Down On The Farm, Investors See Big Potential

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.

Regulators sounding alarms
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.

Better investment returns
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, farmland won't look nearly as appealing.

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

A lot more investors
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.

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. But with Washington running up record deficits, 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."

Agriculture wakes up
Veteran bond trader Perry Vieth doesn't think so. Vieth, the former head of fixed income investments for PanAgora Asset Management in Boston, started buying farms with his own money five years ago, when buyers with no farming experience were rare.

"Agriculture was sleepy," he says. "People looked at me like, 'What are you doing?'"

Now he's buying for 71 wealthy investors. Ceres Partners, his 3½-year-old private investment fund, owns 65 farms, almost half bought since November. He says he's returned 15 percent annually to his investors overall.

Though Vieth says prices in some places have climbed too high — he won't buy in Iowa, for instance — he says the price of farms elsewhere will rise as big money managers start seeing them as just another tradable asset like stocks or bonds and start buying.

"When Goldman Sachs shows up to an auction, then I'll know it's time to get out," he says.

Bullish on farmland
Janowski, the Tulsa software executive, is bullish for other reasons. A self-described serial entrepreneur, he has built four companies, including a software developer that he sold for $45 million three years ago.

Listen to him speak, though, and you'd think he was an economist. He'll talk your ear off about how inflation could rage out of control, and how farmland is more likely to keep up with inflation than other assets. Janowski sold all his stock in April.

He plans to move most of his money into farms and has clearly done his homework. In the past five years, he has flown to more than a dozen farms up for sale, often with an agronomist in tow. Before bidding on that Michigan farm last summer, he visited five times to walk the property, which includes a house and land for commercial development as well as tillable fields.

The day of the auction, which drew more than 100 bidders to the Century Center in South Bend, Ind., he didn't leave anything to chance. Janowski arrived two and a half hours early to get a seat near the entrance so he could size up rival bidders as they walked in.

Then he kept quiet as an auctioneer carved the farm up into lots numbered 1 through 40 and began taking bids for each. After 30 minutes, Janowski broke his silence with an offer to buy the whole thing: "One through 40 ... $4 million." For the tillable parts, he figures he paid about $6,000 an acre.

"I'm probably on the fringe of being a nut job," he says. "But as each month goes by, I become less nutty."

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  • by Wolfgang Location: Chocowinity,NC on Jul 17, 2011 at 09:20 PM
    The Tabacco is growing great. - R.J. Reynolds Tobacco Company buys N.C. tabacco everyday. From Tabacco farmers in N.C. It is all about buiness and company & farmer's profits.
  • by pete Location: grifton on Jul 17, 2011 at 12:39 PM
    Most food and crops are genetically grown.they are enginered to draw insects thus the big chemical companies can sell you chemicals to get rid of the insects. bon appetit.
  • by Common Sense on Jul 17, 2011 at 10:09 AM
    Hopefully most of these guys will lose big. As the prices of food increase more producers will enter the market, and if China makes the same gains in agriculture as it has in manufacturing, then in ten years these speculators will be begging to sell that land back.
    • reply
      by Country boy on Jul 17, 2011 at 06:11 PM in reply to Common Sense
      I wish you were right, but that's not what's been happening. Right now, the government is taking over all the farm lands that have gone into default. Those properties that were bought by speculators are being developed into shopping malls and housing communities. Drive around E NC a bit and you'll see all sorts of signs showing planned communities where farms once were.
  • by Kristy Location: E. NC on Jul 17, 2011 at 08:27 AM
    So my question is what is happening to the farmers that farmed that land? Are they having to pay more rent? Do they still have a job? Otherwise how are these city slickers able to maintain crops and keep their nails all pretty? Sorry. I was raised around farmers in my family and see how they are undercut by these types of big wigs and it isn't always good.
    • reply
      by Country boy on Jul 17, 2011 at 06:08 PM in reply to Kristy
      Remember "share cropping? Farmers can't afford to pay the taxes on farm land anymore so they are selling it to rich folk and then leasing it back to grow crops. Problem is, there's no future in it for the farmers so when their kids grow up, they move off and get a job elsewhere. The rich folk just turn around, subdivide the farm land and build new housing. Then instead of buying locally grown crops in the supermarket, we buy crops grown in Mexico, Brazil, etc. etc. I grew up in farm country and whenever I go back home I see all that beautiful farm land is now shopping malls and big housing developments. It's the same all over the country.
  • by Shine Location: E. N.C. on Jul 17, 2011 at 07:01 AM
    The US grows over 40% of of the world's corn. The problem with the 'above market value' bidders on land is it re-establishes a taz base that alot of neighboring farmers may not be able to meet monotarily.
  • by Barlow Location: Madison on Jul 17, 2011 at 05:52 AM
    Land. They don't make any more of it.
  • by Anonymous on Jul 17, 2011 at 01:45 AM
    90 to 95 percent of all soy beans and corn in the USA is GM and not safe for humans or animals to eat.
    • reply
      by Anonymous on Jul 17, 2011 at 05:32 AM in reply to
      You must not eat anything but the grass in your yard then nut job!
      • reply
        by Anonymous on Jul 17, 2011 at 09:24 AM in reply to
        GM foods can have a toxic effect on the liver, kidneys, pancreas and reproductive system. The recombinant growth hormone, sometimes used in the production of GM foods, has been linked to cancer.

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