On June 27, Drew Wrigley, the attorney general for the state of Nebraska, approved the sale of 2,100 acres to the Red River Farms Trust, a business entity controlled by Bill Gates. The Red River trust needed AG approval for the purchase because Nebraska has Depression-era anti-corporation laws on the books to help preserve farm ownership for farmers. According to reports, the purchase was approved because the ground is being leased back to farmers.

A number of states have similar laws, including our neighbors Iowa and Missouri. What about Illinois? Corporations can purchase ground in Illinois, but are they required to lease the farm ground they purchase back to family farmers? The answer is no.

Illinois doesn’t have any laws that prevent corporations from purchasing farm ground, and there are no requirements to lease that ground to farmers. Corporate investors could operate farmland in Illinois themselves and are often, in fact, the farmers for investments they have in other states.

Role requirements

A farm manager for a California almond or walnut farm (although they call them ranches) typically has a different but similar role compared to a farm manager in the Midwest. California ranch managers are more often responsible for managing the operations that go into growing the crop on permanent tree crop ranches, as well as harvest, delivery and sale of the nuts. They are the operators, but much of the work is contracted out. It is very similar to what we know as a custom lease or contract in the Midwest. In the Midwest, custom farm leases have historically made up just 5% to 10% of the total number of leases we manage. That number could grow higher, though.

If there are no laws to prevent it, what’s to keep deep-pocket corporations from coming in and squeezing out the last bit of profit farmers manage to keep from their operations?

The answer lies in diversification.

Cash income diversification. One way to reduce risk is to diversify how income is made. Permanent crop investments produce more cash income, but that income is more volatile. Good years can be really good, and bad years can be really bad. Leased cash income usually underperforms directly operated investments, but is steadier and more reliable. The combination of directly operated and leased income provides a healthy and overall safer return for investors.

Asset appreciation diversification. Much of the return for farm ground in the Midwest has been through appreciation. This is also attractive to investors. Directly operated permanent crop properties produce a lot of cash income, but land appreciation is lower. In some respects, land appreciation is viewed as a safer type of return. It’s always there, and as the world’s population continues to grow, the demand for arable land for food production will also grow.

Geographic or crop diversification. A corporation needs a certain number of acres to achieve the critical mass to operate the ground internally. And while it boggles my mind sometimes how much money is out there to be invested, the universe of possible investments is even larger.

Sometimes investors think about investments as buckets. How much money do you put into the ag bucket vs. the commercial real estate bucket? In the ag bucket, how much do you put into the corn bucket vs. the cotton bucket? Sometimes corn does better, sometimes cotton. Geographically, how much do you put in a region that is prone to drought vs. a region that can be affected by hurricanes? Do you have enough money to achieve critical mass in all regions and crops, or are you going to put it all into one? And if you do have enough money, do you really want to do that? Is the additional income to be gained worth losing the benefits from leasing?

I don’t think it is. And so far, I don’t think other investors do either.

Lauher owns Rolling Acres Ag Solutions and is a member of the Illinois Society of Professional Farm Managers and Rural Appraisers. Email questions to [email protected]. The opinions of this writer are not necessarily those of Farm Progress/Informa.