Ethanol Boom Fuels Brisk
Sales of Midwest Farmland

Farmland prices are soaring across the Midwest amid a surge in demand for corn driven by the ethanol boom.

In the past year, cropland prices have climbed by double-digit percentages in many parts of the Heartland, as growers looking to cash in on $4-a-bushel prices for corn -- up from about $2 a year ago -- have scrambled to add arable acreage.

Some outside real-estate investors also are seeking agricultural land, but the most recent aggressive buyers have been established farmers who want to expand. At the same time, the price run-up has raised costs and could squeeze profit margins for farmers who rent land, if they have a poor crop.

The phenomenon is yet more evidence of the extent to which the rise of renewable, corn-derived ethanol is reshaping the Midwestern landscape. Once an alternative-energy afterthought, ethanol has become an option to replace a small but significant percentage of the nation's gasoline consumption. The surge in land prices is an indication of farmers' increased confidence that high crop prices will last at least several years.

It also contrasts with prices for residential land on the coasts, which have been flattening or even falling in some places.

U.S. ethanol production capacity is expected to rise to 11.6 billion gallons from today's current production capacity of 5.6 billion gallons in the next 18 to 24 months, according to the Renewable Fuels Association, a Washington-based industry group. The push to grow more corn, in turn, has led some farmers to switch soybean acres to corn, which has put upward price pressure on soybeans, too.

"The dynamics of our market changed," as the prices of commodities such as corn and soybeans soared, says John Kirkpatrick, a vice president and real-estate broker with Westchester Group Inc., a farm asset-management company. Mr. Kirkpatrick adds that farmers now "have a chance to make some real money."

Just last week, Larry King, a 65-year-old farmer who owns and rents 2,400 corn and soybean acres in northwest Iowa, with his 28-year-old son, Steve, snapped up 64.7 corn and soybean acres for $5,250 an acre at a public auction. Mr. King's bid prevailed 16 minutes after the auction started at $3,300 an acre. The same land would've sold for about $3,800 an acre a year ago, says John Hjelm, founder of the Acre Co., which ran the auction. Mr. King got the land after another farmer outbid him at a November auction for 160 acres of corn and soybean land. Back then, he says, he'd decided not to top a bid of $5,130 for an acre of farmland.

Farmland prices have been rising in many parts of the country for several years, partly because of a push by developers to the exurbs. But prices jumped much more sharply in the last half of 2006, according to farmers, farm managers, real-estate agents and Federal Reserve Bank surveys. In parts of Illinois, Iowa, Indiana and Nebraska, farmers say good-quality land that would've sold for $3,000 an acre a year ago in some states has been selling for almost twice that today.

In Iowa, the nation's largest corn grower, the push for property raised the average value of farmland 10% last year to $3,204, according to a survey of real-estate brokers, lenders and others by Iowa State University. In northwestern Illinois, high-quality farmland prices leapt 17% in 2006 from 2005, and prices in Wisconsin increased 10%, according to a survey of banks by the Federal Reserve Bank of Chicago.

In the fourth quarter, irrigated land in Nebraska saw an 8% boost from the previous year's quarter, and Missouri farm ground went for 5% more, according to a survey of banks by the Federal Reserve Bank of Kansas City.

Some investors who profited on the run-up in real-estate prices on the coasts in the last decade have been looking to diversify their portfolios by buying Midwest farmland, says Lee Vermeer, vice president for real-estate operations of Farmers National Co., Omaha, Neb. Fred Hepler, executive vice president and Midwestern real-estate broker with the Westchester Group, says in recent months that he's been getting more calls from deep-pocketed investors with $5 million to $10 million to spend, many from the coasts. Six to nine months ago, $1 million or $2 million investors were showing interest.

Kip Tom, president and chief executive of Tom Farms LLC in Leesburg, Ind., owns, rents and operates 12,000 acres of corn, soybean and tomato acres in northern Indiana and 4,000 acres in northern Argentina. He wants to expand his Indiana farmland, but has had trouble because little land is available nearby. He got lucky in January when one of his neighbors called to say he was retiring and wanted to sell the 85 acres Mr. Tom had been renting from him. Mr. Tom paid $4,100 an acre, about $750 more than he would've paid for the same land a year ago, he estimates.

The spike in land costs could pose problems for farmers renting their land, especially if they have a poor crop. But farmer Chris Gould, 38, who rents 750 acres of corn, soybeans and wheat while managing his father's hog-breeding operation in Maple Park, Ill., thinks higher crop prices will offset rent increases. In January, he went to most of his landlords and offered to raise his own rents 5% to 10%, pegged to the productivity of the land. With crop prices soaring, he says he's afraid neighbors may try to grab his land by offering higher rent payments.

Email your comments to rjeditor@dowjones.com.