Biggest jump in Midwest farmland prices in 34 years

CHICAGO Wed Aug 17, 2011 9:43pm EDT

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CHICAGO (Reuters) - Prices for farmland in the heart of the U.S. grain belt were up 17 percent in the second quarter compared to a year ago, the biggest jump since 1977, the Federal Reserve Bank of Chicago said on Wednesday.

The rising values were driven by strong crop, livestock and milk prices which spurred farmers and investors to buy land, the bank said. Low interest rates have also boosted demand.

"The combination of higher revenues for crop and livestock production has been an impetus for the significant increases in agricultural land values seen this year in the district," the Fed said in its quarterly newsletter, adding "demand for farmland remained strong from both farmers and investors."

Farmland values are closely monitored by economists at the Fed and commercial banks, both for U.S. banking asset values and as a benchmark for agricultural balance sheets.

Farmland strength in the last year has caused concerns about another farmland "bubble" like the one seen in the 1980s U.S. farm crisis, when overextended farmers lost their land. But bankers say most farmers are much less debt-laden than they were at that time thanks to boom crop prices in recent years.

The Kansas City Fed released its own banker survey Monday, showing similar results with farmland values up more than 20 percent from a year ago. But the KC Fed farm income was also down in the southern Plains as a devastating drought had hurt crop yields and thus farmers' incomes.

The Chicago Fed surveyed 226 bankers in its district which stretches across the heart of the U.S. Corn Belt -- Iowa, Illinois, Indiana, Wisconsin and Michigan.

Indiana and Iowa led the Midwest district with farmland up 20 percent or more. Illinois was close behind, up 19 percent.

Compared to the first quarter of 2011, values for prime farm land rose 4 percent in the second quarter. Most bankers surveyed forecast farmland values to stabilize in the third quarter, "yet about one-third still expected farmland values to move higher," the Chicago Fed said.

HIGHER CROP, LIVESTOCK PRICES SUPPORT

Corn, soybean, livestock and milk prices are well above year ago levels. In July, corn prices were 85 percent higher and soybeans up 37 percent, the Fed said. Additionally, USDA is projecting corn harvest in the district to be 7 percent larger than 2010 while soybean output is seen down 8 percent.

"Prices for hogs, cattle, and milk were 23 percent, 20 percent, and 39 percent higher this July than last July, respectively," it said. "The livestock sector has experienced higher revenues, but higher feed costs have limited the rise in income for the sector."

Higher farm incomes aided agricultural credit conditions.

Quarterly repayment rates for non-real-estate farm loans improved and the index of non-real-estate agricultural loan demand fell to its lowest level since 1987.

Farm interest rates dropped below the previous record lows reported in the fourth quarter of 2010.

The average interest rate on July 1 for new operating loans was 5.75 percent, over 300 basis points below the most recent peak of five years ago, the Fed said.

Agricultural mortgage rates averaged 5.62 percent, about 220 basis points lower than five years earlier.

"These record low mortgage rates contributed to the surge this year in district farmland values," the survey said.

Bankers expect non-real-estate agricultural loan demand to fall in the coming quarter while machinery and grain storage construction loans were seen rising, compared to the third quarter of 2010.

(Reporting by Christine Stebbins)

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