Farmland goes for a premium as commodity prices tick up

In the last five years, Lon Frahm has bought 4,000 acres of farmland, expanding the size of his wheat and corn operation to more than 30 square miles of western Kansas. He's done so as farmland prices have roughly tripled in his swath of the Great Plains.

But unlike some regulators and farmland investors, Frahm, 54, says he doesn't believe the United States is in danger of a farmland price bust similar to the one that devastated the housing industry in the past decade - or that crippled agriculture 30 years ago. He says he won't be surprised if farmland prices level off or even fall, but not in a catastrophic spiral like the one that left millions of homeowners owing more than their property is worth.

"The fundamentals are there to support (farmland prices) right now, just like they have been for most of the time in the last 100 years," Frahm says.

The Colby, Kan., farmer may be right. Farm economists, bankers and land auctioneers say far less borrowing is going on now than what produced a massive exodus of bankrupt farmers in the 1970s and '80s. Frahm says the catchphrase when he went into farming then was "borrow yourself rich."

Not today. High prices of corn, wheat and other commodities, low interest rates, investors seeking better returns than can be found in the stock market or bank CDs, and bullish predictions of demand for food in Asia and elsewhere have produced record net farm income. As a result, cash is coming to the land about as rapidly as corn, wheat and soybeans are leaving it.

Many individuals in farm communities - doctors, lawyers, business owners - who in the past put savings in the bank or the stock market are sinking it into land. So are investment funds dedicated to farmland purchases.

Helping drive the market: changing diets around the globe.

"People are eating more meat in their diet and therefore, they need more grain to feed those animals," says Shonda Warner, who grew up on a Nebraska farm, traded derivatives for Goldman Sachs and ran a hedge fund in London before launching Chess Ag Full Harvest Partners in 2007.

Operating out of Clarksdale, Miss., and Dakota Dunes, S.D., her two farmland-investment funds own about $100 million worth of farmland. Her investors range from pension funds to wealthy individuals. Many, she says, have lost faith in a volatile stock market and governments unable to stem debt.

"They say, 'I am just getting some land - if I have to batten down the hatches, at least I can eat off it,' " Warner says.

As a result, farmland ownership "is probably the least leveraged we have had for a long, long time," says Terry Kastens, an emeritus agricultural economist at Kansas State University who now farms corn, wheat, sorghum and peas in western Kansas. "People have more cash. Individuals are choosing not to borrow any more from a risk perspective. Lenders are not just pushing money at you yet, like the late '70s."

The Agriculture Department predicts that net farm income in 2012 will be the second-highest on record, at $91.7 billion, down 6.5% from 2011. But the USDA is forecasting a 5.9% rise in farmland values this year.

Farmers doing the buying

Despite investor interest, farm economists say the chief buyers are life-long farmers such as Frahm, who want to expand production rather than get rich buying and selling land.

Farm equipment is much bigger and covers far more ground than a generation ago, per-acre yields are substantially higher, and the consolidation that overtook the poultry, beef, dairy and pork industries in previous decades has descended this century on grain production.

Frahm says when he started farming in the late '70s, he had a six-row corn planter. Now, he owns two 24-row planters and one 36-row behemoth, and he and two employees can plant 1,000 acres - roughly 1.5 square miles - in a day.

While the stock market is struggling toward pre-2008 crash levels and home prices have plummeted, the average price of farmland increased by 31% from 2006 to 2011, to slightly more than $3,000 an acre, according to the USDA. But in many parts of the traditional Corn Belt- from Ohio to Iowa - economists and land agents say prices routinely doubled to $10,000 an acre or more this winter. Average farmland prices in Kansas rose 13% from 2010 to 2011; Iowa prices jumped 24%, the USDA said, with similar rises in other corn- and wheat-producing states.

"It is still driven primarily by high profitability in the farming sector," Kastens says. "The vast majority of land is being purchased by farmers or people directly connected with agriculture. … Farming has made unprecedented profits the last five years, so they are building up cash reserves. Simultaneously, interest rates have been low, and the stock market has not been that great."

But the land market has gotten hot enough to raise flags.

"Yeah, I am cautious," says James McCandless, a founder of UBS AgriVest, an investment fund that owns about 155,000 acres, valued at $625 million, in 25 states. He has invested in farmland since 1970. He says his fund, which rents land to farmers, is not buying in the Corn Belt because prices there have gotten "frothy" and "beyond what we see as sustainable."

"We could be wrong, and these prices could stick," he says. But McCandless is looking for land in California, Idaho, Washington, Georgia, Texas and Colorado and other states where prices have not overshot the opportunity for good investor return on rental income.

"My concern is not where (farmland) values are at, it is where they may be headed," says Brent Gloy, associate director of research at Purdue University's Center for Food and Agricultural Business. "If we continue to go up very much more, I would start to get a little nervous as to whether price is accurately reflecting risk."

Asking 'hard questions'

Last March, the Federal Deposit Insurance Corporation convened a conference entitled "Don't Bet the Farm - Assessing the Boom in U.S. farmland prices." FDIC Chair Sheila Bair told attendees that while the number of bad loans in agriculture was minuscule compared with the housing industry, boom times in agriculture "should not dissuade us, as regulators, from asking hard questions and articulating our concerns before a crisis is upon us, while times are still good."

Her caution did not stop the upward price pressure. Then Yale professor Robert Shiller, co-founder of the influential Case-Shiller Home Price Index, weighed in. Shiller, who had warned of the housing collapse before it happened, told an investors' conference in Las Vegas last May that "my only bullish call is farmland." He cited rising demand for food and a finite amount of land to produce it.

Shiller says he still holds that view, and last month urged investors in Sweden, where he says a housing bubble is forming, to look at farmland instead.

Land-auction veterans such as R.D. Schrader, of Columbia City, Ind., whose firm sells land in 40 states, suggest that talk of a bust may help prevent one.

"Right now, the moon and the stars are lining up in favor of farmland values," he says. "Odds are that will change in the future. When that correction comes, it is tough to say."

But, he adds: "Farmland values have been appreciating for the last 25 years. We have not gotten there overnight."

Bad memories live on

Gloy says many farmers still remember the agricultural crash of the '80s and resist debt as a result. "But more important, I think the lenders remember that, and the regulators remember," he says. "They are sending a signal here, 'Just don't go crazy.' " For consumers enduring higher prices of everything from Wheaties to milk, land prices are more of a lagging indicator than a source of their grocery bill's rise, Gloy says.

Rising demand for protein in diets abroad, especially in China and other rapidly growing economies in Asia, has driven up prices of corn, wheat and other basic commodities. Those countries lack the land to grow feed for animals and must import it. Droughts, highlighted by the fire devastation of Russia's grain crops in 2010, cut into global grain stocks.

In the USA, demand for corn to fuel ethanol plants has boosted prices, and federal farm policies designed for an era of grain surpluses have kept millions of acres of farmland fallow.

Gloy estimates that 20 million acres - roughly the size of South Carolina- were devoted to soybean exports to China last year and that another 20 million fed corn to ethanol plants. Both were double the acreages from 2006 for those respective markets. Gloy expects demand for ethanol to level off as government subsidies subside.

But Frahm says rising demand from better diets will continue. "No one likes to go backward once they have discovered a new level of living," he says.

Including himself. Frahm says farming has been profitable enough for him to not only buy more land, but to afford an Arizona winter home. This month, Frahm hosted all seven of his employees and their spouses there. They took a side trip to the Grand Canyon on the way back to Kansas, where preparation for spring planting has begun.

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