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Farm land values continue skyward

The farm land values rocket shows no sign of falling from orbit, at least in the 2 districts of the U.S. Federal Reserve encompassing much of the nation's midsection.

Land gained 25% in value in both the Chicago and Kansas City Fed districts, according to Fed economist David Oppendahl and Omaha branch executive Jason Henderson. That's a record one-year gain for both regions, and at least a portion of the ag bankers surveyed in the Fed's latest land value reporting say the trend "has yet to peak."

At least in the Kansas City Fed district -- which includes Kansas, Missouri, Nebraska and Oklahoma -- Mother Nature had as much to do with the last quarter's land value movement than anything. Irrigated crop land in Nebraska gained 40% in value in the last year, while crop ground in Oklahoma, where drought slammed crop yields this year, only held steady in value.

"Expectations of bumper crops and rising farm income in Nebraska fueled a record 40% jump in the value of irrigated acreage compared to last year," according to Henderson. "Almost half of those surveyed in Nebraska expected farmland values would continue to climb, whereas less than 20% of bankers in Oklahoma anticipated further farmland value appreciation."

In the Chicago district, Oppendahl says in addition to rising values, the rise in values aren't the only figures that show strong overall health in the farm sector there.

"Credit conditions for agricultural producers in the third quarter of 2011 remained favorable, as interest rates on farm operating and real estate loans declined further," he says. "However, there was also a slight tilt toward requiring higher levels of collateral to qualify for loans. Repayment rates for farm loans rose in the third quarter of 2011 relative to those of a year ago, while loan renewals and extensions declined."

On top of all that, Oppendahl adds that the availability of funds at District banks is at its highest level in 24 years.

Nebraska and Iowa saw the highest year-over-year increases in crop land values at 38% (41% for irrigated ground) and 31%, respectively. And, for a lot of that land bought over the last year, Henderson says the trend in his district mirrors what's happening in the Chicago Fed district.

"With a limited number of farms for sale during the growing season, strong competition bid up sales prices at public auctions. For new farmland purchases, bankers continued to report that cash down payments averaged 20% of the purchase price, pledges of existing equity accounted for another 30% and the remaining 50% was financed with new debt," Henderson says. "Mirroring movements in land values, cash rental rates also rose compared to last year and were up 15% for nonirrigated and 21% for irrigated acreage in the District."

Looking ahead, Oppendahl says there's a lot of bullish sentiment for farm incomes and land values in the next year in his district, while Henderson says the weather will have a lot to do with how things unfold in the next year, especially where this year's drought was most severe.

"District farm incomes remained above year–ago levels, despite softening in the third quarter as drought continued to shape District income. In Nebraska, where farmers enjoyed ample precipitation, bumper crops fueled strong farm income gains even with a downturn in crop prices just before harvest. In contrast, bankers in drought-stricken Oklahoma expected farm incomes to dip below year-ago levels," he says. "Survey contacts reported that cattle herd liquidations in drought areas provided a temporary boost to farm income, and tight supplies may support stronger livestock prices going forward."

And, despite more expectations for higher land prices and incomes in the next year, the costs associated with raising next year's crop will also rise, translating to higher expected operating loan volume next year.

"For operating loans, farm machinery loans, and grain storage construction loans, there were more responding bankers who expected augmented volumes than those who expected smaller volumes," Oppendahl says.


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