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Irrigated land a hot commodity -- Fed

When a drought's on, you need water.

And, new data shows that's exactly what's happened in the farmland market over the last few months in the nation's center where some of the worst effects of the drought effects unfolded in the latter half of 2012. More farmers and investors sought out land under irrigation in the last quarter of 2012 in an effort to beat back the potentially prolonged effects of the 2012 drought.

There was a "rush" in irrigated land sales during the 4th quarter of last year in the nation's center, according to a report this week from Kansas City Federal Reserve economist Nathan Kauffman.

The numbers show a major spike in demand for irrigated land in the nation's center; just in the 4th quarter of 2012 alone, sale prices rose by 13%. That translated to a 20% increase in cash rent rates for irrigated land from a year prior.

But, that's just part of the equation; non-irrigated land saw similar gains. It shows just how much of an influence crop insurance coverage had on farm incomes despite the dry conditions that gutted yield potential.

"Farmland values rose with stronger-than-expected farm incomes. High pre-harvest crop prices lifted incomes, especially for farmers on irrigated land, while crop insurance payments compensated for yield losses on non-irrigated land. A post-harvest decline in crop prices and strengthening cattle and hog prices improved livestock profitability as losses narrowed," Kauffman says. "Although fourth-quarter incomes were better than expected, bankers expressed concerns that drought could affect some areas further in coming months. Farm incomes were expected to drop in Kansas and Oklahoma, as pasture conditions generally remained poor due to ongoing drought. But strong farm incomes were expected to continue in areas with sufficient water availability."

Those concerns were most acute in the southern reaches of the district, namely in Kansas and Oklahoma where the cattle herd and wheat crop have both been decimated by drought. Those concerns have manifested themselves in expectations for capital spending to remain lower in the areas that have been driest in the last 6 months, Kauffman says.

"As with farm incomes, expectations for further capital spending varied by state. After strong fourth-quarter capital spending in Nebraska, bankers expected purchases to remain relatively strong over the next three months," he says. "Conversely, survey respondents expected capital spending to fall with lower incomes and potential water concerns throughout the District, especially in Kansas and Oklahoma. Bankers generally expected household spending across states to follow a pattern similar to that of capital spending."

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