New York Times – As Crop Prices Surge, Investment Firms and Farmers Vie for Land

From the potato fields of Michigan to the high prairies of Kansas, farmers are receiving record prices for their land — but economists and banking regulators warn that this boom, like so many before it, could end badly.

Across the American heartland, farmland prices are soaring. In places like Waco, Neb., and Chickasaw County, Iowa, where the boom-and-bust cycle of farming reaches deep into the psyche, some families are selling the land that they have worked for generations, to cash in while they can.

Behind the rush is the age-old driver of farm booms: high crop prices. Corn, in particular, has been soaring, reflecting demand overseas and, domestically, for ethanol. High prices mean good profits for farmers, and many are using their growing incomes to bid for land. Sensing opportunity, investment firms are buying, too. David Taylor, of Oskaloosa, Kan., said he was saddened to sell his family’s farm but that the prices were too good to resist. Four generations had planted corn and soybeans on the 146-acre spread. But after living through the Midwest farm crisis of the 1980s, when land values plunged, and realizing that his children would not follow in his footsteps, he sold the farm at auction in December.

“I bawled like a baby,” Mr. Taylor, 59, said. His crop-producing fields sold for $10,100 an acre.

In Iowa, despite the drought last year, farmland prices have nearly doubled since 2009, to an average $8,296 an acre, far surpassing the last boom’s peak in 1979. In Nebraska, the price of irrigated land has also doubled since 2009.

But if the price of corn falls — and many forecasters predict it will, particularly if the ethanol boom wanes — the price of farmland will fall with it. While many farmers have borrowed little money or used cash to finance their purchases, those who have overexpanded could run into trouble, leaving banks and other creditors with their bad debts.

“You can’t continue to see the price increases in land like we’ve been seeing. That’s just heading for trouble,” said Michael Duffy, an economist in farm management at Iowa State University. If the price of a bushel of corn were to fall to $4.50 from about $7 now, farmland values could collapse by as much as 25 percent, he said.

The potential dangers for the economy are nowhere near as serious as the consequences of the housing collapse. But for individual farmers and farming communities, as well as rural farming banks, the repercussions could be severe.

As far back as 2011, when the run-up in land prices was still gathering momentum, the Federal Deposit Insurance Corporation held a symposium in Arlington, Va., for bankers, regulators and investors titled “Don’t Bet the Farm: Assessing the Boom in U.S. Farmland Prices.” But banks and others continued to offer farmers low-interest loans.

Debt held by the nation’s farmers has risen nearly 30 percent since 2007, to an expected $277.4 billion this year. The bulk of those loans were made by commercial banks, the farm credit system and the Farm Service Agency. Some regulators and critics say that figure is most likely undercounting debt from specialized finance institutions or credit extended by seed companies like Monsanto and equipment manufacturers like John Deere.

While national data does not show sharp jumps in closely watched debt gauges, some analysts point to other data that reveal farm debts have already topped levels reached just before the farm crisis of the ’80s. Data that the Kansas Farm Management Association has collected from more than 1,300 farms in the state showed the amount of debt compared to the value of underlying assets had climbed to 25.5 percent at the end of 2011, slightly above where it stood in 1979.

Some farmers are in over their heads already. One of the heartland’s most talked about bankruptcies in years is that of Stamp Farms, of Decatur, Mich. In less than a decade, Michael D. Stamp, 37, built his farm into a huge operation growing corn and soybeans. In November, he was hailed as a savvy farming entrepreneur on the cover of Top Producer, an agricultural magazine, and was one of three national finalists in its annual contest.

“Multiple bankers have laughed me out of their office,” Mr. Stamp said in a video accompanying the article. “I wonder what they’re thinking now.”

Before the month was over, Stamp Farms filed for bankruptcy. Its debts totaled more than $94 million, including $63 million in a loan made a year earlier by Wells Fargo. Millions more were owed to over 200 creditors, including $1.9 million to Deere and $3.9 million to Monsanto.

In bankruptcy filings, Wells Fargo accused Mr. Stamp of misrepresenting his farm’s size, part of what the bank described as an elaborate fraud. The lawyer handling Mr. Stamp’s personal bankruptcy wrote in an e-mail that Mr. Stamp denied the bank’s accusations. He declined to make Mr. Stamp available for an interview, citing possible litigation against his client.

“We all started to wonder what was going on last fall when the corn was still green and he was out there picking it,” Tom Jerdon, who leased land to Stamp Farms, said of Mr. Stamp. Mr. Jerdon said he believed that Mr. Stamp was harvesting early to raise cash. Aware of the allegations made by Wells Fargo, Mr. Jerdon said he found Mr. Stamp to be a hard-working farmer who kept his promises, even those made on a handshake.

“It sounds like he was really growing the farm with borrowed capital,” Mr. Jerdon said. “There was just a lot of debt.”

Regulators say it is difficult to determine exactly how much farm debt exists, because much of it involves debt owed to various vendors and suppliers.

“In so many ways, we’re blind to some of that information,” said Jason Henderson, a vice president at the Omaha branch of the Federal Reserve Bank of Kansas City.

In the meantime, large investors have been moving in. In November, an investment unit of the big Swiss bank UBS bought 9,800 acres of Wisconsin farmland for $68 million, a purchase first reported by Farmland Investor Letter. The financial services firm TIAA-CREF is managing a $4 billion fund and now owns 600 farms — half of those in the United States, according to an executive there. But as prices soar, investors say it is becoming difficult to find bargains.

“There are some opportunities out there, but man, it’s tough,” said Shonda Warner, a former Goldman Sachs trader who returned to her Midwest farm roots in 2006, when she started Chess Ag Full Harvest Partners, a private equity firm that specializes in farmland. Like many other investors, Ms. Warner’s fund buys land and then rents it to farmers. As land prices have risen sharply, so have rents.

“I worry about people who are buying farmland and expecting to get big rents, $500 or even $600 in the Midwest,” Ms. Warner said. “What happens when corn prices fall next year and they can’t pay? What are you going to do? Take their television set?”