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

Last fall, Stoel bought 160 acres, increasing the size of his farm by about a quarter. "You've got to keep growing or you'll be left behind," Stoel said.

He paid $6,300 an acre. Three years ago, he bought an 80-acre parcel. It's a little less fertile than his recent purchase, but it cost only $3,200 per acre.

Tom Haag, a 60-year-old corn and soybean farmer near Eden Valley, Minn., expanded last year, too. He bought 200 acres that almost doubled the size of his farm as part of an effort to bring his son into the family business.

Haag paid just under $4,000 an acre for land that probably would have cost 30 percent less three or four years ago.

"I was not feeling good for three or four days," Haag said. "I've never spent that much money in my life. I want a couple of good years because I don't want to go backwards."

Last year the average price for an acre of cropland jumped 9 percent nationally, according to the U.S. Department of Agriculture.

One factor that adds to the pressure on prices is that there just isn't much land for sale. Only 1 percent of Minnesota's farmland generally comes up for sale in a given year. And despite hot demand, the number of farm real estate sales has actually been falling, hitting its lowest point in decades, said University of Minnesota economist Steven Taff, who tracks farm real estate sales across the state. For a farmer, land coming up for sale next door can be a once-in-a-lifetime opportunity.

Farmers can thank much of their current good fortune to the combination of historically high commodity prices and historically low interest rates.

High prices for corn and other grains, of course, boost farm income. Low rates make borrowing cheaper and intrinsically raise the value of a farm.

Farmers entered a new price era about five years ago. Until about 2007, the long-term average price for corn -- going back at least 30 years -- was around $2.50 per bushel. Then prices for corn and other commodities began climbing in what experts see as a structural change driven by global food and fuel demand.

The thirst for corn-based ethanol has risen sharply. Plus the swell of people entering the middle class in countries such as China and India has buoyed demand for meat, and thus for soybeans and corn for animal feed.

Growing world demand for food has come at the same time that global grain supplies have been tight. With subpar weather, U.S. corn yields have been below long-term trends in recent years.

The result: corn above $5 and soybeans around $13 -- both above historical benchmarks.

Said Stoel: "I never thought it would get this good."

There are so many risks that Bahl, the Wells Fargo banker, joked he can't list them all. "Any one thing could cause that disaster," he said.

Interest rates will inevitably rise at some point, although the Federal Reserve has made clear that it intends to hold rate targets low until at least 2014. Ethanol demand has slowed, and farm economists say that without federal policy changes, the days of go-go growth for the corn-based fuel are gone.

"Corn is land, and land is corn," said Michael Swanson, an agricultural economist with Wells Fargo in Minneapolis. "If we have $6 corn prices going forward, these land prices are fine. We really need to have a couple of monster crops to see how low these prices might go."

Producers themselves, and the age-old specter of such "monster crops," pose their own threat. Farmers worldwide, not surprisingly, react to higher prices by planting more, which in turn can lead to bumper crops that inevitably lead to price declines. U.S. corn farmers were expected to plant more acres in corn this year than any time since 1937.

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