Urban Pressures & Farming Positioning Agriculture for the Future

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 Michigan’s 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. 2040 Farmland Loss: MI Land Use Forecast (1980 to 2040) 2020 1980 Built Agriculture Other vegetation Forest Lake Wetland Projected Land Use Trend 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. Built Forest Other land use Lake 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 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.

17. 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.

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

19. 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

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

21. 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.

22. 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.

23. Basis of Downzoning Return Rate [%] Speculative Return Return from Agriculture Easement Value Value ($) Preservation Funds Value Gap T* X* Tipping Point Time

24. 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.

25. 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.

26. 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.

27. VisionTarget 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

28. 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

29. 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).

30. Potential Funding Sources

31. 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.

32. Actuarial Analysis of EQ & EM • Equity Insurance has a potential cost savings of 40%. • Equity Mortgage has a potential cost savings of 47%.

33. 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.”

34. The Innovation Pipeline for Michigan Agriculture (who should help fund creative agricultural ventures?) Discovery Seed Stage Proof-of- Concept Revenue Stage Sales Viability Profit Stage Growth Commer-cial Start-up Personal Savings, Friends, Government Government- Industry Venture Capital Banks Angels IPO ??? ??? Funding the Innovation Pipeline Entrepre- neurial Stage $100K/Yr $200K/Yr $100K/Yr $200K/Yr $200K/Yr $150K/Yr Total Public Funding $950K/Yr

35. 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.

36. 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.

37. 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.

38. 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.

39. 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.

40. 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?

41. 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.

42. 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.

43. 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.

44. 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.