Bullish grain markets are boosting a lot of farm profits in the nation's midsection, and that's translating to across-the-board jumps in both land values and average farm income, according to a report released this week by economists at the Federal Reserve Bank of Kansas City.

The nation's center, from Missouri to Wyoming and Oklahoma to Nebraska, saw double-digit gains in the fourth quarter of 2010 over the previous year. Kansas led the charge in the region, with land value gains coming in between 14.3% and 19.5%. Those gains pace what Kansas City Fed economist Brian Briggeman says was the "strongest year-over-year gains since the substantial run-up in values during 2007-08.

"Rising farm income, especially for crop producers, drove nearly 20% annual value gains for Kansas and Nebraska farmland. In Oklahoma and the Mountain states, annual farmland value gains were not as sharp due to extremely dry conditions threatening crop yields and limiting cattle grazing," Briggeman says. "Some survey respondents reported record sales prices, and around half expected cropland values would rise further in the coming months."

How did those values translate to cash rental rates? The latter didn't climb as much as the former, raising concerns for some of the lenders surveyed in the Fed's survey.

• Talk: $1,200 land rent
• See more in the Fed's report

"With farmland value gains outpacing the increase in cash rents, some District bankers were concerned that land values may not maintain their torrent pace," Briggeman says. "Three-quarters of survey respondents reported that loan-to-value ratios at their bank had not changed in the last year; however, almost 20% of bankers indicated a decline in typical loan-to-value ratios used for farm real estate transactions. A few bankers mentioned that loan amounts had been capped at a set dollar amount per acre, regardless of purchase price or appraised value. One District contact emphasized tighter scrutiny when evaluating maximum loan amounts."

While farm incomes were found higher in the fourth quarter of 2010 than the previous year, the amount of land bought by investors also climbed, Briggeman says. But, that doesn't include investment land for future development. "Regarding nonfarmer purchases, more bankers reported farmland was bought for investment purposes, such as receiving farm rental income and earning capital gains. Compared to previous years, fewer survey respondents reported farmland sales for recreational use or residential/development projects."

All these conditions resulted in improved credit conditions and lower farm loan demand. And, the Fed's survey shows many farmers are putting their extra 2010 income on preparations for their 2011 crops already.

"Survey respondents reported that farmers used a portion of their elevated income to prepay for next year’s crop inputs. District bankers also noted increased use of vendor credit to finance seed, fertilizer and equipment purchases. However, survey respondents expected loan demand would pick up before spring planting," Briggeman says.