Iowa farmland laws ‘hinder price discovery,’ says Mr Wonderful

Iowa’s anti-corporate farming laws hinder price discovery and harm the interests of local farmers, Shark Tank’s Kevin O’Leary told the audience at Peoples Company’s Land Investment Expo in Des Moines, Iowa, last month.

“Everybody knows, when it comes to producing, in the world, its right here [In Iowa],”  said O’Leary, a Canadian investor famed for his role on NBC’s startup competition show. “If you are building a portfolio of real estate, just like building a wine cellar, you want a few bottles of the very best in the world, that’s how you get diversification. Yet, I can’t buy any land here on a liquid basis.”

O’Leary, who refers to himself as “Mr Wonderful”, said although it made sense that existing land owners would be interested in limiting competition for prized assets, “the government” should not play a role in limiting private citizens business decisions. In addition, excluding buyers from other markets keeps Iowa farmland owners from benefiting from outside capital potentially willing to pay above local market rates, O’Leary added.

“You have the negative aspect of that law, but not the positive,” he said. “The only people who should get to decide who gets to buy the land, if you own it, is you. That is the essence of what made America great in the first place; ownership, capitalism: that’s what works!”

The local, long-view

Peoples Company president Steve Bruere told Agri Investor that O’Leary’s remarks were unlikely to bring about any increased pressure to augment the state’s farmland purchase restrictions, but they sparked conversation among the conference’s 600 attendees.

“If you’re an institutional investor, do you want to go sue the Iowa government to get access to smaller deals that have low returns?” Steve Bruere

“You have all the institutional investors there who are like, ‘Yeah, finally someone is finally dropping the bomb on this topic and making these comments publicly,’ since everybody has kind of tip-toed around the issue,” said Bruere. “The other half of the room is local farmers and organizations representing agriculture in the Midwest, and they were not as excited about it as the institutional investors.”

Bruere said most institutional farmland investors were confident that if challenged in court, the state’s regulations on farmland purchases by corporate entities would be overturned, as they were in Nebraska in 2005. But because most Iowa farmland does not fit well with institutional investors’ preference for large contiguous plots offering high returns, those investors have not yet been motivated to launch such a challenge, according to Bruere.

“If you’re an institutional investor, do you want to go sue the Iowa government to get access to smaller deals that have low returns? Somebody, eventually, will have the courage and desire to do it, maybe if a large deal comes to the table that’s worth having the fight over.”

Increasing pressure

Some land funds are already active in Iowa using an limited liability partnership structure that did not exist when the anti-corporate farming laws went into effect in 1978, Bruere said. Those structures, according to him, are largely used to facilitate investments by high-net-worth individuals and keep insurance companies, for example, from investing directly in Iowa farmland.

Bruere said demographics alone dictate that those laws are likely come under increasing pressure in Iowa. According to Bruere, Peoples Company has calculated that about half of the 30 million crop acres in Iowa, valued at about $224 billion, is likely to change hands during the next 20 years. While farmers are currently the buyer in about 80 percent of Iowa transactions, Bruere expected that percentage to fall in the future.

“When you think about guys like my brother, who are farming several thousand acres, they are not going to be able to keep pace with the number of farms that transact. As this demographic shift happens, my view is that it’s just going to get tougher and tougher and tougher for farmers to keep pace at that level.”

Another important factor, said Bruere, is the health of the overall ag economy and increasing capital intensity of farming operations. While most farmers would prefer to always own the land they farm, they can make themselves comfortable with working with an investor as they see opportunity – for example, to purchase a neighboring property that comes on to the market unexpectedly.

“Nobody likes an investor, unless it’s their own,” said Bruere.