This past weekend, I went with my family, including my granddaughters, to a Wisconsin apple farm. The farm sold apples and pumpkins, raspberries and honey, donuts and cider and lots more. This farm had transitioned away from growing corn and beans to having become a diversified mix of profit centers.
We spent several hours there and paid for the activity area and the corn maze, as well as substantially-higher-than-store-prices to pick our own apples, pumpkins, and raspberries.
We were happy to do it and had a good time. The farm family most certainly made more than they would have if they had sold the same amount of produce to a vendor or supermarket.
This kind of transition away from traditional farming has grown more and more common over the last fifty years.
Even before COVID-19 struck, farming has been changing. Since 2007, the number of farms in the United States has steadily declined, going from 2.2 million to just over 2 million in 2019.1 Fewer farms are producing more crops and milk. In 1930, America’s Dairyland had 167,000 dairy farms producing 11.2 billion pounds of milk per year. As of 2019, just 7,700 farms produced 30.6 billion pounds of milk per year.2
As traditional small-family farming wanes, the organic agriculture market, agritourism, niche farming, and alternative agriculture businesses continue to grow. In 2017, organic food sales in the United States amounted to about $50 billion, making it the world’s largest organic food market. As of March 2020, the U.S. harvests almost 3.3 million organic acres per year3, with that number continuing to rise.
Twentieth century advances in farming technology, crop disease management, and both animal and vegetable genetics (for instance, the development of hybrid corn in the 1920s)4 changed the face of farming. Despite the myriad improvements, stress and workloads grew. Traditional farmers had to get more and more done to compete with one another and with the growing trend toward factory farming. By the 1980s and ‘90s, burnout was happening.
Farming families that have been in business for generations are finding ways to innovatively reinvent themselves, both to stay financially viable and to find creative fulfilment. As in the example of the farm I visited this weekend with my family, farmers are adjusting to keep up with the changing times.
Many of the independent farms of today are small or specialized, focusing on niche markets like organic vegetables, Christmas trees, free-range chickens, or grass-fed beef. There’s a movement to return to simpler, healthier times and to own a business that incorporates more freedom, flexibility, and creativity into it than a traditional farm could allow. Family-owned farms of today are increasingly small, both in acreage and workers. They’re often run by a single family with little or no hired help, and they resemble farms from several generations ago more than farms from ten or twenty years ago.
To appeal to health-conscious and environment-conscious consumers, and to be in a line of work that feels fulfilling, many farmers are going the organic and free-range route, focusing on quality instead of quantity, and charging more. Consumers are often willing to pay more to eat healthier food and to support farms that focus on organic and animal-friendly practices. There is a growing movement to ‘Know Where Your Food Comes From’5 and to support Farm-to-Table restaurants and local farmers’ markets, since eating locally grown food is healthier for both our bodies and the environment. (Fresh vegetables lose nutrients as time goes by, so the more time that produce spends on the road, getting trucked across the country, the less healthy it is when it’s finally consumed.) Food sourced from a local farm also has a smaller carbon footprint than food brought from hundreds or thousands of miles away.
The agritourism business is also a way for farmers to reinvent traditional farms into tourist-friendly destinations. Dairy farms, with their rolling hills and beautiful old barns and outbuildings, are being reimagined as wineries with tasting rooms, petting zoos, wedding venues, and family-friendly parks complete with corn mazes and hayrides. Gift shops are popping up on the premises, offering homemade taffy, popcorn, pickles, honey, and maple syrup. Luna Valley Farm in Decorah, Iowa, is just one example of a farm that has reinvented itself as a glamping/grass-fed meat source/pizza night destination. Wisconsin offers similar setups, like Winghaven Pizza Farm in Galesville, which has been in the Grover family for several generations, but that has changed over time from an apple orchard to a pizza farm and event destination.
Changing times, more idealistic values, and plain old necessity have forced farmers to think creatively about the way they run their businesses. An artisan-inspired approach has, in some cases, saved failing farms. Other times, however, changing course has only provided different scenery on the path to the same unfortunate outcome.
With the onset of Covid-19, many of these niche and tourism-driven farms that were previously thriving have been hit hard. Covid-19 didn’t just change how we spend our time. It changed our eating habits, driving people away from healthy, fresh food and back to processed comfort foods6. Fast food has made a surging comeback, as well as classic, non-perishable cupboard staples like Campbell’s soups and Kraft Mac and Cheese. People want to shop less frequently, save money, and eat familiar foods that remind them of their childhoods. They’re also spending less time in social settings where food is seen as a treat, luxury item, or status symbol. The food we consume at home is usually rather no-frills compared to the way we eat when we’re out at a restaurant or attending a social event with friends. And none of this bodes well for farms that make a living on selling high-end edibles or hosting events like wine tastings and pizza nights.
When changing the form and function of a farm is not enough, a farm family may find themselves in a position to qualify for a Chapter 12 bankruptcy. This kind of bankruptcy allows the farmer to reorganize debt into a three- or five-year payment plan.
Reorganization plans like these often include major transitions for the farmer. Examples of some of those include the following:
We have seen hybrids of all of these.
To demonstrate to the Court and creditors, or even to the principal lender in a workout, that the new proposal will succeed, changes are often necessary to be made. Depending upon the skills, resources, and willingness of the farmer, income can be increased. We have seen farmers who become seed dealers on the side, hoof trimmers for horse owners, or even quilters who then sell their wares to us city folk.
Often these side activities are more profitable than the basic farm operation. Community-supported agriculture and direct sale of product by farmers to the public at farmers market and the like can yield substantially greater profits than bulk sales of corn or soybeans. These kinds of individual actions and sales give the farmer far more control over pricing and in commodity sales in milk, meat or grain.
Fortunately, farmers are resourceful people. They have to handle the many tasks they face daily in their businesses. That resourcefulness has helped many of them to keep their farms.
The Final Transition
Those that do not keep farming make the final transition. That transition must also be carefully viewed by lawyers. The sales of land, buildings, and equipment which have been held for years can result in very substantial capital gains tax. These taxes can often be avoided through the use of a Chapter 12 farm reorganization. Congress has created a safe harbor for farmers who sell capital assets before or during a farm reorganization.
For example, Old MacDonald bought his farm 45 years ago for $500 per acre. Over the years he has run the farm and used the growing equity in the farm assets to borrow for operations.
Now Old MacDonald is selling the farm, either by choice or necessity, and the land value has grown to $8,500 per acre, but all of that money will be going to the bank and other lenders and creditors. These debts may or may not get paid in full, but Old MacDonald will have an $8,000 per acre gain on his 1,000-acre farm. That is $8 million of gain, so we can expect the tax will be approximately $1.75 million dollars.
Taxes are not normally dischargeable in bankruptcy. Income taxes like these can eventually become dischargeable, but only after a wait of several years. And by that time, the tax authorities may have filed liens.
Chapter 12 permits Old MacDonald to sell these assets and to be able to treat the taxes like an unsecured claim, thus discharging them in the bankruptcy case.
Whether transitioning for personal interest or social conscience, whether to augment income or to radically change, transitions in farming are commonplace today, and often necessary. We as lawyers can help clients identify ways to keep their business, grow their business, or even get out of their business. Doing so will help not only that particular farm client, but our farm communities in general.