Do you have a plan for passing on your operations? Preparing for the next generation to take over the family operation is a critical challenge facing many of our clients and the nation’s agricultural producers at large.
While many producers have begun to plan for transferring their significant farm assets in the most tax-efficient way, they may not have considered some operational questions, including:
How will work get done? Who will take charge of various facets of the operation? By helping address those questions, a margin management plan can play a critical role in preparing the next generation to take control helping the operation achieve its long-term goals across the generations. A good margin management plan should take into account some key factors.
Define roles and responsibilities
of all who will be executing the plan. If members of your operation specialize in a certain area of the business, spelling out who will do what helps everyone understand how their work contributes to the common goal and can help coordinate efforts across the operation.
Identify where business knowledge lies. Often, the principal owner or equity partner has been making all the marketing and risk management decisions, and other family members do not understand the decision-making process or the criteria on which decisions have been based. Taking futures and options positions and deciding when to contract for purchases and sales requires specialized knowledge and a different language that is typically foreign to those who haven’t followed the markets for many years.
Share critical knowledge
If the person who typically works in your nursery or milking parlor were to get sick, there is probably at least one other person on your farm who could fill in to ensure operations continue to run smoothly. The same should hold true for the person who makes marketing and contracting decisions for the farm. Unfortunately, bad things sometimes happen. We have seen instances where a sudden illness or accident involving the main decision-maker leaves the rest of the family struggling to make decisions about market positions they don’t understand. You can avoid generating unnecessary anxiety and confusion by educating your intended successors.
Get professional help.
While you may have a firm grasp on how and why you take positions, explaining this complex topic to others requires a different set of skills. Sending your intended successors to one of CIH’s educational margin management seminars can help you transfer your knowledge across generations. Taught by professional educators, these comprehensive seminars provide a solid basis of understanding for the critical decisions that will impact the future profitability of the operation. Some savvy producers have brought not only their children, but also spouses or other relatives, to a seminar to learn margin management, from the basics of what the futures market is and how an option differs from a futures contract, to more complex issues – such as choosing among different contracting alternatives, funding accounts to maintain performance bonds on open positions and communicating with lenders who provide liquidity on credit lines.
Agree on where you disagree
Since older farmers usually have ample equity in their operations, they may feel more comfortable riding the open market and taking on more risk than their sons and daughters. But there may be other areas where your priorities differ from your intended successors. A discussion about your operation’s current risk profile is a great opportunity to identify what will stay the same and what will need to change for future generations. These important conversations can help the younger generation become more invested in the margin management process as they begin to see the connection between contracting decisions and financial performance in closing out marketing periods. We have seen margin management plans revised as a result of this added dialogue, as more input and thought is put into the decision-making process from multiple parties.
While preparing a comprehensive succession plan to efficiently transfer assets to the next generation, it is wise to think about how those assets are being managed. This includes critical decisions such as contracting to protect profit margins and how that fits in to preparing the next generation to take control. By investing the time to include this in your planning, you can ensure a smoother transition and help provide direction to those who will eventually be in charge