Farmland goes for a premium as commodity prices tick up

— -- In the last five years, Lon Frahm has bought 4,000 acres of farmland, expanding the size of his wheat and corn operation to more than 30 square miles of western Kansas. He's done so as farmland prices have roughly tripled in his swath of the Great Plains.

But unlike some regulators and farmland investors, Frahm, 54, says he doesn't believe the United States is in danger of a farmland price bust similar to the one that devastated the housing industry in the past decade — or that crippled agriculture 30 years ago. He says he won't be surprised if farmland prices level off or even fall, but not in a catastrophic spiral like the one that left millions of homeowners owing more than their property is worth.

"The fundamentals are there to support (farmland prices) right now, just like they have been for most of the time in the last 100 years," Frahm says.

The Colby, Kan., farmer may be right. Farm economists, bankers and land auctioneers say far less borrowing is going on now than what produced a massive exodus of bankrupt farmers in the 1970s and '80s. Frahm says the catchphrase when he went into farming then was "borrow yourself rich."

Not today. High prices of corn, wheat and other commodities, low interest rates, investors seeking better returns than can be found in the stock market or bank CDs, and bullish predictions of demand for food in Asia and elsewhere have produced record net farm income. As a result, cash is coming to the land about as rapidly as corn, wheat and soybeans are leaving it.

Many individuals in farm communities — doctors, lawyers, business owners — who in the past put savings in the bank or the stock market are sinking it into land. So are investment funds dedicated to farmland purchases.

Helping drive the market: changing diets around the globe.

"People are eating more meat in their diet and therefore, they need more grain to feed those animals," says Shonda Warner, who grew up on a Nebraska farm, traded derivatives for Goldman Sachs and ran a hedge fund in London before launching Chess Ag Full Harvest Partners in 2007.

Operating out of Clarksdale, Miss., and Dakota Dunes, S.D., her two farmland-investment funds own about $100 million worth of farmland. Her investors range from pension funds to wealthy individuals. Many, she says, have lost faith in a volatile stock market and governments unable to stem debt.

"They say, 'I am just getting some land — if I have to batten down the hatches, at least I can eat off it,' " Warner says.

As a result, farmland ownership "is probably the least leveraged we have had for a long, long time," says Terry Kastens, an emeritus agricultural economist at Kansas State University who now farms corn, wheat, sorghum and peas in western Kansas. "People have more cash. Individuals are choosing not to borrow any more from a risk perspective. Lenders are not just pushing money at you yet, like the late '70s."

The Agriculture Department predicts that net farm income in 2012 will be the second-highest on record, at $91.7 billion, down 6.5% from 2011. But the USDA is forecasting a 5.9% rise in farmland values this year.

Farmers doing the buying

Despite investor interest, farm economists say the chief buyers are life-long farmers such as Frahm, who want to expand production rather than get rich buying and selling land.