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Booming land market continues

In the first quarter of
2011, land values in the U.S. heartland surged by 20% over a year earlier,
according to a just-released survey of bankers in the Federal Reserve’s Tenth
District ­– which includes Colorado, Kansas, Nebraska, Oklahoma, Wyoming, the northern
half of New Mexico and the western third of Missouri.

The survey by the Federal
Reserve Bank of Kansas City found the biggest land value increases in Nebraska
and Kansas ­– at nearly 24% for nonirrigated cropland. Irrigated cropland was
up 23.5% in Nebraska and 18.3% in Kansas. Ranchland also rose by about 11%
across the district.

“The farm boom is
continuing,” said Brian Briggeman, an economist based at the Bank’s Omaha
office and co-author of the latest land value report. “Bankers are expecting it
to continue.”

Briggeman said some of the
256 bankers responding to the survey have talked about the possibility that
record high land prices may be “a bubble in the making” as one Missouri lender
put it.  But for now, the consensus is that land prices will remain strong
in the second quarter of 2011, with more than two-thirds expecting the rise in
cropland values to level off.

“I don’t think any are
expecting them to come down,” Briggeman told

Strong farm income is
driving land sales made mostly to farmers. And the run up in values mirrors the
boom of 2008, which also saw quarters when value increases topped 20%. Even
after commodity prices crashed in late 2008 and through 2009, farmland prices
in the district only fell  back in one quarter, and by less than 5%.

That wasn’t true of other
regions of the country, however, Briggeman said.

“You saw a lot of stress on
farmland values on the coasts,” he said. That’s where the collapse of the
housing bubble hit the value of farmland that once had greater value for its
development potential.

The latest Tenth District
survey, which was conducted from March 15-31, also showed cash rental rates
rising, especially for irrigated land. They showed a 17% increase from the year
before. In Nebraska, even nonirrigated land saw an 18% jump in cash rents.
Oklahoma, hard-hit by drought, saw cash rents for nonirrigated land go up only

Farmers buying land are
making 20% cash down payments, on average, with another 30% of the cost covered
by pledged equity. The remaining half is financed with new debt.

And much of the land being
sold is going to farmers.

“Farmland is a great
bellwether of the financial health of the agricultural industry,” Briggeman

Interest rates remained near
historically low levels at the end of the first quarter of 2011, at just over
6.5% for operating loans and just under 6.5% for real estate loans.

Briggeman says land values
could be affected if interest rates rise and investors see more attractive
returns outside of farmland.  

Right now, one measure of
the return on farmland, the capitalization rate (cash rent divided by the land’s
value) is somewhat low, at about 5% in the District.

That’s far above the return
on bank certificates of deposit, for example, but the historical average
capitalization rate is 7% to 7.5%, Briggeman said.

Officials from the Kansas
City Fed have said that if the capitalization rate goes back up to more normal
levels, farm land values could fall as much as 30% over an extended period of

“While the outlook is
bright, we can’t forget that agriculture is a very volatile today,” Briggeman

Here is the full KC Fed
article, The Farm Boom

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