* Strong farm income, grain price gains boost land values
* Credit conditions also improve, outlook strong for 2011
By Christine Stebbins
CHICAGO, Feb 17 Farmland values in the U.S.
Midwest, heart of the world's most productive grain belt, rose
12 percent in 2010, the second largest annual gain in 30 years,
the Federal Reserve Bank of Chicago said on Thursday.
"After adjusting for inflation, the 2010 annual increase
became the second largest since 1976 all by itself. Iowa
farmland values led the surge, closely followed by those of
Illinois and Indiana," the Fed said in its quarterly survey of
212 banks in the region.
The Fed's seventh district stretches across Iowa, Illinois,
Indiana, Wisconsin and Michigan. Iowa and Illinois alone grow a
third of U.S. corn and soybeans. The region is also a big
producer of wheat, hogs and dairy products.
"Farm income grew dramatically and then generated cash to
use to buy land," said Federal Reserve economist David
Oppedahl, who added that farmers remained the leading buyers of
land compared to non-agricultural investors.
USDA is currently estimated 2010 U.S. net farm income at
$79 billion, up 27 percent from 2009. The government is
predicting net farm income to reach $94.7 billion this year.
A big jump in commodity prices, especially grain prices
given the district's dominance in U.S. row crop production,
boosted farm income. Cash corn prices in December, for example,
were nearly 60 percent higher than a year ago.
Grain prices are at their highest since the spike to record
highs in 2008, driven by emerging market economies buying
heavily and recent price shocks from drought in growing areas.
"The only major sector that did not finish the year
strongly was dairy, which still had seen milk prices move up
for much of the year before tailing off in the fourth quarter,"
the Fed said. Corn and soy are key costs for feeding cows.
Most bankers surveyed expect farmland values to keep rising
during January to March.
Earlier this week the Kansas City Fed also reported a big
jump in farmland values for the U.S. Plains -- a double-digit
climb for both irrigated and non-irrigated land for 2010.
Some bankers worry about land values climbing too quickly,
too fast, with fears of speculative "bubbles" often cited.
The Kansas City Federal Reserve Bank President Tom Hoenig
told Congress on Thursday he is "watching the market closely"
for signs of a bubble in surging farmland values. [N17173536]
MIDWEST CREDIT CONDITIONS ALSO IMPROVE
While non-real estate loan demand was about the same as
last year, loan repayment rates for non-real estate loans
accelerated, the Fed said.
"The index of repayment rates was 142 in the final quarter
of 2010 -- and highest value for the index since early in
2008," it said. "The average loan-to-deposit ratio of 71.8
percent was the lowest in seven years."
The percentage of problem loans fell during the quarter.
District bankers classified just 3 percent of their farm loan
portfolios as having major or severe repayment problems. The
highest was Wisconsin, a top dairy state, at 5 percent.
Farm interest rates continued to trend down, averaging 5.85
percent for operating loans and 5.7 for farm real estate loans
as of Jan. 1.
For the first quarter of 2011, bankers said they expected
higher loan volumes for operating, farm machinery, and grain
storage construction loans compared to the same period in 2010.
But feeder cattle and dairy loan volume were expected to fall
in the current quarter.
The biggest capital expenditures were projected for
machinery and equipment, with 67 percent of respondents
forecasting higher purchases in the Jan-March quarter.
"The expected willingness of farmers to make renewed
investments -- indicated that the agricultural sector rebounded
from the recession more quickly than the overall economy," the
Chicago Fed said. "The issues facing agriculture will be how to
manage the volatility seen in recent years."
Top farm equipment maker Deere & Co (DE.N) reported a much
higher-than-expected profit on Wednesday for the quarter ended
Jan. 31, raising its full-year forecast as high crop prices
drove farm investment in new machinery, it said.
(Reporting by Christine Stebbins; additional reporting by
Chuck Abbott in Washington)