* Strong farm income, grain price gains boost land values
* Credit conditions also improve, outlook strong for 2011
By Christine Stebbins
CHICAGO, Feb 17 (Reuters) - 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]
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