UPDATE 1-U.S. Midwest farmland values see biggest rise in 35 years
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* Blistering pace slowed in Q4
* 40 pct of bankers surveyed expect more gains in Q1 2012
CHICAGO, Feb 16 (Reuters) - The record rise in farmland prices for the U.S. Midwest Corn Belt slowed in the fourth quarter, tempering the biggest annual gain since 1976, the Federal Reserve Bank of Chicago said on Thursday in its quarterly survey of agricultural bankers.
Farmland values rose 22 percent last year, but gained only 4 percent from the third to fourth quarter and may have been "cooling some from the blistering pace," the bank said in summarizing its survey results of 205 bankers in Iowa, northern Illinois and Indiana, Wisconsin and Michigan. In the third quarter, land values were up 25 percent year-over-year.
More than 40 percent of the bankers surveyed expected continued price gains in the first quarter of 2012 and only 2 percent expected a decrease, the Fed said.
"The year 2011 may go down in the annals of U.S. agriculture as a once-in-a-generation phenomenon," the bank.
"Undergirding the huge upward movement in farmland values was an unusual shift up in agricultural prices across the board. Not only did major crop prices move higher, but key livestock and dairy prices were higher as well," it said.
The Chicago Fed's survey comes one day after the Kansas City Fed said farmland prices in the U.S. central Plains states rose to all-time highs in the fourth quarter of 2011, up 25 percent from a year ago.
Farmland values are closely monitored by economists at the Federal Reserve and by commercial banks, both as a barometer of U.S. banking assets and as a benchmark for agricultural balance sheets. Farmland is basic collateral for farm loans.
Skyrocketing land values have caused worries among bankers about another potential ruinous farmland bubble like the one seen in the 1980s U.S. farm crisis, when over-leveraged farmers lost their land as interest rates jumped.
But farmers are carrying much less debt now, thanks to record farm income. Grain prices and production have also been strong, a rare double for farmers used to seeing prices fall as production rises. But booming farm exports and domestic ethanol have changed that traditional equation, market analysts say.
The Chicago Fed's district includes the most productive U.S. farmland for corn and soybeans, the two biggest row crops, as well as a large percentage of U.S. production in hogs and dairy, among other sectors.
The Chicago Fed said its district played a large role in the overall 24 percent rise in U.S. net farm income in 2011 to $98.1 billion. In the Midwest, corn prices were up 57 percent in 2011, for example, with competing crops pulled higher too -- soybeans up 26 percent and wheat 45 percent from a year ago.
Milk prices were up 23 percent and hogs and cattle prices each up 21 percent, even as producers faced higher feed costs.
But the Fed report said commodity price volatility should warrant caution by agricultural managers and bankers. Corn prices, for example, have ranged between $3.41 per bushel in June 2010 and $6.88 per bushel in August 2011.
"These wide swings in prices make risk-management strategies even more vital for agricultural enterprises, whether or not there is a higher level for agricultural prices in the era ahead," the Fed said.
After adjusting for inflation, the 2011 annual rise in farmland values of 19 percent was the largest since 1976.
"The index of inflation-adjusted farmland values set a record for the district. The compound annual growth rate for agricultural land values (adjusted for inflation) has been 5.5 percent since farmland values hit bottom in 1986." it said.
Buoyed by land and crop prices, farmer agricultural credit conditions continued to strengthen in 2011, the Fed said.
"Agricultural interest rates inched down again, setting new lows for the District. At 68.7 percent, the District's average loan-to-deposit ratio reached its lowest level since 1997." (Reporting by Christine Stebbins; Editing by Lisa Shumaker)