* Bumper crops, biofuels and export demand power gains * Farm balance sheets improve as debts paid, land acquired By Carey Gillam and Christine Stebbins KANSAS CITY/CHICAGO, Nov 15 (Reuters) - U.S. farmland prices in the third quarter surged to the highest levels in more than three decades amid an accelerating agricultural boom that has so far defied fears of a bubble about to burst. Prices hit record highs in the U.S. Plains, where wheat and cattle dominate production, and jumped 25 percent in the Midwest Corn Belt, where bumper grain crops and recovering livestock markets put more money in farmers' wallets and enticed investors to bid up for the fertile ground, according to two Federal Reserve bank surveys issued on Tuesday. The surge has picked up pace even as major crop prices fall from peaks earlier this year, cheering farmers who have seen their land values rise nearly tenfold in a decade, but vexing economists who worry that a country still mired deep in a housing slump can ill afford a destabilizing rural crash. "It is amazing," said Carl Sousek, who has farmed for 30 years in east-central Nebraska. "I've been in this business long enough, I remember working a night shift just to get by, to be able to buy Christmas gifts for the kids. These are good times." Investor enthusiasm is starting to cool as prices rise, fueling fear that the farmland value bubble may be about to burst. But many experts say the tell-tale signs of an unsustainable boom are lacking. Unlike the 1980s, buyers are paying cash, not relying on credit, and farmers are paying down their debt loads. Demand for U.S. grains by China and other countries shows no sign of subsiding as the world's population tops 7 billion and is still climbing. And growing demand for biofuel, which uses about 40 percent of the U.S. corn supply, remain strong supportive factors, experts say. Indeed, strong farmland prices are a rare bright spot for the U.S. economy. Grain farmers are retiring debt and building equity, moves that buttress farm banks and lenders like the Farm Credit System. But early warning signs are starting to appear. While arable land in the world's most productive consumer is limited, South America and Africa are attracting billions of investor dollars for the tilling of land that is much cheaper than U.S. acres. "We are essentially on the sidelines in the Corn Belt and Nebraska. In our judgment, prices there are too high," said James McCandless, head of global real estate-farmland for UBS AgriVest, a major investor in U.S. farmland production of 25 different row, vegetable and permanent crops.UP 25 PCT ON 2010 Cropland values in the Plains states rose more than 25 percent over the past year to a record high while ranchland values increased 14 percent, the Federal Reserve Bank of Kansas City said in its quarterly survey of 243 banks in the region. It was the fastest rise in cropland values in the survey's history. Nebraska posted the strongest gains with irrigated and nonirrigated land values rising approximately 40 percent above year-ago levels, the Kansas City Fed said of the Plains states. Oklahoma, mired in one of its worst droughts ever, saw a gain of just over 10 percent, however. Meanwhile, the price of farmland in the Midwest Corn Belt rose 25 percent in the third quarter, the biggest year-on-year jump in more than three decades, a survey by the Chicago Federal Reserve Bank showed. The top U.S. corn-growing state of Iowa is seeing eye-popping prices, according to land brokers. Last month, buyers of an 80 acre farm outside Des Moines paid $16,200 an acre for the row crop and pasture land, a staggering amount that surprised veteran land agent and auctioneer Jeffrey Obrecht of Farmers National Co in Iowa. Ten years ago, farmland in the county was valued at $1,892 an acre, according to an annual Iowa State University survey. "We had an opening bid of $10,000 an acre, and it kept going up and up and up," Obrecht said. "That was a lot, even for what we're seeing out here." The rising values have helped buoy earnings for big farm equipment firms as flush farmers feel more comfortable investing in new tractors and other equipment, although it has not helped their shares outperform the broader U.S. market this year. No. 1 Deere & Co is down 10 percent, No. 2 CNH Global NC down 17.5 percent and No. 3 Agco Corp down 8.8 percent so far this year, while the broad Standard & Poor's 500 index is little changed. All three companies' shares are up sharply over the past month, though. BUBBLING UP? Fears of a farmland bubble have been spreading for more than a year, fueled by warnings from some analysts and federal monetary leaders. Leland Strom, CEO of the Farm Credit Administration, told Reuters Tuesday that he viewed the current climate with "extreme caution." "I'm not ready to term it an asset bubble. I think we are in an era that warrants extreme caution by those in the industry, the farmers or investors who are purchasing land," he said. Many say fears of a bubble are overblown, however. They point to fundamental demand for food and the fact that speculative investment in the sector is limited. "Agriculture is cyclical, but typically when you have a bubble you have certain characteristics that are not in this market," said Loyd Brown, president of Hertz Farm Management, which handles acquisitions and farmland management from Colorado east to Illinois. Although crop prices are down some 20 percent or more from their peaks earlier this year and about flat from a year ago, livestock prices remain higher, supported by strong demand. The Chicago Fed also said that farm credit conditions continued to improve and interest rates on farm loans fell below the prior quarter's record lows. "Farm credit conditions generally held steady across all district states in the third quarter," the Kansas City Fed said. "Bankers reported strong agricultural loan portfolios even with varied farm income levels. The loan repayment index was little changed from the second quarter and remained well above year-ago levels," it added. Back in Nebraska, Sousek and his 24-year-old son would like to buy more land but have so far focused on paying down debt and improving their cropland. The good times are good, he said, but he is cautious about making more acquisitions. "We've had good times and bad times ... things can change in a big hurry," he said.