June 29, 2012

Farmland prices sow riches, worry

Midwest cropland prices are at levels not seen in a century, but there are fears a bust is ahead.

Star Tribune

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Matt Danner stands in a corn field on his farm near Templeton, Iowa, earlier this month. Danner, part of a five-generation farm family, says he still recalls watching grown men cry at sales of failed farms. At 33, he says this is the best time to farm he’s seen in 15 years. “It takes 10 good years to fix the five bad ones of the ’80s,” he said. “It’s going to go the other way. It always does. There’s plenty of history to prove it’s not going to last long.”

The Associated Press

MINNEAPOLIS - Mick Schmiesing strides into the local rec center in a plaid shirt, Massey Ferguson tractor cap and old tennis shoes. It's auction day, and he's ready to make a play for 80 acres of soil in Blue Earth County, Minn.

Bidding starts at $5,000 an acre.

A year ago, that would have been about the going price for good land in this southern Minnesota county. On this day in March, the bids climb much higher, past the county record set just a month earlier. After a few tense minutes, Schmiesing wins out with an offer of $8,375 an acre.

He looks a bit stunned -- he just spent $670,000.

Is the land worth it? "I have no idea," he says. "I'll tell you in five years."

Across Minnesota and the Midwest, concerns are rising that farm values are climbing too high. Farmers, bankers and investors have put huge sums of money on the line, in the hope that boom times for agriculture will last.

Land prices have reached levels not seen in a century, even adjusted for inflation, mainly because historically high prices for commodities such as corn and soybeans have enabled farmers to generate strong profits. Good times are spurring farmers to expand their holdings and newcomers to buy in.

But economists and analysts wonder whether farmland will continue to provide the kind of payoff that justifies the high-dollar purchases. Or whether farm prices are vulnerable to the kind of momentum shifts that hit dot-com stocks and then housing.

"If (prices) keep going up at the rates at which they have been going up, they will not be justifiable," said Brent Gloy, director of Purdue University's Center for Commercial Agriculture.

Farming's last golden era also started with high commodity prices and a big run-up in land values -- only to collapse into what became the 1980s farm crisis. Legions of farmers went bankrupt and land values plummeted, devastating rural economies.

Many observers say farmers are at less risk this time because they aren't carrying as much debt as they were in the '80s. But signs of overinflated land prices have people on guard that the market may be peaking.

"As a conservative banker, I'm concerned every day," said Michael Bahl, principal agriculture industry specialist at Wells Fargo Bank in Owatonna, Minn. He thinks Minnesota farmland that has reached $8,000 to $10,000 an acre is "too high."

Purdue's Gloy watches the "value-to-cash rent multiple" of farmland, which indicates how much buyers are paying for each dollar of rent they could collect for the land. A high number suggests that buyers may be overpaying.

The ratio hit a high in Minnesota in 2007 and remains at levels not seen in 45 years, according to a Star Tribune newspaper analysis of U.S. Department of Agriculture data. It's at similar highs in Iowa, Illinois and Indiana and hasn't fallen back in those states, according to Gloy's analysis.

"We're in uncharted territory," he said.

Farming is the ultimate hard-luck profession, forever at the mercy of weather and faceless commodity markets. In recent years, though, the rewards for many crop farmers have been bountiful.

Sitting in his home office in southwest Minnesota overlooking two large, shiny steel corn bins, Gene Stoel sums up the past couple of years: "It's been very easy to make money," said Stoel, 57, a veteran corn and soybean farmer near Lake Wilson, Minn. "This has been a very good age for farming."

Minnesota crop farmers had two of their most profitable years on record in 2010 and 2011, posting an annual median net income of over $145,000 after farm expenses, according to data from the University of Minnesota and the Minnesota State Colleges and Universities. Surging income has helped put farmers in a financial position to expand.

(Continued on page 2)

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