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Published January 11, 2011, 03:38 PM

Red River Valley land prices make field tile business hum

BUXTON, N.D. — On Dec. 15, Ross Johnson of Mayville, N.D., showed a visitor around a 10-year-old building he’s bought that soon will contain businesses related to field tiling.

By: Mikkel Pates, Agweek

BUXTON, N.D. — On Dec. 15, Ross Johnson of Mayville, N.D., showed a visitor around a 10-year-old building he’s bought that soon will contain businesses related to field tiling.

Originally, this was the Dennis Biliske auction building — a visible fixture from Interstate 94, with its southern wall of windows. In 2000, Biliske built it for the comfort of farm equipment auction-goers. In 2005, auction powerhouse Ritchie Brothers Auctioneers of Vancouver, British Columbia, bought it, but for some reason pulled out. It held its last auction there a year ago.

In November, a partnership owned by Johnson and his father, Neal, bought the building.

In early December, he moved in its tenants — the Agassiz Drain Tile company in which the Johnsons are co-owners with Derek Peterson. Now he’s preparing the building for another tenant — Advanced Drainage Systems Inc. of Hilliard, Ohio. Johnson notes that it’ll be the Red River Valley’s first plastic tile manufacturing business.

A coincidental thing: While the building tour was in progress, a half-section of land of near the Red River near Buxton, sold for $1.3 million. It was prime Red River Valley farmland and went for just shy of $4,500 an acre. The auction is not out of line with other recent sales, which reportedly brought about $5,000 an acre for two 80-acre tracts in the Cavalier, N.D., area, recently.

Dennis Biliske, now with Biliske & Merrill Land Sales and Biliske & Schuster Auctioneers, were handling the land sale.

“We continue to see land prices rise and come more in line with other parts of the Midwest,” Biliske says of the land sale. “The prime Red River Valley farmland that’s well drained and has high productivity indexes continues to increase in value in the valley. It’s going to make all of the property nearby desirable as well.”

Well-drained land

It’s this “well-drained” concept that brings the threads of these elements together.The strengthening land prices are driving a trend toward land tiling, which is creating the opportunity for the drainage tile business. In the Red River Valley, heavy, clay soils in recent years have been plagued with excess water, Johnson says. Surface field drainage had been the predominant method of choice for Red River Valley farmers until about 2006, when there was an accelerated trend toward sub-surface tile.

Recent outstanding financial success in the sugar beet industry is one reason farmers are paying more or looking at tile work, or both. Johnson says some beet growers tell him their newly tiled fields out-yielded nearby land by 10 tons of beet per acre. At $57 per ton, it doesn’t take long to make investments pay off.

The Johnsons bought the building in November and started moving in just before Dec. 1.

It should work out for Advance Drainage Systems, too, he thinks. ADS is one of the world’s powerhouses in manufacturing and selling the corrugated, black coils of plastic “tile” to companies like Agassiz Drain install. ADS announced in late November that it would be moving into the Buxton area.

Construction crews on Dec. 15 were pouring concrete for the manufacturing floor on the east half of the building, where the tile manufacturing equipment will go. That part of the building had been a gravel floor. One machine unit initially will make 3- to 8-inch-diameter tile. The tile is made from plastic beads, flakes or recycled material that is heated and formed into High Density Polyethylene, or HDPE, corrugated tile. The smaller sizes come out at 125 feet per minute.

“We’re seeing enormous demand for HDPE pipe throughout the region, and we want to ensure that our customers continue to receive the very best in customer service,” Joe Chlapaty, chairman and chief executive officer for the company, says in the company’s November announcements. “By manufacturing pipe as close to our customers as possible, it will significantly reduce the time and cost of delivery. This additional production and shipping capacity will serve our growing customer base well.”

The location will serve markets into western Ontario, Manitoba and eastern Saskatch-

ewan, as well as U.S. markets.

ADS, founded in 1966, has 29 manufacturing plants in the United States. Johnson says there will be no direct business link between his Agassiz Drain Tile’s installation business and ADS. Agassiz Drain Tile does buy some of its tile from the company, but so do other tile installation companies in the area. Johnson says the tiling plant will be a welcome development for all tile installers in the region, as it will at least make tile more readily available here.

Starting last August, there was a shortage of tile in many Midwest states.

“Sometimes you had to pull teeth to get tile last year,” Johnson says, and Peterson notes that installers in some other states were contacting North Dakota to see if there was excess tile available in inventories in the state. No such luck.

Another step for tile

Agassiz Drain Tile is part of the wave of popularity of tile, fueled in part by increasing land values (and the lower proportional cost of tiling), a multiyear wet cycle and simple availability of cash with higher commodity prices.

In 2000, Johnson started farming full time with his father and two uncles. The Johnsons tried installing their own drain tile in 2004 and then launched the business for in 2005, working out of a location in Mayville, N.D. During Agassiz Drain Tile’s first year of operation 2006, the company installed 600,000 feet of tile. In 2010, with two crews, it installed 4.5 million feet. Roughly, there are 1,000 feet of tile in an acre, based on placing 40 tile feet apart, one of the typical spacings.

Agassiz Drain Tile initially partnered with Ag Drainage Inc. of Piper City, Ill., a large tile installation company. Eventually, Johnson and Peterson bought out ADI’s share and operated the business independently. Initially, Johnson had expected to be a tile manufacturer for ADI as a winter occupation, but now says he’s happy he didn’t do that.

ADS sounds similar, but is entirely different.

ADS is not in the installation business, but only in the tile manufacturing business and supplies other installers in the region.

“We’ve felt we’re good at installing and thought ADS is good at manufacturing it, so we don’t compete with them,” Johnson says.

Some of the factors affecting tiling are political.

One important development for tile is that Rep. Collin Peterson, D-Minn., who soon will shift from being chairman to the ranking minority leader in the U.S. House Agriculture Committee, is a promoter of drainage tile, both for its land improvement and as control structures to reduce affects from flooding on the Red River and tributaries. This especially is beneficial in summer floods.

North Dakota tile drainage permits can take time to approve.

“It can be very frustrating,” Johnson says, adding that tile advocates are working to get new state legislation to make the process smoother. “It can take six to eight months in North Dakota to get a permit back,” Johnson says.

Johnson is anxious for his new building to be fully operational. A shop building apart from the main building has been occupied by Reynolds United Cooperative elevator since mid-November.

He acknowledges that, in a way, it’s unfortunate the building isn’t used for its original purpose — auctions — but says that isn’t in the cards.

“We had to sign a deal with Ritchie Brothers that we couldn’t put an auction into the building for 50 years,” he says, chuckling.

For his part, Biliske says he’s glad to see the building he created used for a good purpose, though it’s not auctions. The Biliske & Merrill company now holds its sales at the Alerus Center in Grand Forks, N.D.

Johnson is just glad to be here.

“This is a great building. We’re loving it. It gives us great interstate exposure. It’s a bigger shop, a nice office. We’re proud to have people to come in.”

Tax matters

Section 179’ works with tile, equipment, purchases

One of the factors currently encouraging the pace of field drainage in the region is federal tax law. The Small Business Jobs Act of 2010, passed last September, was designed to stimulate the economy by doubling the amount to $500,000 per year that farmers could write off in 2010 and 2011.

Ross Johnson of Agassiz Drain Tile L.L.C. of Buxton, N.D., says he’d had quite a few customers purchasing tile before the end of the year to maximize their tax position.

“It’s an impact — not a huge impact — but it doesn’t hurt, that’s for sure,” Johnson says. “It all kind of ties together. Farmers wouldn’t stick (the money) into something if they didn’t know they were going to get something out of it.”

The tax write-off is more important because some farmers have had a string of good years and have deferred their profits to the point that where — with another good year in 2010 — some of them are in a situation that they either have to pay tax on it if they couldn’t buy capital items like tile.

Johnson says that at about $550 to $600 an acre for tile installation, using the full amount of such a write-off means they can improve 800 to 1,000 acres of land with tile. The so-called “Section 179” provision also can be used for vehicles, up to $25,000, and on grain bins. The terms apply to both new and used equipment.

Here is what the Internal Revenue Service says about the provision:

“A qualifying taxpayer can choose to treat the cost of certain property as an expense and deduct it in the year the property is placed in service instead of depreciating it over several years. This property frequently is referred to as Section 179 property.

“The Small Business Jobs Act of 2010 increases the IRC Section 179 limitations on expensing of depreciable business assets and expands the definition of qualified property to include certain real property for the 2010 and 2011 tax years.

“Under SBJA, qualifying businesses can now expense up to $500,000 of Section 179 property for tax years beginning in 2010 and 2011. Without SBJA, the expensing limit for Section 179 property would have been $250,000 for 2010 and $25,000 for 2011.

“The $500,000 amount provided under the new law is reduced, but not below zero, if the cost of all section 179 property placed in service by the taxpayer during the tax year exceeds $2,000,000.

“The definition of qualified Section 179 property will include qualified leasehold improvement property, qualified restaurant property, and qualified retail improvement property for tax years beginning in 2010 and 2011.

“SBJA also removes cellular telephones and similar telecommunications equipment from the definition of listed property for tax years beginning in 2010.

“Depreciation limits on business vehicles: The total depreciation deduction (including the section 179 expense deduction) you can take for a passenger automobile (that is not a truck or a van) you use in your business and first placed in service in 2010 is increased to $3,060. The maximum deduction you can take for a truck or van you use in your business and first placed in service in 2010 is increased to $3,160.

“Caution: These limits are reduced if the business use of the vehicle is less than 100 percent.”

Information:

www.irs.gov/pub/irs-pdf/fw11.pdf and www.section179.org.

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