Farmers hit the jackpot in Kansas oil boom

HARPER COUNTY, Kan. (CNNMoney) -- Farmers in Kansas are hitting the jackpot.

But instead of holding the winning lottery numbers, it's all about owning the right piece of land.

In Harper County, Kan., and the surrounding areas along the south central border of the state, oil companies are pinpointing plots of land they think will become drilling hotspots and offering farmers up to $1,250 an acre for the mineral rights that allow them to drill there.

Only a year ago, these same rights were worth about $25 an acre, said Gordon Stull, a lawyer in the town of Pratt, who helps clients negotiate mineral right leases.

With a knock at the door, many local farmers who have been sitting atop their mineral rights for decades are suddenly seeing their lives change forever.

John Walker, a 63-year old farmer who has been harvesting wheat in the small town of Anthony since he was six years old, has received $1.5 million over the past year after leasing out mineral rights on 2,000 acres of his land.

Walker received $550 an acre for leasing out half of them last year, then received $1,000 an acre for the other half this year. He will also get royalty payments of 20% from any oil that is produced on that land.

"I've had to pinch myself every morning just to know I'm awake ... we've kind of hit the jackpot," said Walker.

With the new money, Walker went straight to the John Deere store and swapped some of his old farming equipment for two new tractors, a baler, a swather and two pickup trucks. He also bought a luxury motor home, so that he and his wife can start taking a few vacations. But he won't be quitting his day job any time soon, he said.

Mineral rights grant access to the materials beneath the land. So farmers are still able to farm the land above the minerals that they lease out. If a well is drilled, however, they will no longer be able to farm on the portion of land where it is located.

Jack Gates, a 64-year old farmer who leased out 160 acres of his mineral rights for $1,000 an acre, may not have earned a life-altering sum but the $160,000 he received will help him retire more comfortably.

Previously, Gates had struggled to save for retirement. The cost of fertilizer kept climbing as prices for wheat, his big crop, kept falling. He believes that God was responsible for this recent stroke of good fortune, and he doubled his regular contributions to his church as soon as he received his check -- in addition to paying off several small loans and putting more than $10,000 toward his retirement savings.

"Without this money, my retirement would have been on faith that the Lord would have provided for me somehow," he said. "It's just a blessing that we're able to participate in the oil boom going on in Harper County."

Power in numbers: Oil companies typically negotiate with one landowner at a time when leasing mineral rights. This often sparks rumors and jealousy among neighbors about how much more money one farmer was offered than the one who lives down the road, said Stull, the lawyer.

After noticing the discrepancies among the amounts oil companies were paying local landowners last year, Stull began helping clients band together and negotiate equal prices.

For the oil companies, it's a mixed blessing. While negotiating with a group of farmers makes it more difficult for them to offer a lower price to someone who may not know the value of their mineral rights, it saves them the time and paperwork that comes with dealing with each property owner individually, said Stull.

Randy Blanchat, a farmer from Danville, was offered $500 an acre for his rights last year. In an effort to negotiate a higher rate, Blanchat, his wife and three close friends, started a committee and recruited more than 100 local landowners to pool together some 30,000 acres of mineral rights.

Forming the huge block sparked a bidding war between three oil companies, ending in an offer that none of the landowners could resist, said Blanchat.

Blanchat's committee wouldn't release the specifics of the deal, but they did say the rate was more than double the original offer.

Many of the landowners in the group were shocked by the outcome.

"It's hard to believe we're getting such a windfall, when just weeks ago we were trying to pay our bills and make ends meet," said Randy's brother, Jeff Blanchat, who also leased his mineral rights in the block.

Blanchat does have some concerns, however, especially about the possible water contamination from fracking that he's heard about in other parts of the country.

"[Oil companies] say the new technology makes it safer than vertical drilling, but we just don't know," he said. "I don't like to think we sold out for the almighty dollar, but let's be honest -- if all my neighbors are going in it's not going to matter if I don't let them drill on my land. Either I can get some of the pie or none of the pie."

Big windfalls: For Harper County's farmers, that pie has been made even bigger by another force of nature: The wind.

The largest wind farm in the state of Kansas, being built this year by BP (BP) and Sempra (SRE, Fortune 500), is paying local farmers good money to use their land for its hundreds of turbines.

Leon Zoglman, a 64-year old farmer, agreed to host 12 giant wind turbines on his land. In return, Zoglman said BP will pay him more than $20,000 so it could place a transmission cord across a mile and a half of his property. It will also dole out another $3,000 a year for the use of roughly 1,200 acres of his land for 10 years or until the turbines begin producing energy -- whichever comes sooner.

But the real money should come once production starts, which BP expects will happen by the end of this year. Zoglman said he will also receive production royalties -- although he has no idea what kind of payments to expect. He's heard that he could get more than $700 a month per turbine, depending on how much wind is produced. If that were the case, Zoglman could bring in more than $100,000 a year in extra income.

When asked what royalty rates landowners could expect from wind turbines, BP said it does not disclose the terms of its leases with landowners.

Zoglman said the money he has already received has helped him pay off some of his farm loans. Should he get decent production royalties, it would give him a nice cushion in case his farming income doesn't cut it.

"That will be guaranteed income, because the wind is always gonna blow," he said. "Whereas with farming it's a big gamble whether you get a crop and how much you get."