FARMERS ARE SUPPOSED TO hate urban sprawl. Encroaching subdivisions and Wal-Mart superstores take prime farmland out of production. The land, lifestyle and culture of an area are forever changed. But could it allow growers to trade in their farmland for several times as many acres somewhere else? If so, where? And what then?

As urban development encroaches, farmers are selling their prime farmland to developers at multiples of 6 to 15 times the value of agricultural land values. But most are not retiring as idle millionaires. Nor are most being pushed onto marginal acres. Rather, they are “trading out” their land for more acres of prime farmland further from the city. The growing phenomenon has been a major contributor to skyrocketing prices of prime farmland that can exceed $4,000/acre even for land far from any urban growth path.

Tax-free exchange

According to Dale Aupperle, president of Heartland Ag Group, Decatur, IL, more than 60% of farm real estate transactions in Macon County, IL, have been associated with a 1031 tax-free exchange of land acquired by residential and commercial developments. “Farming families understand agriculture and want to keep their money in agriculture,” Aupperle says. “And they don't want to pay the tax, so the IRS 1031 exchange allows them to avoid the tax, or at least delay it.”

For farmers in the path of progress, a tax-free exchange means delaying the capital gains tax, in effect, getting interest-free money from the government to expand their business and multiply production. Taxes can be paid later, allowing the farmer to use that money to buy more property.

Sometimes a farmer who sells at a development premium can multiply acreage by up to 10 times. “Best of all,” Aupperle says, “multiplying acres can also increase earnings 10-fold or more, depending on the area you are coming from.”

Right now, Aupperle is noticing an increased volume of land for sale at the higher prices being bid by these exchange prices. “There is a 10% premium being paid by the exchange land buyer for prime farmland with significant size tracts. Farmers want prime tracts, they want large tracts, and they will pay a premium. It's shown in the marketplace,” he says.

Are those values likely to hold? “Land prices are in an up trend, and I think we are very solid for the market we are trading in now, except for that premium being paid by exchange buyers who are the majority of the market,” Aupperle says. “If the residential housing market slows, or the commercial boom slows, and the need for replacement property slows, that part of the demand could slow down and that 10% premium could disappear.”

Bargains in farmland

An old saying goes that cheap land is usually cheap for a reason. But as the price of prime farmland races ahead, is it still possible to find values and hidden gems? Aupperle thinks so. “Prime farmland is like a growth stock because it has two balanced components: annual earnings and appreciation in value,” he explains. “It looks just like a growth stock of any major corporation on the stock exchange. Farmland is what it earns.”

Following the land-as-stock analogy, a contrarian play could be to buy land that has been traditionally viewed as marginal in production. These are low-priced acres that, while perhaps not appreciating quickly or earning much income now, have the potential to do so in the future. What creates that potential? New technology.

“I believe there are excellent opportunities in the less productive areas because of better hybrids and varieties,” Aupperle says. “In my market, that includes the southern third of Illinois and marginal areas of central and northern Illinois. Better hybrids and varieties with tolerance to stresses such as drought, insects, heat, and low-nutrient soils are going to allow the more marginal soils to produce with higher yields in good years. More importantly, they'll preserve yield in stressful years and minimize income fluctuations.”

Better crop genetics are just part of the technology equation. Seed treatments or coatings allow planting in cooler soils. Variable-rate seed and fertilizer could make marginal soils more consistently productive. Soil moisture can be managed through tile drainage or irrigation. Improvements in these technologies, or new technologies still being developed, have the potential to turn marginal land into profitably productive land.

Thinking of moving your farm?

If you want to move but continue farming, you might choose to stay in the same county, but to do so, you might pay substantially higher prices for land. On the other hand, you might get a chance to trade out or sell at the next development wave.

Dale Aupperle, appraisal specialist with the Heartland Ag Group, gives the following advice for choosing a new and distant farm location:

  • Choose a community that your family will enjoy and where you will like your neighbors.

  • Choose a place where there is a chance for expansion through ownership or rental. Don't get fenced in.

  • Maximize markets. A local river terminal, railroad or ethanol plant can be an excellent silent partner.

  • Be specific about the type of farmland you want. Are you interested in livestock land, prime farmland only, or a recreational area?

For more information about land values, tax-free land exchange and trends in land value, visit www.hagltd.com. To reach Heartland Ag Group, call 217/876-7700.

Location, location, location

Five snapshots of where farmers work and live

Farmland is a business and an investment, but it is also a place to live, raise a family and grow old. A decision to sell, move or stay can involve just as much emotion and personal philosophy as shrewd business planning. We called around the Midwest in marginal and prime farming areas to learn what farmers like, and sometimes don't like, about where they farm.

Northern North Dakota

I think we have adequate market facilities, but we are at the mercy of the railroads. We are 60 miles from the Canadian Pacific or Burlington Northern and Santa Fe Railway main lines and our local elevators, which are on only one line. I have two elevators within 25 miles and six more within 75 miles. We have an ADM processing plant for canola nearby also.

Competition has made it difficult to purchase or rent additional land. Most land is cash rented at $25 to $45/acre. Good farmland in the last couple of years has sold for $500 to recently nearly $850/acre. The higher end is not a price that can be paid from production in this area. Some farmers are paying this, but most of it is coming from money made out of state.

We have adequate access to services, but we pay more for our fertilizers because we have no mainline rail access. This probably costs us $20 to $30/ton and makes it more difficult for our co-ops to be profitable also. The best parts of living here are the low crime rates, lack of congestion, no waiting in lines. We can go where we want, when we want, without waiting for public transportation. We have a good standard of living at a reasonable price compared to metropolitan areas.

Central Illinois

Like a lot of farmers, I already believe that I live in the best place to farm in the Midwest. That doesn't mean that I don't like to look at potential opportunities elsewhere. South-central Minnesota and central Illinois score high in market opportunities. I like that Illinois and Minnesota have both domestic markets (soybean crushers, wet and dry corn mills) along with export markets via the Mississippi and Illinois Rivers.

Central Kansas

I could easily farm another 500 acres, but expanding the farm is nearly impossible. There is no land available for rent, and the price of buying land is way above what cash flow it would justify. An irrigated quarter near here just sold for $3,120/acre.

We live in a great place. We are three miles from a town of about 5,000. We have most everything towns of this size have.

I think the quality of life in Clay Center has gotten better over the past 10 years. We do have some crime, but I do not think we are any worse than any other town of our size.

This a great place to raise a family. The biggest challenge is there is not enough economic growth to keep kids in the area.

Southwest Indiana

We are very fortunate in southwest Indiana to have the river markets of ADM, Consolidated Barge and Grain, and two Cargill facilities within 30 minutes driving time. CBG has a large soybean-processing plant at their river terminal. Also, Azteca has a corn-milling plant nearby that processes mostly white and some yellow corn.

Land prices are a challenge. Urban sprawl, highways, factories and displaced farmers all have fueled land prices. Competition for land to rent or buy in our area is high. It would be extremely difficult to expand my operation. I believe relocating would be difficult. But I could foresee getting a family member started in a new location.

Central Indiana

Land prices are high and getting higher. People are paying $10,000/acre or more for building lots. Cash rents have gone bananas. A fair amount of ground is renting for $180 to $200/acre. That's not uncommon around here. We're talking 150-bu. ground in an average year. This pricing is partly due to farmers who have been displaced from other areas by sprawl. So sprawl affects us, even though we are not currently in its path.

For farmers like me, sprawl is a problem because the new residents typically have a pastoral image of agriculture. They get real upset when that combine drives down the fence row making all kinds of noise and dust. They don't know how to drive around large equipment.