He repeated his admonishment in the late 1960s when a 160-acre farm in Central Indiana went unsold at $400 per acre, despite its two barns, grain storage, chicken house and an excellent colonial-style home.

“The only way that place will sell is if some rich, city guy buys it as a place to retire. A farmer can’t afford that kind of price.”

The old farmer would be shocked to learn farmland now exceeds his top dollar value by as much as 500 percent.

With home mortgage foreclosures dominating the headlines - one in every 544 Hoosier households during the month of August alone - the housing market is tanking at the same time land prices are skyrocketing - and while some buyers are outside investors, most are the farmer from next door or just down the road.

Triggering the increase in land prices are biofuels, a term the old farmer never heard, but a term Sen. Richard Lugar (R-Ind.)

describes as offering a dual opportunity for the economic revitalization of rural America and a solution to a serious national security problem.

Indiana has its fair share of biofuels plants. Louis Dreyfus Commodities opened the world’s largest biodiesel plant at Claypool in August, and two ethanol plants, POET of Portland and Central Indiana Ethanol (CIE) in Marion, opened in September, joining others already in operation or in planning stages.

Each of those plants needs a huge supply of grain - Dreyfus alone expects to use 50 million bushels of soybeans a year.

“The market for farmland is commodity-driven,” said Pat Karst, vice president of Halderman Real Estate and Farm Management Services in Wabash. “Thanks to new ethanol and biodiesel plants, there’s an increased demand for corn and soybeans - and for the ground needed to plant them.”

In September, the Halderman group sold at auction 462 acres of rolling farm ground in the Akron and Gilead areas for $1.511 million - $3,270.56 per acre.

At about the same time, Schrader Real Estate and Auction Co., Columbia City, sold 1,066 acres within a mile of the new Dreyfus plant for a total of $3.699 million - an average of $3,470 per acre - and then sold a 40 acre-farm near Mentone in four tracts for a combined price of $191,000 - $4,775 per acre.

“That land sold on the basis of its production value,” said Rex Schrader, president of the Schrader firm. “The current and future prices of corn and soybeans had a strong influence.”

Their sales echo findings of Purdue University’s June 2007 land value survey. On a statewide basis, the survey showed the average value of bare Indiana cropland ranged from $2,991 per acre for poor quality to $4,407 per acre for top quality land with average quality land selling for $3,688 per acre.

“The question this year is how high might farmland values and cash rent go?” Professor Craig L. Dobbins and research assistant Kim Cook asked in their report.

Higher crop prices are a risk some farmers can’t take.

Farmers enjoying robust corn and soybean prices might be surprised to find themselves earning less for their crops, according to Mike Boehlje, a Purdue agricultural economist.

“As crop prices have risen - especially corn to feed the burgeoning ethanol industry - so, too, has the cost to produce those crops,” he said.

“Even though high prices might infer higher profits, they actually have the potential to create higher risk. We’re now seeing some fairly significant increases on the cost side in agriculture. It isn’t unusual when you get better prices that you may be more willing to pay more cash rent for land and more for fertilizers, seed and chemical products.”

In an article in Amber Waves, published by USDA, Paul Wescott sounded a similar cautionary note by saying, “Overall, ethanol expansion will boost net farm income, but to some extent, these gains are expected to be offset by higher production expenses.”

He predicted higher commodity prices will mean smaller government payments under current farm commodity programs, which, in turn, will mean the agricultural sector will rely on the market for more of its income.

Wescott concluded by saying that while the ethanol boom can be expected to bring higher incomes to farmers and reduce government outlays for farm programs, it also most likely will mean higher food prices for consumers.

Retail price increases for red meats, poultry, and eggs are projected to exceed the general inflation rate in 2008-10, as the livestock sector adjusts to higher feed costs, he said, predicting that overall retail food prices would rise faster than the general inflation rate in those years.

Nevertheless, the 77-year-old Halderman Group, which works with farmers in 15 states and South America, said that, based on their sales this year, cropland values remain strong throughout the Eastern Corn Belt.

“Average farm ground varies by location,” they said, noting that in areas of short supply or when properties offer a variety of uses - such as recreation, hunting, etc. - values are steady to higher.

After conducting several Kosciusko County auctions, Rex Schrader, who developed the Maximum Marketing Method, more commonly called M3, in the 1970s to maximize the sale price of large land tracts at auctions, said, “These auctions proved again the strength of the current land market in northeastern Indiana.”

Although the 63-year-old Schrader firm lists real estate as well as conducting auctions, Rex Schrader believes auctions, which account for 75 percent of their business, afford the seller the highest price.

“There’s a lot of cash available,” he said, “and there are a lot of cash buyers.”

He believes the substantial increase in land prices and the risk of higher capital gains taxes in the future are reasons most sellers have decided this is the time to put their land on the market. Conversely, he points to higher incomes from commodities.

“Land prices follow the surges in the grain market,” he said. The Schrader Co. has now reached 37 states, marketing large holdings of farms, ranches and timberland as well as commercial and industrial portfolios. Their highest priced sale this year was the 263-acre Fox Island in Lake Ontario, N.Y., which sold for $3.78 million - $14,370 per acre, meaning a substantial capital gain since the owner purchased the property for $900,000 four years ago.

Both Halderman and Schrader work with sellers in dealing with Section 1031 of the U.S. Internal Revenue Code that allow investors to defer capital gains taxes on the exchange of like-kind properties. And both agree the old farmer was wrong. A farmer can pay more than $100 per acre - a lot more, in fact - and still make a living. It just takes careful planning, a lot of savvy and, hopefully, a continually strong commodity market.

This farm news was published in the Oct. 10, 2007 issue of Farm World, serving Indiana, Ohio, Illinois, Kentucky, Michigan and Tennessee.