July 16, 2011 in Business

Fertile fields for profit

Bernard Condon Associated Press
 
Associated Press photo

Braden Janowski walks through a watermelon field in Niles, Mich., last month. Janowski bid $4 million for 430 acres of corn fields last summer.
(Full-size photo)

Uncertain subsidies

In Iowa, corn prices are high partly because corn is used to make ethanol, a fuel additive subsidized by the federal government. The U.S. Department of Agriculture expects 40 percent of the nation’s corn crop this year will go to factories that make it. But with Washington running up record deficits, it’s anyone’s guess how long the subsidy will remain.

Braden Janowski has never planted seeds or brought in a harvest. He doesn’t even own overalls.

Yet when 430 acres of Michigan cornfields was auctioned last summer, it was Janowski, a brash, 33-year-old software executive, who made the winning bid. It was so high – $4 million, 25 percent above the next-highest – that some farmers stood, shook their heads and walked out. And Janowski figures he got the land cheap.

“Corn back then was around $4,” he says from his office in Tulsa, Okla., stealing a glance at prices per bushel on his computer. Corn rose to almost $8 in June and trades now at about $7.

A new breed of gentleman farmer is shaking up the American heartland. Rich investors with no ties to farming, no dirt under their nails, are confident enough to wager big on a patch of earth – betting that it’s a smart investment because food will only get more expensive around the world.

They’re buying wheat fields in Kansas, rows of Iowa corn and acres of soybeans in Indiana. And though farmers still fill most of the seats at auctions, the newcomers are growing in number and variety – a Seattle computer executive, a Kansas City lawyer, a publishing executive from Chicago, a Boston money manager.

The value of Iowa farmland has almost doubled in six years. In Nebraska and Kansas, it’s up more than 50 percent. Prices have risen so fast that regulators have begun sounding alarms, and farmers are beginning to voice concerns.

“I never thought prices would get this high,” says Robert Huber, 73, who just sold his 500-acre corn and soybean farm in Carmel, Ind., for $3.8 million, or $7,600 an acre, triple what he paid for it a decade ago. “At the price we got, it’s going to take a long time for him to pay it off – and that’s if crop prices stay high.”

Buyers say soaring farm values simply reflect fundamentals. Crop prices have risen because demand for food is growing around the world while the supply of arable land is shrinking.

At the same time, farmers are shifting more of their land to the crops with the fastest-rising prices, which could cause those prices to fall – and take the value of farms with them. When the government reported June 30 that farmers had planted the second-largest corn crop in 70 years, corn prices dropped 8 percent in two days.

And even if crop prices hold up, land values could fall if another key prop disappears: low interest rates.

For now, though, investors can’t seem to get enough of it.

At a recent auction of 156 acres in Iowa, the 50 or so farmers who showed up withheld their bids out of respect for a beloved local farmer who had rented the land for two decades and wanted to own it. But his final bid of $1.1 million was topped by a California insurance executive. In Iowa, 25 percent of buyers are investors, double the proportion 20 years ago.

“They were angry, but what are they going to do about it?” says Jeffrey Obrecht of Farmers National, the brokerage that ran the auction. He told the farmers they shouldn’t worry because some of the new investors will find a new way to make money in a few years and start selling their land.

As with stocks, U.S. farms can swing wildly in value along with the economy. Despite the fragile recovery, though, farm prices are nearing records now, capping a decade of some of the fastest annual price jumps in 40 years.

© Copyright 2011 Associated Press. All rights reserved. This material may not be published, broadcast, rewritten, or redistributed.


There is one comment on this story. Click here to view comment >>

Get stories like this in a free daily email