Farmland values in the U.S. Midwest surged 16 percent during the first quarter compared with a year earlier, matching the largest quarterly increase from the past 32 years, as soaring crop and livestock prices bolstered demand for prime acres, the Federal Reserve Bank of Chicago said.

The upswing was led by Iowa and Indiana, where prices for “good” farmland as of April 1 jumped 20 percent and 19 percent, respectively, from a year earlier, Chicago Fed economist David Oppedahl wrote in a May 18 report:

“The latest gains were spurred by higher commodity prices, which prompted farmers to buy additional land,” Oppedahl said. According to some bankers surveyed, farmers “tended to outbid investors for agricultural land at auctions,” Oppedahl said. The report, based on a survey of the region’s agricultural bankers, didn’t provide dollar values.

Tight grain supplies and growing global demand sent corn and soybean prices rallying to multi-year highs earlier this year, fueling a farm income boom that’s expected to lift cropland values even further. Midwest farmland values have climbed by at least 10 percent for three consecutive quarters and for all of 2010 gained 12 percent, the strongest annual performance since 2007, according to the Chicago Fed.

“The rapid increase in agricultural land values may not be over,” Oppedahl said. Based on the survey, 56 percent of responding bankers expected farmland values to continue rising in their areas during the second quarter, while 2 percent expected a decline, he said.

During the first quarter, corn averaged $5.37 a bushel, up 50 percent from a year earlier, Oppedahl said, citing USDA figures. For the 12 months beginning September, corn is projected to range from $5.50 to $6.50, compared with $3.55 two years earlier.

Soybeans averaged $12.33 a bushel during the first quarter, up 29 percent.

“Projections of tight stocks for both corn and soybeans helped elevate and maintain higher prices,” Oppedahl said. The USDA forecasts crop prices to remain above first-quarter levels through the rest of this year, partly supported by strong global demand, he said.

States in the Midwest accounted for about 83 percent of the nation’s corn production in 2010 and 77 percent of soybean output, according to the U.S. Department of Agriculture.

The 16-percent rise in first-quarter Midwest land values was the largest since prices increased by the same amount during the fourth quarter of 2007, according to the Chicago Fed. Prior to 2007, the biggest quarterly year-over-year gain was 17 percent in 1979.

Illinois farmland rose 17 percent during the first quarter, while Michigan and Wisconsin farmland rose 11 percent and 9 percent, respectively.

According to an annual USDA survey released in August, Iowa cropland averaged $4,100 an acre in 2010, up 1.2 percent from 2009. Illinois averaged $4,820 an acre, up 3.2 percent, and Indiana averaged $4,030, up 2 percent.