Who really owns American farmland?

Think of it this way: If you wanted to buy Iowa farmland in 1970, the average going price was $419 per acre, according to the Iowa State University Farmland Value Survey. By 2016, the price per acre was $7,183—a drop from the 2013 peak of $8,716, but still a colossal increase of 1,600 percent. For comparison, in the same period, the Dow Jones Industrial Average rose less than half as fast, from $2,633 to $21,476. Farmland, the Economist announced in 2014, had outperformed most asset classes for the previous 20 years, delivering average U.S. returns of 12 percent a year with low volatility.

That boom has resulted in more people and companies bidding on American farmland. And not just farmers. Financial investors, too. Institutional investors have long balanced their portfolios by putting part of their money in natural resources—goldmines and coal fields and forests. But farmland, which was largely held by small property owners and difficult for the financial industry to access, was largely off the table. That changed around 2007. In the wake of the stock market collapse, institutional investors were eager to find new places to park money that might prove more robust than the complex financial instruments that collapsed when the housing bubble burst. What they found was a market ready for change. The owners of farms were aging, and many were looking for a way to get cash out of the enterprises they’d built.

And so the real estate investment trusts, pension funds, and investment banks made their move. Today, the United States Department of Agriculture (USDA) estimates that at least 30 percent of American farmland is owned by non-operators who lease it out to farmers. And with a median age for the American farmer of about 55, it is anticipated that in the next five years, some 92,000,000 acres will change hands, with much of it passing to investors rather than traditional farmers.

But what about the people—often tenant farmers—who actually work the land being acquired? During the same period that farmland prices started gaining steam, many crop prices have stagnated or fallen. After hitting highs above $8 a bushel in 2012, corn prices today have fallen back to less than $4 a bushel—about what they were ten years ago, in 2007, when farmland prices first started to soar.

It’s a tenuous predicament, growing low-cost food, feed, and fuel (corn-based ethanol) on ever-more-expensive land, and it raises a host of questions. Is this a sustainable situation? What happens to small farmers? And are we looking at a bubble that will burst?

Three big factors have contributed to the rapid increase in the prices paid for farmland—which is usually defined to include grazing land and forests—according to Wendong Zhang, an assistant professor of economics at Iowa State University. (Zhang tracks farmland prices, especially Iowa farmland prices, which are among the best documented in the country.)

First, interest rates, since the financial crash of 2007–2008, have been at historic lows, which tends to drive asset prices up. There has been “phenomenal growth” in the ethanol market, Zhang says, linked to increasing interest in sustainable fuels. Indeed, if you graph ethanol production over the past 20 years, it shows exactly the same explosive growth as land prices. And as exports to China and elsewhere have increased, farm income has risen. “Farm income is the variable to track” in analyzing land prices, Zhang explains.

But there’s an additional factor: well-heeled investors are snapping up farmland, driving prices up. Here’s how the Economist explained it:  “Institutional investors such as pension funds see farmland as fertile ground to plough, either doing their own deals or farming them out to specialist funds. Some act as landlords by buying land and leasing it out. Others buy plots of low-value land, such as pastures, and upgrade them to higher-yielding orchards.”

And, says Craig Dobbins, a professor of agricultural economics at Purdue University, “Farmland and other real estate investments are good investments to balance the risk of investments in stocks and bonds. These buyers are sensitive to the expected rate of return that will be received from the purchase of such an investment. If farmland values rise to levels that it does not appear the investment will provide the threshold rate of return, they will not purchase. The location preferences of these buyers are much more flexible than an individual farmer.”

Institutional investors can and do buy land in every region and of every type: cropland in the Corn Belt, rangeland in cattle country, or fruits and nuts in California. Among the big players are TIAA-Cref, BlackDirt, Hancock Agricultural Investment Group, American Farmland Company, AgIS Capital, and Gladstone Land Corporation. There are other institutional investors as well, showing a cross section of financial interests in the relatively stable investment that land represents over time. According to RD Schrader, a real estate broker of farmland based in Colorado, “The number of investors is growing, and because of that, it occurs more often and makes the marketplace more fluid. With the downturn in values now, the institutional investors help keep the land values more stable.”

That sounds great if you want to sell land, as many American farmers, approaching retirement age do. But from the viewpoint of sustainability, there are many disadvantages to consolidating farmland in the hands of financially oriented landlords.

Chief among them: The investment entities that own the land can control what’s grown on it and how. A quick look at farmland investment company websites makes it clear that they are very particular about assessing the fertility, the access to water and distribution, and other criteria of the land they are buying. And they favor conventional agriculture—the kind that uses the agro-chemicals, mono-cropping, and extensive tilling that continue to degrade American farmland. For financial investors, commodity crops are king, and it’s hard to imagine that they will change their minds anytime soon. As Don Buckloh of the American Farmland Trust put it, “When it comes to crop diversification it is nearly impossible to shift a commodity operation to something less monolithic. For example, the infrastructure for dealing with products other than corn or soy in Iowa, simply doesn’t exist. So farmers are stuck with having to grow the same crops ad infinitum. It’s a scary proposition because should the ethanol program be dissolved, what will corn farmers do with all that extra corn? Already the prices are so low that farm incomes are projected to be half what they were six or seven years ago.  We have no plan B for this type of eventuality.”

Could investment companies become a force for a more ecological approach to agriculture? In theory, yes. BlackDirt Capital, a Connecticut-based firm that specializes in property in the northeastern part of the country, claims to be wholly based on agroecological principles. But that approach is rare and likely to remain so.

In practice, our best hope of true stewardship of the land will come from enlightened, committed owner-farmers. But the trend toward treating farmland as a financial investment, and the high prices that have come with it, make it harder and harder for new young farmers to enter the field. Lindsey Schute, Director of the National Young Farmers Coalition points out, “Access to secure, affordable land is the biggest challenge young farmers and ranchers face in this country. With two-thirds of our nation’s farmland set to change hands in the next few decades, we cannot afford to see the price of farmland driven up beyond what a working farmer can compete with.”

In these examples, ownership of the land becomes corporate, but it remains in U.S. hands. In another variant of land investing that’s become increasingly significant over the past few years, ownership—and control over the land and the food it produces—goes overseas.

We’re all familiar with the concept—though going the other way, with multinational corporations from the United States, United Arab Emirates, United Kingdom, Egypt, China, or some other developed nation buying from sellers in developing nations. Investment in farmland is a key strategy for governments anxious to stabilize their food supply and their food prices. By buying land in other countries and farming it, foreign buyers are able to support their domestic food supply and other markets that depend on agriculture without having to compete for essential products on the global market. Foreign investors will buy several hundred thousand acres, say in Africa, to produce palm oil, rubber, or a biofuel. The deals are typically accompanied by promises of jobs, infrastructure, resource development, or just a jolt for the national economy, but all too often, those promises come to nothing. The local population reaps no benefit, they lose their farming rights, access to water, even their homes. Quite often, civil unrest will ensue. Ethiopia at this very moment provides a prime example of this phenomenon.

The new target for farmland investment: The United States. The most recent figures from USDA, dating from 2011, show that roughly 25 million acres, about 2 percent of our national total of 930,000,000 acres, are in foreign hands. And the pace of investment seems to be picking up. In the period since USDA’s 2011 report, foreign investors have gone on shopping sprees in the heartland and beyond. Saudi Arabia and the UAE alone have acquired more than 15,000 acres in Arizona and Southern California to grow fodder for dairy cattle. Italian buyers are reported to have purchased 102,000 acres in Missouri, and New Zealand some 18,000.

The most memorable deal—though most coverage treated it as a corporate acquisition rather than a resource grab—was the 2013 acquisition of America’s largest producer of pork, the Smithfield Company, by a Chinese company called Shuanghui—which subsequently changed its name to the WH Group. The company is an independent entity, but it has received substantial funding from the Chinese government. It’s probably not overstating much to say that the government of China now controls more than 400 American farms consisting of a hundred thousand acres of farmland, with at least 50,000 in Missouri alone, plus CAFOs (concentrated animal feeding operations), 33 processing plants, the distribution system—and one out of every four American hogs.

Smithfield is a “vertically integrated” company, meaning that it owns everything right down to the feed supply and all the way up the food chain to the many brands of processed and packaged foods distributed throughout the United States and the world.  However, one could make the argument that the most important assets within this $4.72 billion sale are the farmland and the water.

One thing that is clear is the lack of a universal national policy governing water rights and water use. In states that are water insecure in the Southwest, there is a dizzying and arcane array of regulations that are barely equal now to the challenges of current domestic use, much less answering the needs of foreign agriculture. It seems the barest common sense that there should be some federal entity protecting citizens’ rights to water against anonymous industrial agribusiness. As yet that has not happened. And while California and the Southwest would seem the most obvious areas that will face serious water challenges in the future, we have already seen similar drought conditions playing out in other states, such as Nebraska, Kansas, and Oklahoma. Eventually we may find that dry states must be supplied in some measure by wet states. Logic would dictate that laws regarding water use and access should be firmly in place before selling off resources to another nation.

States like Iowa have banned the sale of farmland to foreign buyers and others have laws that limit the number of acres that can legally be sold, but it can be quite tricky to tell who is doing the buying. Foreign buyers can hide their identity by creating an American corporation, or buying through a U.S. majority-owned subsidiary.

So just how much of our farmland are we willing to sell? And who decides? Most proposed deals must go through the Committee on Foreign Investment in the United States (CFIUS). Established under the Ford Administration in 1975, it has broad powers to accept or deny requests for foreign acquisitions of American companies and land. After September 11, additional criteria were included under the jurisdiction of the CFIUS, including food, water, and agriculture. The committee is made up of representatives from 16 government agencies, and chaired by the Secretary of the Treasury. It includes members from the Department of Defense, Homeland Security, the State Department, and the Departments of Commerce, Energy, and Justice, as well as the offices of the U.S. Trade Representative and Science and Technology Policy. Its reviews and deliberations are closed to the public, and decisions are handed down with virtually no transparency.

The dangers of high land prices are obvious—especially for younger farmers who are trying to get established and farmers who want to steer away from Big Ag approaches. The dangers of ownership by large corporations and foreign buyers are equally clear. But there is another danger to high, rapidly rising land prices—one that brings to mind the great real estate bust of 2007: a bubble. Bubbles can be devastating, leaving small land owners underwater on their mortgages and depriving them of the crucial collateral they need to get loans on operating expenses.

Could the current rise in farm prices be a bubble? Certainly if you read some headlines in Midwestern newspapers, you might get the impression not only that there’s a bubble but that it is in the process of bursting. Though farmland prices are still high, they peaked somewhere around 2013 and have fallen for three years in a row—the first time that’s happened.

“I don’t think it’s a bubble,” says Zhang. “In a bubble, you’ll see dissociation between prices and the value of the underlying assets. This time, when crop prices went down—with corn dropping from six or seven dollars a bushel in 2013 to about half that price today—the land prices dropped with them. And farmers still have some money.”

Don’t get too optimistic—or too pessimistic—just yet, though. Interest rates are creeping up. Farm income, the key factor in determining land prices, has been falling for the past three years from record highs, and USDA is predicting a fourth year of decline. On the other hand, operating costs seem to be going down. And prices in Iowa seem to have ticked up slightly, though that may be just because farmers are holding on to their property, waiting for better prices to return; farmland for sale is in short supply in Iowa. (These insights come courtesy of Professor Zhang. For much, much more, visit the invaluable Iowa Land Portal.)

Zhang himself takes a temperate view: “Despite the deteriorating agricultural financial conditions and continued decline in farm income, the current farm downturn is more likely a liquidity and working capital problem, as opposed to a solvency and balance sheet problem for the entire agricultural sector,” he writes .”Rather than an abrupt farm crisis, we are likely to [see] a gradual, drawn-out downward adjustment to the historical normal return levels for the agricultural economy. The U.S. farmland market [is] likely headed towards stabilization and potentially slightly more modest downward adjustments before bouncing back in the near future.”

If it pans out that way, Zhang’s prediction is probably good news for the economy. Is it good news for a sustainable approach to agriculture rooted in small, independent farms, enlightened farming practices, and short supply chains? That’s less obvious. At the very least, it’s going to require the progressive wing of farming to rethink its economics and its go-to-market strategies and possibly make big changes.

But that is a story for another day.