Farmland Reaps Bonanza for TIAA
as Commodities Rise (Update 1)

By Brian Louis
Bloomberg - USA

Fields of corn grow near the cattle farm of Tanner Rowe outside of Dallas Center, Iowa, June 11, 2008. Photographer: Gary Fandel/Bloomberg News

Reprinted here in its entirety.

June 13 (Bloomberg) -- TIAA-CREF, the largest U.S. manager of retirement funds, bought $340 million of farmland in seven states in December. George Washington University plans to earmark $100 million for agricultural investments during the next year.

Farmland is having its biggest revival in almost 30 years as demand for corn and soybeans from Asia and the ethanol industry drive commodity prices to record highs. From Iowa to South Dakota to Wyoming, gains in rural land prices have ranged from 78 percent to more than 200 percent, according to farmers and data from Farm Credit Services of America in Omaha, Nebraska.

Farm values probably will rise at an annual rate of 6 percent to 10 percent in the next five years, said Murray Wise, the chief executive officer of Westchester Group Inc., a Champaign, Illinois-based manager of $550 million of global farm tracts. The median U.S. home is forecast to gain 1.2 percent through 2010 and stay below the 2006 peak of $221,900, the Mortgage Bankers Association in Washington said.

``It's just crazy out there right now,'' said Mac Boyd, 65, a real estate broker at Farmers National Co. in Arcola, Illinois, who has sold farms for more than three decades. ``The land market has never been stronger. Never been stronger.''

College endowments, pension funds and real estate fund managers are buying land even as U.S. homebuilders dump thousands of undeveloped parcels. The five largest home construction companies reported $2.6 billion of land-related writedowns in their most recent quarter.

Corn Prices

``There is a real transition from financial assets to real assets,'' said Don Lindsey, the chief investment officer of George Washington University's $1.1 billion endowment, in an interview earlier this week. ``Farmland is certainly one of them.''

Corn prices climbed 80 percent in the past year and soybeans advanced 86 percent. Corn will average $7 a bushel in the year ending Aug. 31, 2009, and rise to an average of $8 a bushel in 2010, Morgan Stanley said in a report published last month. Corn futures for July delivery rose 5.75 cents to $7.09 a bushel yesterday on the Chicago Board of Trade.

Westchester Group bought a 2,150-acre farm in December southwest of Springfield, Illinois, when farmland went for $5,000 to $6,000 an acre, said Randall Pope, the company's president. Now the market is at $6,500 to $7,000 an acre, he said.

``There's no shortage of potential buyers,'' Pope said. ``That causes pretty intense competition when something comes on the market.''

UBS's Farmland

Hancock Agricultural Investment Group, a unit of Toronto- based Manulife Financial Corp., has $940 million of farmland holdings and commitments from pension funds and other institutional investors. Hancock posted an annualized total return of 12.3 percent over 10 years, according to the company's Web site.

The farmland holdings of UBS AgriVest LLC have had annualized gains of 11 percent since 1991, according to the company's Web site. It has $172 million of assets with 66,514 acres of land under management. UBS AgriVest is part of Zurich- based UBS AG, the European bank hardest hit by the collapse of the subprime mortgage market in the U.S.

``We get calls on a pretty regular basis from people looking for land,'' said Allan Worrell, an owner of Worrell-Leka & Associates Land Services LLC in Jacksonville, Illinois. ``While there are no guarantees of future appreciation, historically it has had appreciation.''

Iowa Prices

Teachers Retirement System of Illinois sold its agricultural land to TIAA-CREF in December for about $340 million, said Eva Goltermann, a spokeswoman for the Illinois teachers retirement system. The portfolio included land for growing oranges, almonds, apples and corn, Goltermann said.

``This portfolio was attractive to TIAA-CREF as it adds a high-quality, well-managed and well-diversified agriculture exposure to TIAA-CREF's portfolio,'' Abby Cohen, a TIAA-CREF spokeswoman, said in an e-mail. ``High-quality investments in alternative asset classes are one way TIAA-CREF seeks to deliver consistent long-term growth for our investors.''

The average value of farmland has jumped by 220 percent in South Dakota and by 123 percent in Iowa during the past 10 years, according to a survey of benchmark farms conducted by Farm Credit Services of America. Values rose 78 percent in Nebraska and 118 percent in Wyoming.

`Hungry to Buy'

Prices in Iowa increased 22 percent last year to a record $3,908 an acre, according to data compiled by Iowa State University Extension in Ames.

The surge in prices means the best investments may now be in Latin America, Eastern Europe and Australia, said Lindsey of George Washington University in Washington.

``There's a strong likelihood that institutional investors will end up bidding up the price of farmland in the U.S.,'' he said.

Wiltsie Cretsinger, 49, of Coon Rapids, Iowa, has seen the value of his 633 acres rise 200 percent in the past 10 years, outstripping the 22 percent return of the Standard & Poor's 500 Index.

His land is now worth about $1.8 million and he's not looking to sell. If prices fall, then ``I'm going to be hungry to buy'' more land, he said.

The last time farmland generated these kinds of returns was in the 1970s and early 1980s when grain exports surged to countries such as the former Soviet Union. Rising grain prices prompted farmers to take on debt to buy more farmland.

Ethanol Boom

Then, lending rates climbed and farmers couldn't cover their ``high debt levels,'' said Darrel Good, a professor of agricultural economics at the University of Illinois at Urbana- Champaign. Farms went into foreclosure and the crisis in rural areas led to the first Farm Aid concert in 1985, organized by musicians Willie Nelson, Neil Young and John Mellencamp.

Farmland prices plunged as much as 75 percent in the mid- 1980s, said Randy Hertz of Hertz Farm Management Inc. and Hertz Real Estate Services in Nevada, Iowa. An index of Indiana farm values compiled by Purdue University fell 56 percent from 1981 through 1987.

It took 15 years for land prices to recover, said Good of the University of Illinois.

Now global economic growth and the booming ethanol market are driving the gains. Demand for corn to feed livestock jumped 24 percent in the past decade as growth boosted personal incomes and meat consumption in developing countries.

Price Doubled

Ethanol is a component of President George W. Bush's plan to reduce the country's dependence on oil. Corn is the primary feedstock for ethanol production in the U.S., which increased more than 220 percent since March 2003.

Glenn Kreuder, 48, a farmer and investor in Garden Grove, Iowa, sold 70 acres of land in Wayne County, Iowa, for about $4,000 an acre. He held the land for about two years.

``It probably almost doubled in that period of time,'' said Kreuder, who farms about 800 acres of land in Iowa, and has also bought and sold land in Illinois.

George Washington University's endowment has allocated about half of its planned $100 million investment in farmland, Lindsey said. So far, none of the money has been invested in the U.S., though it has committed to a fund run by UBS AgriVest that will buy U.S. real estate, he said.

To contact the reporter on this story: Brian Louis in Chicago at blouis1@bloomberg.net.

See online story at www.bloomberg.com .

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