that say most farms never make it past the third generation. In this instance, the first generation built the farm with sweat, the second generation expanded the farm with real estate equity, and the third generation needs to concentrate on not using that equity to fund a lifestyle. Remember, “We aren’t rich, I’m rich”.

 

“In order to touch the cheese, you need to present me two degrees” – Shaquille O’Neal

 

I love the moral of the story in this quote as well. To come back and be part of the transition of the family farm, you need to find higher education and experiences off the farm. This I believe is invaluable when it comes to not only life experiences and values but also in identifying what the family farm really means and how to make it more successful. In fact, even today as I read through “X” (aka Twitter), I saw a discussion regarding that in order to come back to the farm, the next generation should have a plan to produce a 6X return on their starting salary. Interesting theory, and I don’t necessarily disagree. On our farm we always talk about “Time, Brains, and Money”; to work here you must be able to provide time (labour), brains (management), or money (investment or real estate).

 

Now, what exactly is a degree? I am a bit jaded on this topic as I can whole-heartedly tell you the main thing I got out of University was a plan and a piece of paper. Other than some entry-level accounting and public speaking experiences, most things I got out of post-secondary school do not affect my daily job at this point. But it did instil networking, relationships, and how to talk to people which I believe may have been the ultimate value. It also provides a “plan B” as farming is not always predictable, and a backup plan is never a bad thing.

 

In my eyes, a degree can also be experienced in the world. We have a lot of foreign workers come over and the main reason is to experience Canadian farms. The plan is to return home and utilize what they learn on the family farm, so this I believe could constitute a degree. This is also why we have started working with Olds College on a type of “co-op” program or “scholarship for work”. We believe that even if they don’t end up at HGV, they will be better off having this experience and learning. 

 

Circling back to the main point that the next generation will, and should, have it harder than the last. Most farms will subsidize retirement to keep the legacy, and this is not a bad thing. But I believe that starting at the bottom and working your way up is a better motivation and learning tool for the next leaders. Giving them the golden key is not the answer and I have seen it backfire more times than I can say. 

 

If a basketball player who grew up with nothing and now has amassed a fortune greater than $400M asks more from his kids, why wouldn’t you? And his first million bought his parents a house and a car.