Attending a farm real estate auction these days is not for the faint of heart, nor those with a “lean” checkbook. Even opening bids would shock those who have not stayed tuned to the wild chase that now seems to be part of the Minnesota land grab.

As an example, at an early March public auction of 151.11 acres more or less (of which 147.44 acres were tillable land) in Renville County, the opening bid was $3,500 per acre.

That was $500 per acre more than the auctioneer, Gary Hotovec, had anticipated.

Even location of auctions can be an additional enticement. Seldom are land auctions held on the farm being sold. This particular sale was held in the spacious dining room of a new restaurant where the 36 attendees could enjoy coffee, soft drinks and delicious cookies while seated in comfortable chairs around the several tables.

By the 10:30 a.m. start time 12 people had requested bidding numbers.

Roger Heller, 44-years in the land appraisal and farm management business and founder of North Central Realty, which handled this particular sale, briefly discussed various disclosure issues that are routine procedures at public auctions.

These include Natural Resources Conservation Service and Farm Service Agency records on wetlands and/or highly erodible land, meth and well disclosure information if pertinent, the status of real estate taxes, and of course auction terms and conditions, which often now include a buyer’s premium (2.5 percent on this particular auction).

Everyone received a hand-out which included general information on the farm, legal description, FSA crop base acreage, FSA yield data, plus a description of soil types, topography and drainage. Also included were aerial photos and a tile map outlining known tile lines on the property.

At 10:33, auctioneer Hotovec thumped the podium with his wooden gavel calling for the opening bid. Almost instantly a $3,500 bid came from two younger farmers, both with off-farm businesses. Subsequent bids were in $50 and $100 increments. At 10:40 with the bid at $4,250, Hotovec announced a five-minute break “to refill your coffee, call your banker, or do some fine-tuning with your calculator.”

At 10:47 he resumed the bidding chanting “we’re at $4,250, do I hear $4,300? Do I hear $4,300?” Then a lengthy pause before his last chant “do I hear $4,300?”

He didn’t, his gavel thumped the podium, he announced, “sold to No. 5” and the auction was done.

Sellers were the Kopacek family, brothers Ron and Thomas and sister Nancy. “We were very pleased with the auction. It probably exceeded our expectations,” said Ron, who has been farming the land. The first abstract of the property dates back to May 1869 from the United States to the state of Minnesota. The first private ownership was titled in December 1887 with the abstract history showing a consideration (price) of $240 for a 40-acre parcel that eventually grew into the quarter section purchased by the Kopacek family in 1914.

What’s the accelerator?

Mike Swanson, economist with Wells Fargo Banks of Minneapolis, shares some recent history to describe what’s driving this crazy land market.

“Back in 2003 we saw very low interest rates. That is what really kick started the current land market boom. You could finance ground cheaper than in the past 20 years, plus CDs were paying paltry rates, the stock market was in the dumps, and there were a lot of people outside of agriculture looking for a home for their unused money. They looked at land values, saw it could cash flow, so they bought land and that started setting the new standard.

Swanson said that thanks to the renewable energy expolosion, the appetite for land purchases is fed by $4 corn and $8 sybeans. With interest rates still attractive and the short-term look on commodities looking good, he said there’s lots of new money out there — mostly in the hands of farmers.

“Ethanol has definitely changed the game,” said Swanson. “And it’s not because ethanol is necessarily guaranteeing high prices, but rather ethanol is eliminating low prices. ... I think the combination of higher crude oil prices and a growing ethanol market is going to keep the corn market stronger than it has in the past.”

Swanson isn’t implying that this new generation of energy demand guarantees a $4 corn market. “If that market dips to $3 to $3.25, that price might be financially as difficult to endure as was $2 corn when your input costs were only half what they are today,” he said.

Don’t buy just to buy

So what’s the trigger when you’re at a farm auction with 20 other bidders for the same quarter section?

“You have to be very aware of where you are in your current farming operation,” said Swanson. “If you’re already farming 1,600 acres as an example, you’re already busy, you might be too busy. So why buy another 200 acres of ground that’s not priced to make money immediately?”

He offered a caveat, however.

“Yes, if it’s good land, buy that 200 acres but also sell 200 acres of your poorest producing land. Just getting bigger to get bigger is a bad recipe unless you have access time, and you have the equipment to handle another 200 acres. ... Recognize that it takes discipline to be a smart land buyer.”

So if local land is overpriced, should you buy elsewhere, like Brazil?

“No way,” was Swanson’s answer. He said even Dakota farmland today is way overpriced based on long-term return on investment standards. His point is that you make the most when you bring your own skills into the ballgame — Don’t buy ground just to own ground, buy ground to further test your own management skills.

He indicated that from 2003 to 2007, the financial assets of U.S. farmers and ranchers increased by $10 billion due to land inflation. But in that same timeframe, their overall net asset value increased $60 billion, and Swanson said that was due to management.

“It’s hard to believe the prices we’re seeing today,” said Don Kvasnicka of North Central Realty. He recalled the ag crisis of the early 1980s with interest rates crowding 20 percent, and then came the dramatic drop in land values and resulting bankruptcies for many land buyers.

“I’m very pleased to see the new confidence in the agricultural world,” Kvasnicka said. “It’s evident because most of the buyers today are farmers, not outside investors. Ethanol is the big factor today. Non-ag investors aren’t yet nearly as visible, partly perhaps because of the whipping they took four to five years ago when the stock market collapsed.”

Major player

Hotovec credits today’s commodity prices as being the major player in land auctions and sees that factor being a strong hand at least for the immediate future.

“That opening $3,500 bid might have set the tone a little bit,” he said, “but in most chanted auctions, it really doesn’t matter where you start because if you have active bidding like we did today it doesn’t take long to get up to the selling price. In a ‘real auction’ package where we accept written bids on various parcels making up the total auction, the process moves along a little slower.”

Hotovec notes that 1031-money is not the big influence today that it was two to four years ago. “Farmland auctions now are mostly farmers bidding against other farmers.”

Roger Heller added, “obviously the influence of the energy issue is very real. Our country has decided that grains will be used not only for livestock feeds, and for foreign export, but also to supply some of our energy needs.” He said high oil prices a year ago brought those needs much more quickly than anticipated.

“Commodity prices started rising last October right in the midst of harvest,” said Heller. “And when that bullish attitude continued to prevail, then the enthusiasm of farmer buyers to add to their land base set in. Add to that the fact that farmers have enjoyed two successive years of good crops, many would even say exceptional crops in view of weather, and thus those farmers who are both good marketers and good producers are feeling comfortable about adding to their existing base.”

He said farmers are feeling confident that a new farm bill will continue to provide certain provisions to sustain agriculture and even increase production to help meet this unquenchable thirst for more renewable energy resources.

Though Heller described this early-March auction as primarily a local auction with local bidders, often these days a local person is authorized to bid on behalf of an absent party, thus cell phone conversations were prevalent as the bidding proceeded.

He noted that the quest for land purchases is not just a phenomenon of the Upper Midwest where most of the ethanol refineries are located. “It seems that since 9/11, plus debacles in the corporate world exposing the greed and fraud that sometimes exists in big business, some investors are now wanting part of their investment capital in the hard assets of real estate.”

Recognizing that escalating land prices make it harder for younger people to get into farming, Heller suggested entry-level partnerships, with the younger person providing labor equity in exchange for the landowner providing the land resource. Like most veteran farm appraisers, Heller hesitates to speculate on the future of land prices.

“Seems the last three to four years I’ve been wrong more than I’ve been right so no comment is perhaps a better answer. The horizon has both bullish and bearish factors.”