Green Acres

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Once-in-a-Lifetime Prices

Farmland prices in Iowa, the country's biggest ethanol producer, surged 13.6% between September, 2006, and March, 2007, adding to a total year-over-year increase of 16.5%, the second-highest rate in 20 years, according to the Iowa Farm & Land Chapter No. 2 Realtors Land Institute. The value of the state's best farmland, which produces 160 bushels of corn an acre, rose to an average of $4,300 per acre from $3,800 between September and March. Farmland prices in Nebraska and Indiana have also seen double-digit growth in the past year.

"This is the greatest increase over the shortest period of time since cotton was king," says John McAllister, president of the Chicago-based Realtors Land Institute and a farmland consultant in South Carolina. McAllister says his 79-year-old father, who was also in the farm real estate business, does not recall seeing this great a shift in agricultural land prices in such a short period of time in his lifetime.

Most corn farmers are giddy about the runup in land value—they're making more money and, with the added equity, their balance sheets look shinier. "For no additional work, you've got extra cash flow," says Bob Thompson, a partner at Bryan Cave in Kansas City, Mo., who has represented ethanol farmers and also runs his own commercial cattle farms in Kansas and Missouri.

Mega-Market or Flash in the Pan?

Ethanol does have its fair share of adversaries: among them, livestock farmers who must now pay much more for corn feed. "It's a two-edged sword," says Thompson of rising corn prices (see BusinessWeek.com, 3/19/07, "Ethanol's Growing List of Enemies").

The recent dip in corn prices may placate livestock farmers for a while, but the ethanol boom responsible for Midwest farm real estate appreciation is a more permanent influence than, say, the weather fluctuations that have controlled corn prices in the past. "It's not just a flash in the pan—it's a new mega-market," McAllister says (see BusinessWeek.com, 3/30/07, "Has Corn Hit Its Peak?").

The 2005 Energy Policy Act mandates that renewable fuels make up 5% of gasoline by 2012, and in his State of the Union address in January, President Bush called for a fivefold increase in ethanol fuel production by 2017. The USDA reported recently that U.S. farmers will plant 90.5 million acres of corn in 2007 to meet ethanol demand, a 15% increase from last year and the most since World War II. Monsanto (MON), the world's largest seed company, said on Apr. 4 that its second-quarter earnings rose 23%, boosted by demand for corn seed.

Back to the Heartland

Even if ethanol demand subsides, or an alternative source for the renewable fuel, such as woody biomass or cellulose waste, replaces corn, farmland price appreciation could endure. As the nation's population increases (the U.S. Census Bureau has said it could hit 400 million or more by 2040), so will demand for food, energy, and space.

McAllister still believes farmland is a good value right now. "I think land is a good investment, period," he says. "Maybe this [runup] is just a correction to an inefficient market. There has not been an adequate amount of credit given to the contributions made by Midwest agriculture in the past."

And if the rural real estate boom persists, U.S. farmers, who produce 42% of the world's corn, may even convince the kids to come back to the farm.

Click here to see which states have the most expensive farmland in America.

Click here to see the top ethanol-producing states in the U.S.

Roney is Real Estate writer for BusinessWeek.com.