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Farmland value dip seen lasting through 2014 -- Fed

Another quarter's passed, and so has materialized a sign that the farmland market's reached a plateau and, in fact, is nearing a tipping point at which a downward price trajectory is reality.

In the nation's center comprising the Federal Reserve Bank of Kansas City, the gains in farmland value that had been at breakneck levels in the years preceding the last few months have slowed dramatically, with some values already on the decline, according to the latest land survey results from the Kansas City Fed released this week. Omaha Fed Branch executive Nathan Kauffman says the price decline in some areas is more noteworthy based on the inventory of land on the market, causing some ag lenders to suspect the decline will have legs through most, if not all, of 2014.

"The sharp slowdown in cropland price gains occurred despite there being less farmland for sale compared with last year," Kauffman says. "Looking ahead, more bankers expect farmland values to decline in 2014 while fewer expected prices to rise further."

Overall in the Fed's Kansas City district, land rose in value by 1%, a stark contrast from the 6% average value gain each year going back to 2010. Those numbers translate to a huge jump in the number of ag lenders who feel values have topped.

"A growing number of District bankers felt that farmland values have topped out and could retreat from current highs. At the end of 2012, only 1% of survey respondents expected a decline in cropland values compared with 16% at the end of 2013," Kauffman says. "Several contacts cited land quality as a main driver of price appreciation and indicated there was still competition for highly productive farmland but little demand for marginal ground."

Grain prices continue to be the main driver of lower land prices. Inputs like land have fallen, but not as quickly as grain prices did in late 2013 and early 2014, and the potential -- or likely, in some cases -- profit loss has led to a lot less interest in farmland that some say was already well overpriced.

"Lower crop prices continued to dampen farm income. Despite some drought conditions during the growing season, fall crop yields in most of the District recovered to near-average levels," Kauffman says. "Still, the rebound in crop production was not enough to overcome the drag on income from lower prices that have prevailed since harvest, particularly for corn."

Concerns about the disconnect between grain prices and general input costs -- and how that disconnect could yield a crop income scenario at or near the breakeven point for corn and maybe soybeans -- will likely keep the land market from turning back around from the current trend, Kauffman says, noting that other costs may not influence overall farm income as much as a big-ticket buy like farmland, but the volatility in lesser input markets is enough to keep most farmers cautious.

"Looking forward, bankers expected farm income to remain weak in 2014 unless production costs begin to moderate. They noted that while fertilizer costs had declined 17 percent from their peak in May 2013, prices of other crop inputs had not adjusted," Kauffman says. "In fact, seed prices continued to climb and have doubled since 2007. Though more volatile, fuel costs have remained at a historically high level for almost two years."

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