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Fed: Cash rent rates reflecting land values climb

There's no question about the direction of farmland values in the last few years. Are cash rental rates reflecting this climb?

Results released this week from a survey of agricultural lenders in the Seventh Federal Reserve District show rent rates have closely shadowed the years-long climb in land values. In the Federal Reserve Bank of Chicago's survey of 240 ag bankers in the district comprising Iowa, Michigan, southern Wisconsin, and northern Illinois and Indiana, rental rates were pegged sharply higher. But, the numbers show the climb may be leveling off.

"Farmland cash rental rates in the Seventh Federal Reserve District soared higher this year compared with those in 2007, rising 21%. But the year-over-year increase in District farmland values eased to 14% in the first quarter of 2008," according to Chicago Fed business economist David Oppendahl. "The District average year-over-year increase in the value of 'good' agricultural land for the first quarter of 2008 dipped to 14% -- still the third largest such increase since 1980. Compared with the first quarter of 2007, Iowa and Michigan land values climbed the most at 17%, followed by Illinois at 14% and Indiana and Wisconsin at 10%."

These numbers, Oppendahl adds, reflect heightened competition among farmers to plant more acres to capitalize on surging grain markets. "The key factors driving both cash rental rates and farmland values higher were elevated crop prices and the prospect that corn and soybean prices will continue to rise," he says. These factors remained stronger drivers of farmland value and rental rate through the winter months than usual.

"Two thirds of the respondents reported that the demand to purchase farmland exceeded the demand of the winter and early spring a year ago," he says.

What's ahead? Oppendahl says he sees no sign of land values and rental rates sliding sharply anytime soon. Values may fluctuate in the next few months, but the upward trend in the land market will remain in play.

"Future crop prices may propel cash rents and farm-land values even higher in the quarters ahead. It's not surprising that 49% of reporting bankers expected farmland values to increase and 49% expected stable values during the period from April through June," Oppendahl says. "The responding bankers anticipated the volumes for operating, farm machinery, and grain storage construction loans to grow, while feeder cattle and dairy loan volumes would retreat."

There's no question about the direction of farmland values in the last few years. Are cash rental rates reflecting this climb?

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