Cropland values in the heart of the Great Plains climbed 20% in the second quarter versus a year ago, but drought is taking a bite out of farm incomes, the Federal Reserve Bank of Kansas City said Monday.

Values of both cropland and ranchland edged up modestly from the prior quarter, the bank said in its quarterly survey of agricultural credit conditions. Ranchland in the bank's district, which includes Nebraska, Kansas, Oklahoma, Colorado, Wyoming and parts of New Mexico and Missouri, was up 11% from a year ago.

Gains were greatest in Nebraska, which saw non-irrigated farmland values jump 30% from a year ago, while Kansas posted a 21% jump. Meanwhile Oklahoma, which has been hit harder by this year's drought, saw cropland climb 10.5% from a year ago and ranchland climb 6.4%.

Drought strengthened its grip on the district during the quarter, particularly in southern areas, where it hurt the wheat crop and prompted ranchers to liquidate cattle herds as suitable grazing land withered away.

Ranchland in the district gained just 1% from the prior quarter, while irrigated farmland climbed 3.9%.

In addition to drought, rising input costs also hurt farmer incomes, the Fed said.

One silver lining for landowners in drought-stricken areas: land lease revenues from energy exploration will support farmland values, "particularly in Oklahoma and the mountain states," the K.C. Fed said.

Farmland values across the nation's mid-section, from the Dakotas to Indiana, have soared during the past year along with crop prices, which have rallied thanks to disappointing crops and relentless global demand. The K.C. Fed said three-quarters of respondents expected farmland values to level off in the coming months, but that most "expected that strong demand for farmland and tight supplies would keep prices elevated near current levels."

The jump in land values across the Midwest has prompted some concern about a potential bubble, particularly within the K.C. Fed, which has said prices could drop substantially once the Federal Reserve raises interest rates. That particular concern has been pushed back after the Fed said last week it was unlikely to raise its core interest rate until mid-2013.

A slight decrease in farm loan repayments and an increase in loan extensions in the quarter was not expected to extend through the rest of the year, the K.C. Fed said.