Planet Money
3:49 pm
Thu October 6, 2011

Why 158 Acres Of Corn Costs $1.5 Million

Originally published on Fri October 7, 2011 10:16 am

I went looking for a bubble the other day. I'd heard that prices for American farmland were spiking – up thirty percent over the past year, and double what people were paying five or six years ago. It sounded like irrational exuberance.

I flew to Iowa, drove to the town of Colo, an hour north of Des Moines, and dropped in on a land auction. It was a great scene: A hushed crowd of farmers, an auctioneer with a voice made for opera, and a climactic duel between rival bidders, one of whom raised the price with a wink, the other with a slight nod.

The winking man won, if you can call it a win when you have to hand over $1.5 million for 158 acres of corn stalks. The seller, a sweet middle-aged woman, seemed genuinely conflicted about selling her inheritance. But she needed the money, she said. And she said it: "It just seemed like we had this bubble going on with agricultural properties."

But the more I learned about the economics of corn farming and farmland, the less bubble-ish it seemed.

Consider what our local expert, the Iowa State economist Bruce Babcock, told me: Farmland in Iowa changes owners, on average, every thirty years. Buyers generally put down 30 percent of the purchase price, and 60 percent is common. This isn't a no-money-down, buy-and-flip kind of market.

And at today's corn prices, you can earn a tidy 4 percent return on your investment, just by growing corn. In that light, it all seems terribly rational. (Relevant side note: Babcock was so convinced about his calculations that he bought some farmland for himself a few years back.)

Of course, it all hangs on those corn prices. They're way up, too. As it turns out, corn farmers are in the energy business. You can convert their corn into ethanol, and put it in your gas tank. This is happening on a massive scale: More corn this year will go to ethanol factories than will feed farm animals. And the higher gas prices go, the more profitable the ethanol business, and the higher the demand for corn.

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GUY RAZ, host: It's ALL THINGS CONSIDERED from NPR News. I'm Guy Raz. While much of the economy is in the dumps these days, we're going to focus the next few minutes on one sector that's booming: farmland prices. Some people are even calling it a bubble. But can it last? NPR's Dan Charles has been working with our Planet Money team, and he went to Iowa to find out.

DAN CHARLES: Some of you may need a little reminder of what good economic times sound like.


CHARLES: He's selling land - 158 acres of prime Iowa farmland. It's happening in the community center of the town of Colo. The room is full of farmers plus the selling agent, Bill Vogel, from the real estate company Hertz Farm Management.

BILL VOGEL: This is a fantastic piece of ground. You know, this is as good as I ever get to sell.

CHARLES: Vogel has been selling land for 40 years, but he's never seen prices so high. They've doubled over the past five or six years. So, what is behind it? The reasons, it gradually becomes clear, are not in this room. These farmers are responding to markets and political decisions far away - in Chicago, Wall Street, even Saudi Arabia. I get a clue to this when the auction's just getting started. I'm standing in the back of the room with an expert who agreed to come along and help me out: an economist at Iowa State University named Bruce Babcock. And Babcock points to some men right ahead of us. They're staring at their cell phones.

BRUCE BABCOCK: They're checking the corn price today, these guys right here.

CHARLES: Do you know, is it up or down?

BABCOCK: It's down.

CHARLES: Later, he lays it out for me: why corn prices drive land prices.

BABCOCK: In the Midwest, most farmland is corn. Corn is king. And so what drives farm profitability is the amount of money you can make off growing corn.

CHARLES: Corn prices have gone gangbusters over the past few years. And it's not because people or chickens are suddenly eating more corn. Reason number one for the land price boom? High oil prices. Here's the connection: You can feed corn to animals - and until recently, that's where most of it went - but you can also feed it to your car in the form of ethanol.

BABCOCK: And when gas prices go up, it suddenly becomes profitable to convert it into ethanol.

CHARLES: This is happening on a huge scale. This year, for the first time, more corn will go into ethanol than is fed to domestic farm animals. So, Midwestern farmers are in the oil business. And with oil prices high, their land - their oil well, you might say - is really valuable. Now, it doesn't hurt that the U.S. government hands out subsidies to both corn farmers and the companies that put ethanol into gasoline. Let's call that reason number two. Babcock calculates that those subsidies have added about 10 percent to the price of corn - a little, but not that much. And the third reason: low interest rates. When you can't get any interest on your money in the bank, putting it into land looks a lot smarter.


CHARLES: In the Colo Community Center, the auction has turned into a duel between two farmers: a tall guy in a plaid shirt and a short, round man in overalls.


CHARLES: Overalls man shakes his head. He's out.


CHARLES: Nine thousand nine hundred dollars per acre times 158 acres - that farm just sold for a million and a half dollars. The seller, Deborah Ray Miller, is sitting up front, and the funny thing is, despite her windfall, she actually sounds a little sad about letting go of family land. But she needs the money for retirement, possibly to cover healthcare costs. And she decided now is the time to sell.

DEBORAH RAY MILLER: It just seemed like we had this bubble going with agricultural properties, and the prices just kept going higher, and we felt that perhaps this was a good time to consider selling it before the climate changed again.

CHARLES: There. She said it: bubble. Is it a bubble? Certainly prices are high. And they could fall if, say, oil prices collapsed. But it's not quite like the real estate boom in Florida or Las Vegas. People who buy farmland have to put 30 percent down; often it's 60 percent. Most important, people like the man in the plaid shirt are buying farmland to farm it, not flip it, and they're earning money at it. So, for now it doesn't take irrational exuberance to buy farmland; it just takes a little optimism and an awful lot of money. Dan Charles, NPR News. Transcript provided by NPR, Copyright National Public Radio.

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