This is getting crazy!!!!! Private-equity firms' interest in farmland grows Demand for ethanol, steady rate of return bodes well for investors By JILIAN MINCER, Dow Jones Newswires First published: Monday, May 14, 2007 NEW YORK -- Private-equity firms are starting to look for profits on the farm. In the last year, the soaring price of farmland, fueled by demand for corn and ethanol -- which is created from corn -- and increased popularity of ranch land has attracted a small but budding group of private-equity investors. A number of deals for private-equity firms to buy farm and ranch land have closed or are in negotiations in states like Illinois, which has some of the nation's best farmland. Obstacles remain. Quality farmland is difficult to find, the investment isn't liquid, and not everyone is convinced that the ethanol craze won't burn out, despite massive investments by some agricultural giants. Despite potential hurdles, a lot of people are betting that farmland thrives for at least the next several seasons. The returns on both farmland and crops have been good, and producers are able to lock in high corn prices. "Farmland has very little volatility, and it has very consistent earnings," said Joel R. Hertz, chairman of the board of Hertz Farm Management in Monticello, Ill. The annual return from crops has been 3 percent to 5 percent a year, not counting land appreciation. While private equity "can't trade in farmland like they do in stocks and bonds," he said, "they're now getting into it because of ethanol and (land) prices going up." In some parts of Iowa, land values have increased 20 percent to 30 percent in the last 16 months, Hertz said. "It's a sellers' market. There's very little land, and a lot of people looking to buy." Said Steve Wright, vice president of the Midwest region for JPMorgan and a senior farm manager in Lafayette, Ind., "I think the American farmer is going to make more money in 2007 than ever." Wright, who is giving a private equity firm advice about farmland, said the numbers speak for themselves. The demand for ethanol pushed the price of a bushel of corn from $2.20 in early harvest last fall to $4 by the end of harvest. It's currently about $3.25 to $3.50. At the same time, land prices have soared. High-quality farmland in places like Indiana, Illinois and Iowa climbed from about $4,200 or $4,400 an acre to $5,200 an acre. "The last six months I've definitely gotten a lot more calls from private-equity managers and hedge funds," said Jeffrey Conrad, president of the Hancock Agricultural Investment Group, a farmland investment advisory firm in Boston. Its clients are all institutional and often pension funds. Don McCabe, president of Soy Capital Ag Services, is working with an East Coast brokerage firm to establish a private equity fund before the next buying season, which typically runs after harvest. He anticipates an 8 percent to 10 percent annual return, which while lower than many private-equity investments, is very stable. "It's a consistent, steady type of return," McCabe said. And that makes it a good match for pension funds, which want predictability and don't mind investing for long-term returns. "One of the dilemmas is whether the farmland will have the capacity to support the extra dollars," McCabe said. That's because farmers aren't selling and, in several states, "anti-corporate farming" laws prohibit corporations or non-U.S. citizens from buying the land. However, in recent years the courts have thrown out several of the laws, and more are expected to go. Carl Palmer, co-founder of Beartooth Capital Partners, in Bozeman, Mont., has raised more than $16 million for the one-year-old private-equity firm. The company invests in "ecologically important" ranch land. Beartooth makes improvements in the ranch land it buys. It then sells the conservation rights to environmental groups and the actual land to individuals, who want a ranch for hunting, fishing and horseback riding. The fund requires a $500,000 minimum investment and expects a return of more than 15 percent. Investors "love the fact that it's a diversification opportunity," said Palmer, an environmentalist who worked on the investment model for the company while receiving his MBA at Stanford University. "This is a great real estate investment." The price of farmland had been increasing steadily in recent years, often because it gets snapped up to feed urban sprawl. But the value has continued to climb even as the residential market has cooled, said Mike Duffy, an economics professor at Iowa State University in Ames, Iowa. In 2006, the average value of an acre of Iowa farmland climbed 10 percent to an all-time high of $3,204. In some counties, the price jumped to more than $4,000 an acre, and in eastern Iowa it was more than $5,000, the highest ever recorded.