Experience Counts: Farm Business Survival in the
U.S.
Like nonfarm businesses,
farm businesses exit often, but longevity reduces
the likelihood.
James
M. MacDonald, Penni
Korb, and Robert
Hoppe
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Farming,
like other businesses, exhibits high
turnover, with many thousands of existing
farms going out of business each year.
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As
in other industries, new farm businesses
enter at a high rate and new entrants
subsequently exit at high rates, irrespective
of the size of the farm or the age of
the operator.
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Exit
rates fall as businesses age to 5-9
years old, and then fall again, although
modestly, for more experienced farm
businesses. Experience seems to provide
an important advantage to well-established
businesses that can learn quickly and
efficiently. |
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This
article is drawn from . . . |
Understanding
U.S. Farm Exits, by Robert A. Hoppe
and Penni Korb, ERR-21, USDA, Economic Research
Service, June 2006. |
You
may also be interested in . . . |
“Industrialization
and Contracting in U.S. Agriculture,”
by Mary Ahearn, Penni Korb, and David Banker,
Journal of Agricultural and Applied Economics
37 (August 2005): 347-364.
“The Role of Retail Chains:
National, Regional, and Industry Results,”
by Ronald Jarmin, Shawn Klimek, and Javier
Miranda, Working Paper CES-WP-05-30, U.S.
Census Bureau, Center for Economic Studies,
December 2005.
“Small
Farms Can Grow Into Large Enterprises,”
by Doris Newton, in Amber Waves,
Vol. 3, Issue 2, April 2005.
“Productivity and Firm
Dynamics: Evidence from Microdata,”
Organisation for Economic Co-operation and
Development, OECD Economic Outlook
69 (June 2001): 209-223. |
New farm businesses exit the sector
at a high rate. More specifically, recently started
farm businesses are much less likely to remain in
farming than farms that have been in business for
5 years, which are, in turn, less likely to survive
than those that have been in business for 10 years
or more. The pattern holds among large farms and
small, independent of the separate impact of farm
size, whereby large farms are more likely to last.
The pattern also holds among young and old operators,
again independent of the profound impact of operator
age, whereby farms with middle-aged operators are
more likely to survive.
It’s not surprising that
an operator’s age has a strong link to the
survival of a farm business. Most farms, even very
large ones, remain family-operated businesses whose
operators will often sell or close the business
as they reach retirement. It’s also not surprising
to see farm size matter—production has been
shifting sharply to much larger farms over the years.
But we know far less about the links between a farm
business’s age and its chances for survival.
Why should we care about business
age and survival? While not all farm exits represent
business failures, for those that do, failure can
be costly. Entrants to commercial farming commit
substantial amounts of money and effort to the enterprise,
and some of the costs of exiting might be avoided
if the risks of entry and the causes of failure
were better understood. It is exactly because the
costs of exiting farming are high that several Federal
programs, often in partnership with States, local
agencies, and universities, target assistance at
beginning farmers and ranchers. Some beginning farmer
and rancher programs aim to improve skills by providing
funding to universities and community groups that
offer training in areas such as risk management,
technical production, or financial management. Others
provide support for farm practices, such as increased
cost-sharing in conservation programs. Still others
offer financing assistance through direct and guaranteed
farm ownership and farm operating loans.
How We Analyze Business
Age and Survival
A farm business is not the same
as the set of physical assets (land, equipment,
and buildings) that make up a farm site. When a
business closes, the land farmed by that operator
might go out of production, and the other assets
might be sold or put to other uses. More commonly,
the land operated by that business is rented by
or sold to another farm business. And because farmers
may rent land and other assets, farm businesses
can start and close much more frequently than farmland
can be converted to another use.
With data from the census longitudinal
file, ERS linked farm records from five censuses
of agriculture conducted in 1978, 1982, 1987, 1992,
and 1997 (see box, “Data Used
in the Analysis”). Researchers identified
farms that were operating in 1992, and then noted
whether they were still operating in 1997. Information
from the file allowed the measure of several key
factors that might have prompted farm exit by 1997:
Farm businesses often exit farming—35
percent of those recorded in the 1992 Census were
not there in 1997. This reflects, in part, the large
share of very small farms, which enter and exit
prolifically. But many observers might find the
exit rates for other farms surprisingly high as
well. For example, 17 percent of large, well-established
farms with middle-aged operators exited during 1992-97.
The data were not designed to
track businesses over time, and so errors in linking
records may lead to an overstatement of exit. Still,
these patterns closely match those observed for
many other industries and countries. For example,
during this period, about 27 percent of Canadian
farms exited, while 39 percent of small U.S. manufacturing
plants and 30 percent of chain retail stores closed.
Across Italy, France, Germany, and the United States,
between 27 and 40 percent of private businesses
exited between 1992 and 1997.
The Effects of Farm Business
Age on Survival
ERS assigns farms to 80 different
classes, based on 5 categories of sales, 4 of operator
age, and 4 of business age. Since farm size and
operator age are expected to affect farm survival,
the effects of farm business age on survival can
be isolated by examining the exit rates for different
farm size and age categories.
Each class has thousands of farms.
That is, while one might expect large farms to be
well established, many are new entrants, including
dairy and poultry operations with newly constructed
facilities and new crop operations that rent much
of their land. Or, while one might expect older
operators to have been in farming for many years,
thousands of new businesses have operators who are
at least 65 years old. Some older entrants may be
farming part-time after retiring from another occupation,
but others are operating new and large farm businesses,
sometimes with a younger partner. Longitudinal data
show that several businesses started by an older
operator as very small operations have grown into
very large operations over a decade or more.
With many farms in each category,
one can obtain meaningful measures of exit and survival.
Operator age, farm sales, and age of business all
have strong impacts on farm business exits.
As one would expect, the entire
pattern of exit rates shifts up sharply among the
oldest farm operators. Exit rates across all sizes
and business ages exceed 30 percent when the operators
are 65 or older.
Farm size also matters. Across
every operator and business age class, larger farms
are less likely to exit, and the effects of size
are great. What’s more, the effects are continuous.
In any given business and operator age category,
the largest farms exit less often than the next
largest class ($100,000-$249,999 in sales), which,
in turn, exit less than the next smaller farm class
($50,000-$99,999), and so on.
![Charts: Exit rates fall as farm businesses age](https://webarchive.library.unt.edu/eot2008/20080921075938im_/http://www.ers.usda.gov/AmberWaves/April07/Features/Charts/feature1_fig01&02.gif)
But the primary interest here
is in business age, and several clear patterns stand
out.
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For any farm size or operator age class, new
entrants (0-4 years old) are more likely to
exit.
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The effects of business age
are generally even larger than the effects of
farm size. For example, among the largest farms
(at least $250,000 in sales), the newest businesses
are 60-90 percent more likely to exit than well-established
farms, for each operator age class except the
oldest (where the newest are 30 percent more
likely to exit). By contrast, the smallest farms
in every business and operator age category
are 30-50 percent more likely to exit than the
largest.
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A little experience matters
a lot for the youngest operators. Exit rates
among young operators drop sharply as their
businesses mature from 0 to 4 years old to 5
to 9 years old.
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Experience continues to
matter, at a diminishing rate, as farm businesses
age. That is, well-established businesses are
more likely to survive, in most size and operator
age classes, than those that are 10-13 years
old, which, in turn, have greater survival prospects
than those that are 5-9 years old.
New farm businesses that survive
also grow, as evidenced by changes in acreage operated
by surviving field crop farms in each size and age
class. This part of the analysis is confined to
field crop farms, where acreage is a useful measure
of size. On average, well-established farm businesses
with operators under 65 years old operated the same
amount of acres in each census. That is, some of
those farms grew and some shrank, but the total
farmland in well-established surviving farms remained
the same in succeeding census years. But, surviving
new businesses (0-4 years old) grew, on average.
Again, some grew and some shrank, but in total these
farms added 10 percent more acreage as they aged
to the 5-9 year category, and another 10 percent
as they reached 10-13 years.
U.S. farmland acreage has declined
little over time, falling by about 1.4 percent between
1992 and 1997 and by about 7.5 percent over 1978-2002.
If, on average, well-established farms retained
acreage, then the acreage added to new businesses
must come from exiting farms. Indeed, the acreage
operated by field crop farms that left farming between
1992 and 1997 shrank sharply prior to exit, by 15
to 20 percent during 1987-92.
Why Does Business Age
Matter?
Many preharvest crop decisions
(such as the timing and extent of soil preparation,
seeding, and pest management) vary with local soil
and weather conditions, and operators often learn
through trial and error as much as through training,
extension services, and suppliers. Similarly, successful
livestock enterprises require breeding, feeding,
and culling savvy that improves with experience.
Marketing decisions—when to sell, how much,
to whom, and under what kind of arrangement—also
benefit from experience and new information. Moreover,
the relevant experience is specific to a particular
farm business (encompassing the commodities being
produced, the services provided, and the resources
available to that business), which is why business
age matters, and not simply the operator’s
age and personal experience.
The total number of U.S. farms
has changed little in recent years. High exit rates
are offset by high rates of entry into farming.
There is no apparent shortage of people willing
to try farming, but the challenge is in creating
a viable farm business.
Some Federal programs are directed
at beginning farmers and ranchers, in part because
of concerns about the high cost of entry into farming.
ERS’s analysis suggests that exit rates are
significantly higher for businesses with less than
5 years of experience. Challenges lie in understanding
the types of businesses that specific programs ought
to target and in identifying the appropriate mix
of services that programs should deliver. That is,
do new and prospective entrants have different needs
than businesses that have survived the first few
years? Who is best targeted by information and training
programs, and who is best targeted by cost-share
and financial assistance programs?
This tailoring of aid is important
because some turnover among new entrants may be
a strength of U.S. agriculture and an important
source of productivity growth. New farmers who can
realize high levels of productivity survive and
expand, while those who cannot exit quickly, freeing
resources for subsequent entrants. Farm businesses
that survive often apply new techniques and equipment,
and their operators have learned how to make effective
decisions, further amplifying farm productivity.
Data Used in the Analysis
Every 5 years, the U.S.
Department of Agriculture’s National
Agricultural Statistics Service (NASS)
administers the census of agriculture, which
records information on location, acreage,
production, sales, expenses, and operator
characteristics for all farms in the United
States. NASS summarizes census findings at:
www.nass.usda.gov/Census_of_ Agriculture/index.asp.
The census longitudinal
file links individual farm-level census records
over time by using a code, the census file
number (CFN), to link census forms to operator
names and addresses in each census year. Because
ongoing farm businesses retain the same CFNs,
while new farm businesses receive new ones,
a farm business’s responses to different
censuses can be assembled together using its
CFN. Specifically, statisticians linked CFNs
and associated farm records for the 1978,
1982, 1987, 1992 and 1997 censuses.
We defined five classes
of farm size based on gross sales. The largest,
with $250,000 or more in annual sales, accounted
for 6.5 percent of U.S. farms in 1992, but
62.5 percent of farm sales. The smallest,
farms with less than $10,000 in 1992 sales,
accounted for 47 percent of all farms and
2 percent of farm production.
Next, we defined four classes
for the principal operator’s age in
1992: 44 years or younger; 45-54; 55-64; and
65 years or older. Finally, we developed four
classes of business age, depending on when
the business was first recorded in the longitudinal
file. A farm business that first appeared
in the 1992 census was 0-4 years old in 1992.
If it were an older business, it would have
appeared in the 1987 census. By similar reasoning,
farms that first appeared in 1987 would be
5-9 years old, and those that first appeared
in 1982 would be 10-13 years old, in 1992.
Of course, farms that first appeared in 1978
were at least 14 years old in 1992, and could
be much older. We refer to the youngest farms
as “new entrants” and farms
in existence since at least 1978 as “well-established”
farm businesses.
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