Transcript Slide 1

Urban Pressures & Farming
Positioning Agriculture for the Future
Presentation at the Annual Meeting of the
National Association of County Agricultural
Agents
Amway Grand Hotel
Grand Rapids, MI
July 17, 2007
Soji Adelaja
John A. Hannah Distinguished Professor in Land Policy
Director, Land Policy Institute
Michigan State University
Summary
National Population Dynamics.
– Causes of Suburbanization.
– Etiology of Sprawl.
– Implications for Agriculture
Farming in the Path of Development.
Effects of Urbanization on Agriculture.
Farmland Preservation and Farm Viability.
Political Economy of Urban-Fringe Land
Policy.
Positioning Agriculture for the Future.
National Population Dynamics
States
increasingly
experiencing out
migration of
people and
businesses away
from cities and
urban centers
into suburban
and rural areas
which historically
were dominated
by agriculture.
Causes of Suburbanization
Largely American phenomenon tied to our land use
heritage:
– Home Rule, Planning Framework, American Consumerism.
Significant national and local costs of sprawl:
– Duplication, High Cost of Services, dysfunctional cities, struggling
metros, and social/economic sprawl.
Push factors (Characteristics of Cities):
– Schools, Income, Crime, Concentrated Poverty, Old Housing Stock,
Shrinking Jobs, Cultural and Entertainment Opportunities,
Preferences, Recreation and Lifestyle.
Pull factors (Characteristics of Non-Urban Areas):
– Better Schools, Larger Homes, Property Ownership, Income, Open
Space and Amenities, Safety, Jobs, Lifestyle.
Other Factors:
– Divorce, Family Structure, Highways, Public Spending, Schools,
etc.
Etiology of Sprawl
Populations in Michigan’s Largest Metros 1990-2000
20%
18.1%
16.1%
Central City
15%
MSA
10%
4.1%
5%
3.5%
3.5%
4.3%
1.3%
0%
-5%
-7.5%
-10%
-6.1%
-11.6%
-15%
Flint
Detroit
Lansing
Source: Michigan Land Resource Project
Ann Arbor
Grand Rapids
Etiology of Sprawl
Detroit Metropolitan Area Population 1990-2000
20%
17.6%
15%
12.8%
10.2%
9.2%
10%
9.9%
5%
0%
-2.4%
-5%
-7.5%
-10%
Detroit
Wayne
County
Monroe
County
Macomb Oakland St. Clair
County County
County
Source: Michigan Land Resource Project
Lapeer
County
Etiology of Sprawl
Land to Population Growth Ratios 1960-1990
Ann Arbor
2 to 1
Muskegon 12 to 1
Lansing
2 to 1
Jackson
10 to 1
Grand Rapids
3 to 1
Saginaw
14 to 1
Kalamazoo
2.5 to 1
Detroit
13 to 1
Flint
7 to 1
Bay City
27 to 1
Source: Michigan Land Resource Project
Impacts
Loss of some of our best farmland (unique farmland under
threat).
Rising land values (82% of market value of farmland is
development value in one state).
Reduced political clout of the farm community – unfavorable
policies.
Growing conflicts between neighbors and farmers, especially
agriculture (RTF).
Disinvestments in technology (impermanence syndrome).
Loss of a critical mass of agricultural activities.
Increased land fragmentation (efficiency).
Declining profitability of farmers (systematic).
Loss of open space and rural quality of life.
Increased likelihood of down-zoning.
De-motivation of farmers.
Integrity of agriculture is affected.
Urbanization and Farmland Loss
Best and most productive farmland are near cities.
Most vulnerable farmland are the best farmland.
Projected loss of
farmland is
severe – will
challenge the
functionality of
agriculture as an
industry.
2040
Farmland Loss:
MI Land Use Forecast (1980 to 2040)
2020
1980
Projected
Land Use
Trend
Source: Michigan Land Resource Project
Built
Agriculture
Other
vegetation
Forest
Lake
Wetland
Future Farmland Loss
Land Use Change in Michigan, 1980 – 2040 (Millions of Acres)
Class
Agriculture
Built
Private
Forestland
Other
Vegetation
Wetland
1980
11.0
2040
9.1
Change
- 1.9
%
-17
2.3
6.4
+ 4.1
+178
18.23
16.9
- 1.3
-8
2.93
2.2
- 0.7
-24
1.83
1.37
- 0.2
-10
Source: Michigan Land Resource Project
Land Use Projections from 1980-2040
Southwest Michigan
1980
Built
Forest
Other land use
Lake
2020
2040
Urbanization and Land Values
Urbanization significantly raises the value of farmland.
Development value ranges from 0% to 82% of farm land values
(Plantinga).
Other Effects of Urbanization
•Farmers have to deal
with new issues and
challenges not
common in a rural
farming environment.
•These problems
gradually weaken
agriculture, its
infrastructure and its
short-term viability.
Effects of Urbanization (LAA)
Regulatory effects:
– Caused by the decline in the political clout of farmers.
– Agricultural and non-agricultural conflicts become more severe as
suburban residents move closer to agriculture.
– New non-farmer residents tend to implement new regulations that
constrain agricultural production (e.g., regulation of effluent
discharge and pesticide usage, limiting building codes and, in some
cases, down-zoning).
Technical effects:
– Reduce the technical efficiency of agriculture through vandalism,
frequent right to farm complaints, damage to farm equipment, and
other limiting activities.
– Communities can use their eminent domain and police powers to
condemn farmland for public purposes.
– This erodes the efficiency of farms and de-motives farmers.
– A technical effect is the erosion of critical mass of farming activities
which, if severe enough, would eventually result in the loss of a
farm.
Other Effects of Urbanization
Speculative effects:
– Relate to distortions in farm production decisions and the resulting
suboptimal behavior of farmers as a result of rising land values and
uncertainties about asset valuation.
– Farmers typically become less interested in investing in the farm,
especially in technologies that have a long-term payoff.
– The shortening of the farmer’s planning horizon as a result of
suburbanization is typically referenced as “The Impermanence Syndrome.
– Another dimension is the long-term profit potential from the eventual sale of
land.
Market effects:
– Accrues because suburbanization brings farmers closer to customers.
– Urban fringe farmers have opportunities to directly market their products to
consumers and have greater proximity to the market.
– Farmers at the urban fringe who take advantage of direct marketing
opportunities enhance their incomes considerably.
– Nursery and ornamental operations are particularly lucrative as they are
driven by the same factors that enable suburbanization.
– Agri-tourism opportunities can contribute to the bottom-line . Market effects
are generally overshadowed by technical and regulatory effects.
On the average, farmers lose money because of suburbanization.
Some Facts About Farmland Preservation
Farmers need to educate Non-farmers about the benefits of
farmland preservation.
Benefits include: Avoiding traffic, reduced congestion,
infrastructure/service duplication, auto-dependence,
diminishing quality of life, higher property taxes and high
cost of living.
However, farmland preservation is a public good.
Gap between desire and propensity to support preservation.
When pressured by growth, communities pursue regulatory
means to conserve open space (will see later).
In the absence of a significant preservation program, the
regulatory approach will eventually set in, making it possible
to rob farmers of their equity.
Farming is a business –
to survive, we must also preserve
the underlying farm enterprise.
Economic Viability and Resiliency
“A farm is economically viable when it generates
enough revenue from its operations to cover all
variable and fixed costs of production, all
appropriate family living expenses, and capital
replacement costs.” Adelaja, 2004
“A Farm is resilient when it optimizes survival by
optimizing its benefits to the public and to the
farm community itself”. Adelaja, 2007
Michigan Example (2002)
Commodity
Net Gain
(# of
farms)
% Making
Money
Net Loss
(# of
farms)
2002
% Losing
Money
1997
% Losing
Money
Vegetable &
Melon
1,084
71%
447
29%
29%
Fruit & Tree Nut
1,193
51%
1,149
49%
37%
Greenhouse/
Nursery
2,017
61%
1,300
39%
38%
Oilseed & Grain
7,280
55%
6,046
45%
52%
Other Crops
5,492
39%
8,480
61%
54%
Animal Products
5,671
30%
13,137
70%
61%
Total
22,737
43%
30,559
57%
53%
Source: 2002 Census of Agriculture, Table 59. Summary of North American Industry Classification System.
Past Viability Studies Show . . .
Agribusinesses with appropriate managerial, financial
and marketing practices are more viable.
Farmers who direct market and utilize frontier marketing
techniques are more profitable.
Farms with high liquidity and high return on assets fare
better.
Ecotourism, farm-based recreation, and value-added
products enhance profitability.
Farmers with longer planning horizons are more
profitable.
Farmers who sell bits of their land less profitable.
As land value rises, viability falls.
Innovative farmers and processors are more viable.
Farmer attitude and interest are important.
Past Viability Studies Show . . .
Education increases viability.
Viability falls with age (except for beginner farmers).
Right-to-farm conflicts reduce viability.
Deer damage adversely affects viability.
Farmers who complain about regulation and the farming
environment are less profitable.
Farmers who reduce chemical use are not less profitable.
Farmers with difficulty accessing inputs are less viable.
Farmers who work regularly with extension are more
successful.
Farmers who are involved politically and with neighbors
are more successful.
Preservation alone will not guarantee profitability.
Farming is a business – to survive, we must also
preserve the underlying farm enterprise.
Basis of Downzoning
Return
Rate
[%]
Speculative
Return
Return
from
Agriculture
Easement
Value
Value
($)
Preservation
Funds
Value
Gap
T*
X*
Tipping Point
Time
Downzoning
Propensity to support preservation is income
driven, not wealth driven.
Most suburban communities desire to slow down
growth.
When pressured by growth and sprawl,
communities pursue regulatory means to conserve
open space.
Zoning that restricts farmers’ use of the land is not
the right answer.
States are beefing up their war-chest for
preservation and the leadership usually comes
from the state.
LPI Study on Preserving Viable Farms
Farmland preservation that does not address the viability of
agriculture will be ineffective.
It must also address the issue of sustainability of farms.
Many state programs focus on productivity (soil quality and
farm profitability) but ignore other important factors in
setting the target and selecting areas for farmland
preservation.
Survivability is an issue of market access and farm
diversity, as well as critical mass and soil quality.
It is also an issue of ecological integrity of the state.
Based on the concept of strategic growth.
– Focus on global competitiveness by exploiting assets and thinking
in terms of clusters and regions.
Four Farmland Preservation Projects
The Land Policy Institute set out to answer
four fundamental questions for the State of
Michigan:
– Vision:
How many acres? At what cost? Where and for what reason?
– Funding:
What funding source will support State’s vision?
– Can we save money through innovative
preservation methods?
Can we do it more cheaply through equity insurance/mortgage
– How do we make agriculture more viable?
Can the venture capital community be brought into agriculture.
What needs are being unmet in enhancing viability.
Vision
Target Acreage and Price
Acreage at most at risk of being developed that also
scored high on indicators of resiliency (including
biological, economic, social, and land use factors).
Agro-ecological:
Prime Farmland
Unique Farmland
Biodiversity
Economic:
Farm Viability
Commodity Viability
Proximity to Consumers
Proximity to Markets & Processors
Value-added Potential
Economic Support
Livestock Local Demand
Product Diversity
Social:
Income Demographics
Ethnic Diversity
Tourism
Open Space
Land Use:
Farm Size Diversity
Farm Cluster Capacity
Population Pressure
Competition of Land Use
Current Preservation
Four Scenarios for Potential Target
Acreage & Funding
Scenario 1: 2040
Scenario 2: 2020
Farmland Acreage
at Risk & Resilient
1.3 million acres
$3.3 billion
Scenario 3: Leap Frog
Farmland
Acreage at Risk
& Resilient
683,000 acres
$1.8 billion
Scenario 4: Half 2040
Farmland
Acreage at Risk
& Resilient
639,000 acres
$1.5 billion
Farmland
Acreage at Risk
& Resilient
661,000 acres
$1.7 billion
Funding
How do we pay for it?
Alternative funding sources.
– 18+ existing taxes/fees and 14+ innovative funding sources
evaluated to raise $50 million annually.
Each source evaluated for:
–
–
–
–
–
–
–
–
–
Nexus to farmland preservation.
Use in other states and feasibility.
Incidence (population affected by change).
Stability of revenue source.
Projected revenue stream.
Proponent and opponent views.
Legality.
Implementation strategy.
Ability to achieve target ($50 million).
Potential Funding Sources
Revenue
Source
Origin
(Act & Yr)
Rate
(Current)
Rate
(New)
Meet
$50m
Target?
Nexus?
Stable?
Broad?
Other
States?
Income
1967
PA 281
3.9%
3.93%
X
X
X
X
Sales
1933
PA 167
6%
6.045%
X
X
X
X
X
Use
1937
PA 94
6%
6.15%
X
X
X
X
X
Real Estate
Transfer
1993
PA 330
0.75%
0.87%
X
X
X
Gasoline
2000
PA 403
19¢/gal.
20¢/gal.
X
X
X
Impact Fees
N/A
N/A
$1,200/
home
X
X
X
Water Tax
N/A
N/A
$12.60/
household
X
X
X
X
Service Tax
N/A
N/A
6%
X
X
X
X
Tobacco
Settlement
N/A
N/A
N/A
X
X
Bond
Financing
N/A
N/A
Variable
X
X
X
X
X
X
X
X
X
Saving Money
With a pool of $50 million each year, it would take 20 years to
purchase 765,000 easement acres using traditional PDR
programs, assuming a 50% local match.
Land appreciates as we acquire easements each year; locking
land in now reduces long-term expenditures.
Equity Insurance and Equity Mortgage programs (Adelaja) would
allow the state to save money over traditional PDR programs.
These tools allow the state to preserve land now, spread
payments out over time, and save money.
Equity Insurance programs: state purchases an insurance policy
in exchange for development rights.
Equity Mortgage: state purchases development rights through
mortgage.
A legal analysis conducted by Dickinson and Wright showed that
Equity Insurance, while legal, will not likely result in the avoidance
of capital gains tax.
Implementation would probably require reform of state laws and
education of the lending and insurance communities.
Actuarial Analysis of EQ & EM
Michigan
Farmers (between the ages of 25 and 59)
Average Farm Size (acres)
Farmland to be Preserved (acres)
Average Easement Value per Acre
Total Easement Value
Adjusted Easement Value (2.5% growth)
20% Down Payment
Interest Paid to Farmers (2.5%)
Total Premiums Paid
1.5 % Up-front Fees and Expenses
Loan Amount
Total Paid to Farmers
Total Interest Payments at 4%
Total Payments to Acquire Easements
Net Present Value of all Payments
Cost Per Acre (Net Present Value)
Equity Insurance
35,349
190
6,736,634
$ 2,142
$ 14,432,107,057
$ 16,168,840,508
$ 3,233,768,102
$ 9,811,566,901
$ 22,746,639,307
$ 25,980,407,409
$ 9,467,981,602
$ 1,405
Equity Mortgage
35,349
190
6,736,634
$ 2,142
$ 14,432,107,057
$ 16,168,840,508
$ 3,233,768,102
$ 242,532,608
$12,935,072,406
$ 9,506,023,180
$ 25,917,396,295
$ 8,582,423,298
$ 1,274
• Equity Insurance has a potential cost savings of 40%.
• Equity Mortgage has a potential cost savings of 47%.
Viability and Innovation?
Entrepreneurial farmers need access to capital
and tools to make their ideas work.
We need to position farms for a more innovative
future.
Traditional funding sources in agriculture are
now well positioned to fund innovative ideas.
Farmland preservation must be supported by an
initiative to move agriculture closer to areas of
growing demand in the economy.
A Innovation Fund for Agriculture can attract
new venture capitalists into agriculture and can
be positioned to enhance long-term viability.
We identified funding gaps and designed an
“Innovation Pipeline.”
Funding the Innovation Pipeline
Entrepreneurial
Stage
$100K/Yr
The Innovation Pipeline for Michigan Agriculture
(who should help fund creative agricultural ventures?)
Discovery
Seed
Stage
GovernmentIndustry
Personal
Savings,
Friends,
Government
$200K/Yr
$100K/Yr
Proof-ofConcept
Angels
$200K/Yr
Commercial
Start-up
???
$200K/Yr
Revenue
Stage
???
Sales
Viability
Profit
Stage
Growth
Venture
Capital
Banks
IPO
$150K/Yr
Total Public Funding
$950K/Yr
Tenets for Planning for Agriculture
Farming is a business. If worthwhile, farmers will farm.
Agriculture is an industry, it too can grow.
Need comprehensive industrial policy for MI’s 2nd industry.
Must connect agriculture better to other industries.
For agriculture to be viable in the future, it cannot be
stripped of its wealth base (i.e. Down-zoning is not the
answer).
Can have real agricultural development centered around
helping farmers achieve viability and Resiliency.
Agriculture’s benefits go beyond food and fiber. When we
consider the environmental and fiscal impacts of
development, it makes sense to invest in agriculture.
Well managed farms are more beneficial than abandoned
farms, dilapidated barns.
County and local government can do more to support
agriculture.
Enhancing Viability of Agriculture
Promoting local and regional agricultural visions.
Right to Farm enhancement.
Examine municipal codes for restrictive regulations.
Creating and strengthening County Agricultural Development
Commissions to provide better economic development assistance and
strategies.
Creation of statewide agricultural development zones.
Enhancing funding for innovative agriculture.
Agricultural Venture Capital.
Regional asset analysis and cluster-based development strategy.
Attracting farm-based value added production that relies on agricultural
products (bringing value added opportunities to farmers).
Agriculture’s share of economic development funds.
New Marketing Opportunities (Direct Marketing Outlet, etc).
Regional innovation centers for agriculture.
Ecotourism, Farm Based Recreation & Bed and Breakfasts.
Better defined intergeneration transfer program.
Moving Agriculture Forward
Requires a Focus on Prosperity
In our work on farm prosperity, we identified drivers of successful farming.
Successful farmers have one thing in common:
–
–
–
–
–
–
–
Appropriate production technology (efficiency).
Entrepreneurial spirit (innovation).
Consumer orientation (product uniqueness).
Market Saavy (alternative markets, ecotourism, value added, new products).
Enabling environment (proactive state/local policies, farmland preservation).
Regulatory Climate (RTF, Supportive local Government).
Commitment to compatibility and sustainability.
Some drivers of success under control of farmers and others are
community, state and policy induced.
One study of ag at urban fringe shows that the things outside of the
farmers control are just as important as those things within their control.
Moving agriculture forward is a group effort – farm community, individual
farmers, local and state government and consumers.
Market Elements of Prosperity
For agriculture to be successful, it must take
advantage of its critical assets.
In the rest of my talk today, I will focus on five things
that are critical to exploiting those assets.
– Taking advantage of agriculture’s location.
– Exploiting consumer’s desire for convenience in food
consumption and access.
– Exploiting consumer’s quest for quality of life (niche
products, health and wellness solutions).
– Making new market connections.
– Local support infrastructure for agriculture success.
Location, Location, Location
Agriculture is a real estate asset and the #1 driver of success in real estate
is location.
In many states, agriculture is on the pathway to recreational destinations.
What are farmer’s doing to tap into this unique market opportunity?
Another dimension of proximity is the nearness to major cities in the region
(Grand Rapids, Detroit, Chicago)
Farmers must intensify their efforts in the following areas:
–
–
–
–
–
Farmer’s markets;
Bed and breakfasts;
Agro-tourism;
Farm-based recreation;
Pick-your-own operations;
In one state, the ag community has partnered with Mapquest to create a
directional tool that highlights farm product purchase opportunities, as
people plan travel routes.
Convenience, Convenience,
Convenience
Agriculture produces food and rule number for food marketers
is convenience.
The American consumer is changing and the following
characterize their new persona:
– Consumer’s increasingly time-starved (two wage earner families).
– Growing culinary illiteracy (desire for complete solutions and home
meal replacements).
– Desire for one-stop shopping solutions (Farm markets that offer more).
Are farmers well-positioned to take advantage of this trend.
For example, over the last 20 years we have seen a shift
away from food consumed at home to food consumed away
from home.
How are our farmers and policy-makers positioning
agriculture to capture a larger marketing margin in the
dynamic environment where people are eating differently?
Unique Market Opportunities
Food is more than a product, it is an experience that is an important element of lifestyle.
Food consumption has evolved from processed foods to specialty prepared foods.
Aging baby-boomers have dominated consumer consciousness.
Health-consciousness is a major trend in American consumerism.
Influence of 1st generation Americans and interests in wellness.
Interest in natural products and organics.
As consumers become wealthier, they demand specialty, quality and wellness solutions.
Consumers demand more vegetables, fruits and other healthy products.
What are farmers doing to connect better with the health market?
What are we doing to produce pharmaceutical crops?
Can our product development research focus more on producing crop varieties with
enhanced health attributes (low fat, high protein and appropriate fatty acids), rather than
have our processors have to take bad things out of what farmers have produced.
Another opportunity is the potential for farmers to benefit from carbon markets.
A recent study completed for the Land Policy Institute by Professors Kerr, Skole and others,
estimated almost $1,000,000 in the value of carbon sequestration by agriculture and forestry.
Another recent study by my colleagues and I, estimated that the development value of
farmland appreciates at rates that typically exceed the treasury bill rate.
Does this mean that we can develop a land bank that holds development rights that can then
be traded in financial markets as we trade mortgage-backed securities.
Connections, Connections,
Connections,
How well do farmers focus on connecting better with consumers?
What do we know about where, when and how people eat, and we can better
position ourselves?
For example, the avg person shops for food within two miles of their homes
(Adelaja et al).
The average Michigan farmer farms in suburban communities where the end user
is right next door.
Yet farm products go through the complex maze of the food distribution system
(vegetables are trucked to auctions, sold to wholesalers, pass through
warehouses, only to end up in the back yard of many farmers. By then, truckers
and graders make a fortune and farmers don’t).
If the average farmer is just as close to the average consumer as he is to the
average supermarket, what are we doing to exploit this connection opportunity?
One solution that has worked well, is community-supported agriculture (CSA’s).
One CSA I’m familiar with grosses about $1 million dollars on 60 acres, an average
of $16,000 in revenue per acre.
Another growing trend is the use of the internet.
How many farms have websites?
Farmers need to seek new connections.
Local Support
A farm is a business and agriculture is an industry.
Sometimes our communities forget this.
In many local communities, we have plans and organizations that are
embedded in our public infrastructure for the things that are important to
us – downtown and economic development.
We need to instill a sense of local commitment to agriculture as an
industry in Michigan.
Business climate matters.
Without supportive local government, agriculture will continue to struggle.
Every community needs to go back to examine the following:
–
–
–
–
–
–
–
Its right-to-farm provisions.
Wild life management strategies.
Its regulation of agriculture.
Its marketing infrastructure to support farming.
Allowable signage on farms.
How it promotes local agriculture.
Incentives for agriculture.
Final Thoughts
Farming is a business. If worthwhile, farmers will farm.
Agriculture is an industry.
Can have real economic development centered around
helping farmers achieve prosperity.
Agriculture’s benefits go beyond food and fibre. When we
consider the environmental and fiscal impacts of
development, it makes sense to invest in agriculture.
County and local government can do more to generate funds
to support agriculture.
We need to promote the concept of ag enterprise zones. They
can be the anchors for a new economic development strategy
for agriculture.