Urban Pressures

1
Urban Pressures FarmingPositioning 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

2
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.

3
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.

4
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.

5
Etiology of Sprawl Populations in Michigans
Largest Metros 1990-2000
Source Michigan Land Resource Project
6
Etiology of Sprawl Detroit Metropolitan Area
Population 1990-2000
Source Michigan Land Resource Project
7
Etiology of SprawlLand to Population Growth
Ratios 1960-1990
Ann Arbor 2 to 1 Lansing 2 to 1 Grand Rapids 3
to 1 Kalamazoo 2.5 to 1 Flint 7 to 1
Muskegon 12 to 1 Jackson 10 to 1 Saginaw 14 to
1 Detroit 13 to 1 Bay City 27 to 1
Source Michigan Land Resource Project
8
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.

9
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.
10
Source Michigan Land Resource Project
11
Future Farmland Loss
Land Use Change in Michigan, 1980 2040
(Millions of Acres)
Source Michigan Land Resource Project
12
Land Use Projections from 1980-2040Southwest
Michigan
1980
2020
2040
13
Urbanization and Land Values

• Urbanization significantly raises the value of
  farmland.
• Development value ranges from 0 to 82 of farm
  land values (Plantinga).

14
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.

15
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.

16
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 farmers 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.

17
Farmland Preservation

• Due to negative net effects, efforts are growing
  to preserve agriculture.
• Land conversion is irreversible. For Michigan,
  LPI showed that by 2040, 235 million of todays
  agricultural row crop value will be lost to land
  conversion (soy, wheat, corn and hay).
• FP allows equitable maintenance of amenities
  without robbing farmers or compromising their
  survival potential.
• Farmers need their assets to move into the
  future.
• FIAs suggest that strong agriculture makes
  sense, not only to the farm community, but to the
  state.
• Conservation organizations very aggressive in
  preserving land through PDR, TDR and other means.
• States increasingly investing in protecting
  farmland.
• Gov. Rendell Says Pennsylvania Making Largest
  Commitment Ever to Farmland Preservation.
• HARRISBURG (Feb. 17) -- Governor Edward G.
  Rendell has announced a record-setting investment
  in farmland preservation by releasing close to
  150 million to help farmers protect vital
  agricultural land.

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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.

19

• Farming is a business to survive, we must also
  preserve the underlying farm enterprise.

20
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

21
Michigan Example (2002)
Source 2002 Census of Agriculture, Table 59.
Summary of North American Industry Classification
System.
22
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.

23
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.

24
Basis of Downzoning
Return Rate
Speculative Return
Return from Agriculture
Easement Value
Value ()
Preservation Funds
Value Gap
T
X
Tipping Point
Time
25
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.

26
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.

27
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 States 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.

28
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

29
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
Farmland Acreage at Risk Resilient 683,000
acres 1.8 billion
Scenario 3 Leap Frog
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
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FundingHow 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).

31
Potential Funding Sources
32
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.

33
Actuarial Analysis of EQ EM

• Equity Insurance has a potential cost savings of
  40.
• Equity Mortgage has a potential cost savings of
  47.

34
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.

35
Funding the Innovation Pipeline
Entrepre- neurial Stage 100K/Yr
200K/Yr
100K/Yr
200K/Yr
200K/Yr
150K/Yr
Total Public Funding 950K/Yr
36
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 MIs 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.
• Agricultures 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.

37
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).
• Agricultures 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.

38
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.

39
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 agricultures location.
• Exploiting consumers desire for convenience in
  food consumption and access.
• Exploiting consumers quest for quality of life
  (niche products, health and wellness solutions).
• Making new market connections.
• Local support infrastructure for agriculture
  success.

40
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 farmers 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
• Farmers 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.

41
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
• Consumers 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?

42
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.

43
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 dont).
• 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 (CSAs).
• One CSA Im 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.

44
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.

45
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.
• Agricultures 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.