Corn Driving Farmland Higher

August 26, 2007
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While drought conditions have somewhat dampened optimism this season, growing interest in ethanol and other next-generation agricultural products and rising commodity prices are driving investment in farmland locally and across the Midwest.

“Ethanol has made corn king in our area,” said Thomas Stewart, a farmer in Barry County six miles north of U.S. Bio Woodbury, the U.S. BioEnergy ethanol plant in Lake Odessa. “We’ve seen land triple and quadruple. The attitudes have changed; everyone wants to get bigger and not necessarily better.”

Stewart added only a few acres of farmland this year, rented from retired farmers and family trusts. Many of his neighbors invested heavily. A tract of farmland across Portland Road that had been rented for $70 an acre a year ago went for $125 this year. A 700-acre tract adjacent to his farm rents for $160 an acre. Another parcel previously rented at $84 an acre soared to $181 an acre.

Prices for land have skyrocketed near the nation’s nearly 200 existing or proposed ethanol plants, where transportation costs to the plants are cheapest and development pressure is lowest. The 45-million-gallon U.S. Bio Woodbury facility, which opened a year ago this month, is no exception. Corn is purchased from farmers and commercial elevators throughout western and central Michigan. It is fermented into a form of alcohol that can be blended into gasoline, while creating a solid byproduct called distiller’s grain that is used as livestock feed. The majority of the ethanol is sold within the state of Michigan.

Various studies estimate that if the nation’s entire corn crop were to be converted to ethanol, it would only support 20 percent of its gasoline usage. The growth of the ethanol market, at least where domestic farmers are concerned, is largely dependent on producing more corn.

“Farming is only limited by the amount of land that is available,” sad Jim Zook, general manager of U.S. Bio Woodbury. “The need to have that land remain in production is critical to ethanol production. The increase in demand for the product they produce and the price they receive for that product helps offset any alternative use they may see for the land.”

The price for a bushel of corn on Chicago Board of Trade peaked this year at over $4, up from $1.86 at the end of 2005. Largely attributed to the ethanol boom, the higher price and slackening pressure from residential and commercial developers put more acres into tiled crops than at any point in recent history. Michigan farmers planted 15 percent more land this year than last, according to the Michigan Farm Bureau, a full 2.2 million acres.

Unfortunately, the drought has many of those farmers eating that investment. The U.S. Department of Agriculture last week lowered its projections for the Michigan harvest to 111 bushels per acre, down from earlier projections of 147 — by far the national low.

“Certainly the drought has curtailed enthusiasm and cut the opportunity for farmers to capitalize on this,” said Robert Boehm, manager of the commodity and marketing department at the Michigan Farm Bureau. “This is reminding people of the challenges in managing the risk of Michigan weather. But the long-term demand is still there, and it’s not just ethanol: The growth in world population and in the economic conditions of developing nations is fueling export demands. There is going to be more and more of a push for production.”

Norris Brookens, a 40-year veteran of the agricultural market and broker at The Wisinski Group in Grand Rapids, agreed. “This year is going to be a set-aside because of the drought. It’s going to be a couple of years before we see how it all shakes out.”

John Finkbeiner, president of the Kent County Farm Bureau, estimates that county rental rates are up 25 percent to 30 percent this year. The Caledonia farmer owns 230 acres and rents another 600 acres, planting corn, wheat, soybeans and hay and raising dairy cows. He did not bid for additional land this year, but said he would have taken it if it was offered at a reasonable price.

“This is something we haven’t seen a lot of lately,” he said. “Five-dollar-corn really makes everybody feel better. You’re willing to pay a little more for rent — people were trying to rent ground away from each other.”

Fred Walcott of Valley View farms — which has operations in Allendale, Ionia and Oceana County — said he has seen similar increases in Ottawa County. “When the corn price took off late last fall, a lot of rental prices went up,” said the past president of the Ottawa County Farm Bureau. “Land has gotten very competitive and sensitive to rent and to own.”

In Kent, Allegan and Ottawa counties, the value of tiled farmland is expected to climb 7.8 percent this year, according to annual projections published by Michigan State University. The value of tiled farmland in Muskegon and Newaygo counties is expected to grow 4.3 percent, 6 percent in Barry and Ionia counties.

Nationally, ethanol investment is picking up the slack of the housing market. Microsoft founder Bill Gates made headlines this spring with the purchase of 2,408 acres of farmland in rural Illinois, bringing his agricultural holdings in the state to roughly 3,000 acres. He has invested nearly $65 million in farmland nationwide since 2006. Elsewhere in Illinois, John Hancock Financial Services purchased 3,667 acres for $10 million.

Earlier this year, an Iowa farmer received financing to purchase a 230-acre tract of corn-suitable land for $1.38 million, or $6,010 an acre, a national record for land with no development potential. Rental rates in Iowa jumped 10 percent overall last year, according to Iowa State University, the largest increase since the school began tracking rates in 1994. Other studies have shown historical highs for farmland in several other states — large tracts in Illinois sold for $7,777 and $9,259 per acre last month — with the most recent USDA analysis reporting an average price of $2,160 per acre in the first quarter, up 14 percent from the previous year.

Still, the purchase of farmland is out of reach for many farmers. Finkbeiner said that the standard financing package available for tiled farmland purchase is around $2,000 per acre (it is higher for orchards and irrigated land). The price per acre of tiled farmland in Kent County is $3,205 according to MSU, which gathered its latest data from surveys in April 2006. The price for the same land when available for non-agricultural use is $12,608 (residential), $48,307 (commercial/industrial), and $6,924 (recreational).

Aside from recreational investment, Brookens, the Wisinski broker, said development interest has slowed considerably of late.

“In the past year, with the housing market being what is has been, we haven’t felt the pressure from developers,” said Finkbeiner. “They’re sitting on a lot of developments already that aren’t full.”

With the increased profitability, farmers are more likely to resist development pressure under any conditions, reasoned Dennis Gebben, a land advisor for Grubb & Ellis|Paramount Commerce in Grand Rapids. His primary involvement with agricultural land is on behalf of developers.

“It’s an ethics thing for many farmers,” he said. “If they’re making a decent living, whether they’re young or older, they’re going to be more likely to keep the land.”

And for the same reasons, retired farmers are more likely to rent their land or pass it on to family or other farmers, Finkbeiner said. “They just like to see stuff growing on their land.”

Yet, there are deeper concerns facing the market. For farmers like Stewart, a 20-year-old who operates his Lake Odessa farm in partnership with his 24-year-old brother Tim, sky-high rental rates and unattainable purchase rates make it difficult to establish a business.

Bruce Noel, treasurer of the Corn Marketing Program of Michigan, chairman of the National Corngrowers Association’s Ethanol Committee and a Jackson-area farmer, believes the greatest concern for farmers should be securing ownership in ethanol manufacturing.

“My concern is ultimately who owns these plants,” he said. “All we want is to get paid a decent margin for our risk, and we’d love to get that from the market rather than the government. The only way to do that is for us to keep ownership of the product.”

The breakeven point for a bushel of corn converted into ethanol is believed to be $9 a bushel, nearly three times that of the current market price. Noel also cautioned against farmers embracing corn at the expense of other products, many of which are seeing parallel price gains and also have potential for next-generation uses, such as soy, which is being used to create an alternative cooking oil devoid of trans fatty acids. Futures of soy are currently trading 45 percent higher than a year ago, and wheat is trading 65 percent higher.    

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