REFILE-WRAPUP 1-US farmland prices stay strong despite drought

Thu Nov 15, 2012 5:28pm EST

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* Farmers, investors paying top prices for U.S. cropland

* Farm income hurt by rising feed, fuel prices on drought

* Livestock operations, other farmers take out more loans

By Christine Stebbins

CHICAGO, Nov 15 (Reuters) - Farmland prices in the United States, the world's largest grain and food exporter, stayed strong in the third quarter as cash-rich farmers and investors ignored the worst drought in 50 years and pushed values to record highs in many areas.

Quarterly surveys by Federal Reserve banks in the Midwest, Plains and mid-South showed that grain farmers, though hit hard, did much better than livestock and dairy operators in coping with the drought, thanks to extensive crop insurance. Growers continue to buy and rent more land, with record corn and soybean prices seen staying as key drivers in 2013.

Farmland values had the strongest gains in the Plains states in the July-September quarter, even as corn and soybeans wilted from drought. Average farmland prices in the Plains states jumped as much as 25 percent, setting new highs, according to a Kansas City Federal Reserve survey of 241 district bankers.

"Drought conditions had little effect on the demand for farmland, and bankers expected sales to remain solid even with a seasonal upswing in the number of farms for sale after harvest," the KC Fed said of its district, which includes the major crop and cattle states of Colorado, Kansas, Nebraska, and Oklahoma.

"It's still a hot market," said Jason Henderson, chief economist for the KC Fed.

"I think people are expecting prices to hold at least until the first part of the year," he added. "Right now what we are seeing is the demand is still very strong, even though there is more land being put on the market."

The Federal Reserve Bank of Chicago said Midwest crop land values rose an average of 13 percent from a year ago in the third quarter, which the bank noted was the slowest year-on-year gain in a quarter since 2010. A year ago, Midwest crop land prices rose 25 percent in the third quarter, the biggest jump in more than three decades.

But the Chicago Fed indicated that was misleading since demand in the quarter for farmland stayed strong. Farmland prices in July-Sept were up 5 percent from the previous quarter and crop land prices were expected to continue rising in the fourth quarter of 2012, based on its survey of 233 bankers published on Thursday.

"The drought does not seem to have derailed bankers' anticipation of further upward movement in farmland values. Moreover, the demand to acquire farmland this fall and winter was not anticipated to ebb, particularly among farmers," the Chicago fed said.

The bank's district includes Iowa, northern Illinois and Indiana, and most of Michigan and Wisconsin. The region accounts for more than a third of all U.S. corn and soybeans and has a large concentration of hogs and cattle, especially dairy; and supports a vast new network of ethanol and biodiesel plants.

"The high level of interest in farmland should also persist on account of the sustained strong demand among nonfarm investors," the bank said, with a third of the bankers surveyed saying they expected more investor demand for prime Midwest farm acreage.

The St. Louis Federal Reserve Bank, in a survey of mid-South farmland issued on Thursday, said farmland prices varied in the quarter, with Missouri row crop land drawing the highest prices. But district farmland prices in general were forecast to keep rising in the next three months. The St. Louis Fed just began its surveys last quarter.

CLOSELY WATCHED BELLWETHER

Farmland values in the central United States are closely tracked by government economists as a gauge of the U.S. economy and health of the banking system. In recent years both crop prices and farmland prices have set records as the burgeoning biofuels industry and record food exports spotlighted the value of hard rather than paper assets.

In October, a parcel of 80 acres of crop land in northwestern Iowa sold for a record $21,900 an acre.

Sky-rocketing land values have stirred banker fears about the possibility of a 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 today, thanks to record incomes in recent years.

According to the U.S. Agriculture Department, U.S. farmer assets will rise to $2.55 trillion in 2012, up 26 percent from 2008. Of those 2012 assets, $2.2 trillion is represented by farmland. Farm debt is projected up 8 percent from 2008 to a $261 billion in 2012. So both debt-to-equity and debt-to-asset ratios for farmers are down sharply.

Bankers said that despite the drought many grain farmers look set to continue to buy crop land in coming months.

"Land value gains continued to accelerate faster than cash rents as annual rental rates increased an average of 12 percent for both cropland and ranch land in the third quarter," the KC Fed said, underscoring the farmer demand for land. (Reporting By Christine Stebbins; Editing by Peter Bohan and Bob Burgdorfer)

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