The New Breed of Farmer: Rich Investors
(Star Tribune) 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.
Fundamental reasoning
"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.
When the Federal Reserve cut its benchmark rate to a record low in December 2008, yields on CDs and money market funds and other conservative investments plunged, too. Investors were unhappy with earning less, but they were too scared about the economy to do much about it.
As they grew more confident -- and more frustrated with their puny returns -- they shifted money into riskier assets like stocks and corporate bonds. To many Wall Street experts, this hunt for alternatives also explains the rapid rise in gold, art, oil -- and farms.
Those who favor farms like to point out that, unlike the first three choices, you can collect income while you own it. You can sell what you grow on the farm or hand the fields over to a farmer and collect rent.
In Iowa, investors pocket annual rent equivalent to 4 percent of the price of land. That's a 60-year low but almost 2.5 percentage points more than average yield on five-year CDs at banks. That advantage could disappear quickly if the Fed starts raising rates.
For now, though, investors can't seem to get enough of it.
Possible risks lurking
Still, other dangers lurk for investors. 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. It's anyone guess how long the subsidy will remain.
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. In Iowa, farm prices rose 160 percent in the decade through last year to an average $5,064 per acre, according to Iowa State University.
Concern that farm prices may be inflated is serious enough that the Federal Deposit Insurance Corp. held a conference for farm lenders in March titled "Don't Bet the Farm." Thomas Hoenig, head of the Federal Reserve Bank of Kansas City, oversaw dozens of bank failures when a farm boom turned bust 30 years ago. Today, he suggests prices may be in an "unsustainable bubble."
http://www.startribune.com/business/125695638.html
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.
Fundamental reasoning
"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.
When the Federal Reserve cut its benchmark rate to a record low in December 2008, yields on CDs and money market funds and other conservative investments plunged, too. Investors were unhappy with earning less, but they were too scared about the economy to do much about it.
As they grew more confident -- and more frustrated with their puny returns -- they shifted money into riskier assets like stocks and corporate bonds. To many Wall Street experts, this hunt for alternatives also explains the rapid rise in gold, art, oil -- and farms.
Those who favor farms like to point out that, unlike the first three choices, you can collect income while you own it. You can sell what you grow on the farm or hand the fields over to a farmer and collect rent.
In Iowa, investors pocket annual rent equivalent to 4 percent of the price of land. That's a 60-year low but almost 2.5 percentage points more than average yield on five-year CDs at banks. That advantage could disappear quickly if the Fed starts raising rates.
For now, though, investors can't seem to get enough of it.
Possible risks lurking
Still, other dangers lurk for investors. 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. It's anyone guess how long the subsidy will remain.
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. In Iowa, farm prices rose 160 percent in the decade through last year to an average $5,064 per acre, according to Iowa State University.
Concern that farm prices may be inflated is serious enough that the Federal Deposit Insurance Corp. held a conference for farm lenders in March titled "Don't Bet the Farm." Thomas Hoenig, head of the Federal Reserve Bank of Kansas City, oversaw dozens of bank failures when a farm boom turned bust 30 years ago. Today, he suggests prices may be in an "unsustainable bubble."
http://www.startribune.com/business/125695638.html
Posted by Colvin & Co. at 7/19/2011 5:17 AM 
Categories: Farmland
Tags: corn commodities ethanol farming farmland food Illinois Iowa inflation Land Value
Categories: Farmland
Tags: corn commodities ethanol farming farmland food Illinois Iowa inflation Land Value
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