Farmland values surging as U.S crop-price gains spur income

Farmland values surged during the first quarter from Kansas to Indiana as gains in crop prices during the past two years bolster income, according to a survey of lenders by regional Federal Reserve Banks.

Midwest farmers in a five-state region saw an increase of 19 percent as of April 1 from a year earlier, including a 27 percent increase in Iowa, the largest U.S. corn and soybean grower, the Chicago Fed said in a report today. Great Plains states posted a 25 percent increase, led by a 39 percent jump in Nebraska and 24 percent in Kansas, the Kansas City Fed report showed.

Corn and soybean futures last year reached the highest averages ever, while wheat was 34 percent higher than in 2009. Net farm income for domestic growers will reach $91.7 billion this year, second only to last year's $98.1 billion, the U.S. Department of Agriculture said on Feb. 13.

"We have had two years of exceptional farm income, historically low interest rates and a lack of alternative investments driving farmland prices," Mike Walsten, the editor of Land Owner Newsletter, a unit of Pro Farmer publications, said by telephone from Cedar Falls, Iowa. "Farm income in 2011 was $30 billion higher than the 10-year average, and that's what's increasing farmer purchases."

Grain prices

The rally in farmland prices may slow because grains are down this year, Walsten said. The average corn price may fall 25 percent to $4.60 a bushel in the year that begins Sept. 1, down from an estimated $6.10 this year, the USDA said on May 10. Wheat prices may fall to $6.10 a bushel in the season that begins June 1, down from $7.25 this year.

"We are probably going into a period of more stability and a leveling off in the land market," he said. "I have seen some sales in Iowa and Illinois recently that were not as strong as I expected. It's not the same zip and drive that we saw in late 2011 or earlier this year."

During the first quarter, Indiana prices advanced 15 percent from a year earlier, Wisconsin increased 13 percent, and Michigan rose 7 percent, the Chicago Fed said. Midwest land values climbed 5 percent from the fourth quarter, and about one- third of the 231 bankers surveyed by the Fed forecast higher values in the second quarter.

"Bidding among farmers was common at farmland auctions, driving up" prices, David Oppedahl, a business economist at the bank, said in the quarterly report. "Relative to investors, farmers again purchased a higher share of the acres sold in the past three to six months."

Rents rise

The cost to rent farmland in the district rose 17 percent from a year earlier, the second-largest increase since the survey began in 1960, according to the quarterly report.

Falling interest rates for operating and real-estate loans improved credit conditions for agricultural producers in the first quarter, the Chicago Fed said. The index of rate of repayments on non-real-estate agricultural loans climbed to the highest ever and 56 percent of survey respondents reported improvement. Loan renewals and extensions declined, with 37 percent of bankers reporting fewer than a year earlier.

Loans to buy farm machinery and build grain storage were expected to rise in the current quarter from a year earlier, the Fed said.

Plains states

In the Plains states, Oklahoma had the smallest increase at 8.9 percent, according to the survey of 235 banks by the Kansas City Fed. Ranchland in the region gained 16 percent as high feed costs boosted demand for pasture, and irrigated farmland gained 30 percent from a year earlier.

"Record-high farmland prices prompted landowners to place more land on the market," bank economists Jason Henderson and Maria Akers said in the quarterly report. About a third of the bankers surveyed anticipated farmland values would rise further, while the rest expected prices to hold at peak levels.

The report covered the Fed's 10th District, which includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming and parts of New Mexico and Missouri.

Income gains in the region "spurred additional household and capital spending in the first quarter," the economists said.

In the first quarter, interest rates averaged 6.2 percent for operating loans and 5.8 percent for real-estate loans.

Several bankers reported that crop insurance and mineral leases helped with loan repayments in drought areas, according to the survey.