Upper Midwest Management Corporation

November 1, 2000May 2, 2008 Daniel Vance

Photo By Kris Kathmann

Many entrepreneurs attribute at least some of their business success to having earned a four-year college degree. Jim Thomas, 58, owner and president of Upper Midwest Management Corporation (UMMC) in New Ulm, attributes some of it to not having earned one.

In the early ’70s Thomas ran headfirst into a brick wall each time he tried moving up the corporate ladder at Farm Credit, now AgStar. Puzzled, he asked them, Why aren’t you interested in promoting me? They said his two years at the University of Minnesota weren’t enough, that he needed a four-year degree.

But rather than return to U of M to finish up, which is what most people would have done, he suddenly decided to strike out on his own. A Realtor friend had just introduced him to a West German attorney representing German clients who were trying to buy Minnesota farmland. It was an opportunity he couldn’t turn down. (The Realtor, Bob Johnson, was his wife’s friend’s husband.)

His new business: Thomas would help absentee owners buy farmland and then manage it for them. His Farm Credit experience and family farm background had prepared him for it, having grown up on a livestock farm in Appleton, Minn., near the South Dakota border. Returning to college hadn’t been an option anyway because he “didn’t like school, didn’t like being at the big university,” he says.

He had tried college twice before, the first time a one-year fling ending in 1960 when he rented 200 acres near his dad’s farm. He continued farming there until low crop prices and a new wife gave him a reality check. “In the early 1960s farming was about like it is today, and maybe worse because production wasn’t as good and we had drought conditions. It just didn’t work out. I developed back problems, too.”

So he gritted his teeth and returned to U of M until he “was fortunate enough to be hired by Farm Credit in Windom before graduation.” In 1969 Farm Credit asked him to manage its New Ulm office, which he did through 1974 when the opportunity through Bob Johnson arose.

“In 1974 the West German attorney brought over a rural German investor interested in buying a sugar beet farm,” says Thomas while glancing out his New Ulm office that overlooks Cash Wise Foods, a building his company also manages. “The farmer knew he had to have a good on-site manager – he certainly couldn’t manage it from Germany. So we met with him to discuss its potential.” At the time there wasn’t enough money in it for Johnson and Thomas, so they put the idea on hold until the same attorney brought over two more German buyers in search of Red River Valley land. Now they had enough potential income to start a company and for Thomas to leave Farm Credit.

“I took a gamble,” he says. “The farms totalled only about 5,000 acres, but it would cashflow if we didn’t take large salaries. That’s how we started it, through my wife having an acquaintance with a lady whose husband knew the West German.”

The buyers were West German farmers mentally locked in a Cold War, knowing they would lose all if Russian tanks ever broke through the Berlin Wall and rolled over and onto their farms. Buying farmland in a relatively safe and secure America was a hedge against those Russian tanks.

To start the venture, Thomas partnered with Alfred Haupt, the West German attorney, and the Realtor, Bob Johnson. (Thomas became sole owner in 1991.) “We formed the business in 1974, opened an office in Hector, Minn., and two years later the door slammed shut, just like that,” he says, snapping his fingers. “In 1975, agriculture was booming, oil prices were shooting up, and there was a kneejerk reaction to the Arabs potentially buying up all our farmland. Minnesota, with its corporate farming laws, shut the door to future agricultural acquisition by corporate farms or aliens.” All Minnesota lands owned by aliens were grandfathered in, and today they still own about 12,000 acres, of which UMMC manages 10,000.

The door wasn’t just shut, it was cemented shut. To expand the business beyond its narrow focus, the company purchased a local farm management business that provided a mix of American clients to balance the West Germans. (Currently 40 percent of their farm management clients are Americans.)

They also searched for greener pastures, which they found in nearby Iowa, where alien investors could own up to 640 acres per person. UMMC immediately began funneling West German clients there until 1980 when that state enacted the same legislation that had curtailed business in Minnesota. All Iowa land purchased by aliens through 1980, about 12,000 acres, was grandfathered in.

All along they were selective in buying farmland, searching diligently for larger tracts over 360 acres, testing for soil fertility and drainage, and negotiating for price. Not one acre of ground in Minnesota or Iowa was purchased through auction, which, Thomas says, was “tough for investors like us. In larger properties there are always things to negotiate. With an auction you don’t negotiate. We have since bought land at auction but don’t like to do it. We would much rather sell it that way.”

UMMC became a turnkey operation for both its alien and U.S. investors: from land selection and purchasing to management – and in handling three types of lease arrangements. One lease type, “Cash renting,” involves little owner risk or input while “crop share” and “custom farming” involve scrutinizing seed, chemical, and fertilizer selection and tilling practices, paying bills, handling insurance, and marketing grain. In crop share arrangements the owner and operator share the input, returns and risk. In custom farming, the owner takes all the return but also shoulders all the risk. In general, UMMC steps in as if it were the property owners, managing it in the best manner possible given the situation.

“In Iowa we concentrated on the upper three tiers of counties,” he says. “The furthest south we went was north of Des Moines, near Ames. Even today we are a unique company in that we represent investors in the acquisition of farm land as well as sellers. Usually a buyer will come into us and say they want to buy land. We determine what they want and then we go out and find it.”

When the 1980 Iowa law went into effect, UMMC, having been through the dance before, had to shift its focus to alien friendly Ohio where now they manage 25,000 acres east of Dayton. Ohio land, when available, runs $2,400 to $3,000 an acre.

Diversification Kept Them Growing

Since 1975 they have diversified to shield themselves from any future laws that could hurt them. In 1978, (just after opening a New Ulm headquarters), again with alien investors, they began a commercial property division that today manages property in Minneapolis, Rochester, Duluth and New Ulm. In 1999 this division alone accounted for 40 percent of company revenues. (Farm management accounts for 40 percent; farm and residential appraisals, 20 percent.)

In New Ulm they manage the Cash Wise Foods building and also Sunset Apartments, a 97-unit subsidized housing complex for seniors; in Minneapolis, shopping centers, office buildings, warehouses, and grocery stores, primarily for alien investors; in Duluth, a grocery and seven-story office building; and in Rochester, a property leased to a grocery chain.

Alien investors use UMMC for its experience, ability to help break through cultural barriers, and as a physical hand to keep tabs on property 10,000 miles away. Unlike the 1975 restriction placed on alien ownership of Minnesota farmland, there are no corresponding state restrictions on commercial property ownership.

Jim Thomas shrugs his shoulders. “In Minnesota an alien can own the Mall of America but can’t own ten acres of farmland outside city limits,” he says. “The state is trying to protect the family farm concept. It’s a debatable issue. We feel absentee owners provide opportunity for young farmers to get started. Today, it’s virtually impossible for a younger farmer to have enough capital to own both machinery and land. The opportunity to rent land and compete could give him the opportunity. If it was owned by a local farmer he’d never have that opportunity.”

They have purchased a New Ulm farm management company and two in Ohio, all of which serve American clients. A farm and residential appraisal division, begun in 1998 and headed by a professional with 18-years hands-on experience, has been growing by leaps and bounds. Total company revenues, including the farm management, commercial property management, farm and residential appraisal divisions, and real estate acquisitions and sales are “over one million a year,” claims Thomas, the total modulating according to commodity price and yield. In October 2000, UMMC had fifteen employees, with offices in New Ulm, Minneapolis, and Jamestown, Ohio (25 miles east of Dayton).

Freedom That Has No Mercy

Thomas’ alien investors hail from Germany, Denmark, Austria and England – countries with much higher tax rates than ours – who view the U.S. economy as relatively stable. The investors aren’t happy with U.S. farm laws, though.

“Various farm laws have caused problems for us in that they have prevented alien owners from participating in farm programs,” Thomas explains. “We have been in the free market system with our clients since the late ’80s, which is fine if you have $2.50 corn and $5.00 soybeans. Because of these farmer subsidies corn has fallen to $1.30. Since we don’t share in any loan deficiency payments we are at the mercy of the market.”
The laws have forced them to change the way they manage alien-owned land. Thomas says that these clients, like their American ones, have three alternatives: either cash rent, crop share or custom work. “We were one of the first companies that took our investors into custom farming in the early ’80s because it showed a much better return than cash rent.” However, current crop prices and the Freedom to Farm payment scheme has forced them into more cash rent arrangements.

He feels the farm programs are unfair to alien investors who already pay real estate taxes at a higher, non-homestead rate, and have fewer tax deductions. The investors grandfathered in can’t sell to other alien investors and any ownership changes can only occur at death, which means the investor can’t do estate planning. Since UMMC earns a percentage on what they make for their clients, the farm programs and depressed prices have been pinching their alien farm management revenues by about 40 percent annually.

Which Is Better: Minnesota or Ohio Farmland?

“Quite a difference between the two,” claims Thomas, nodding rapidly. “Not in the types of crops grown, but in the opportunities. In Ohio, the basis is closer to the crop price. For instance, if the Chicago Board is $2.50 corn, Ohio might be $2.40 and Minneapolis much less. It has a price advantage because it’s closer to the markets. Real estate taxes in Ohio are less than $10 an acre; in Minnesota they run $18-$28. Yieldwise, Ohio has a longer growing season that runs through mid-October.”

He does give a thumbs up to Minnesota’s land quality, which has prairie-based soil that contains more organic matter than Ohio’s tree-based. Erosion has been a major challenge in Ohio, he says. “No-till is done in Ohio but with limitations. With no-till you can have spring rains that create massive erosion. We are limiting no-till on soybeans in Ohio. With no-till on corn, the stalks hold rainwater well, which reduces sheet erosion.”

Because of the I-can-do-it-myself nature of Minnesotans, most absentee owners in the state manage their own farms or have relatives do it for them. Ohio, Illinois and Indiana have a much higher percentage of absentee-owned land. “There it’s common to have three or four management companies within a single county,” he says, “and they are all doing very well. Here, you have just a few management companies like ours in the entire state.” Minnesota has only a handful of farm management-only firms, including ones in Marshall, Olivia, Faribault and Windom.