Farmland values in the U.S. Plains states rose 20 percent in the first quarter from a year earlier, with acreage commanding record prices because of red-hot demand for cropland in the world's biggest food-exporting nation, the Federal Reserve Bank of Kansas City said on Wednesday.
The rise marked the third straight year of double-digit annual increases, setting a survey record, the bank said, but the rate of gains moderated from the fourth quarter, with slower growth in farm income.
"There was a modest slowdown in farmland value growth in the first quarter," Nathan Kauffman, the bank's economist in charge of the survey, said in an interview. "At this point we haven't seen anything to suggest there is going to be a rapid decline. How this plays out going into 2014 is going to be the bigger question if farm incomes fall significantly from 2013 levels."
The Kansas City Fed's quarterly survey of 223 regional bankers is a closely watched gauge of the U.S. farm economy. The district stretches across the major wheat, corn and cattle states of Colorado, Kansas, Nebraska, Oklahoma and Wyoming, along with parts of New Mexico and Missouri. So it is seen as a barometer of both grain and livestock trends.
"The farm economy is strong. Our bankers have expressed that loan demand is still soft because the economy is so strong," Kauffman said.
Skyrocketing land values, the basic collateral for most farmer loans, have stirred fears of the possibility of a ruinous bubble the last few years like the one in the 1980s when overleveraged farmers lost their land as interest rates jumped.
But farmers, especially grain producers, are in a much stronger financial position now than 30 years ago after several years of record exports of and prices for their crops.
"Farmers have had more cash the last couple years than usual. So a lot of farmers have been using cash to pay down debt," Kauffman said. "There are certain groups that have limited cash," he added, such as livestock producers who have seen a prolonged squeeze from high corn and feed prices.
But the main holders of farmland - grain farmers - continue to enjoy profitable returns, drought or not, due to protections like crop insurance, he said.
"Most farmers have crop insurance and 2013 should be relatively strong for most farmers because they are more or less guaranteed a profit from crop insurance," Kauffman said.
SLOWER PACE OF PRICE GAINS
In the Plains, irrigated farmland attracted the most interest in the first quarter. Values rose 21.5 percent from a year earlier, boosted by lingering concerns after the worst drought to hit the United States since the 1930s, according to the Kansas City Fed survey. Plains ranchland values jumped 14 percent.
However, compared with the fourth quarter, the frantic pace of farmland price gains moderated, the Fed said.
Non-irrigated cropland and irrigated cropland rose 7.7 percent and 9.0 percent, respectively, from the fourth quarter of 2011 to the first quarter of 2012. By comparison, non-irrigated cropland and irrigated cropland rose 3.4 percent and 2.9 percent, respectively, between 2012's fourth quarter and the first quarter of this year.
"Cropland value gains slowed compared with last year due to falling crop prices and rising input costs," the bank said.
(U.S. Plains farmland values:)
The western half of Missouri posted the biggest jump in land values, with non-irrigated farmland prices up 28 percent from a year earlier, the Kansas City Fed said.
Bankers in the Kansas City Fed district said record land prices raised debt obligations for young and beginning farmers and producers expanding their operations.
"Producers appeared to be taking advantage of record low interest rates to finance capital purchases but were using cash to cover operating costs, limiting overall operating loan demand," the bank said.
Loan repayment rates remained higher than in 2012, but bankers expected the pace of improvement to slow due to rising production costs and forecasts for lower farm income.
"Some bankers expressed concern that a downturn in farm income or land values could impact the ability of more leveraged operations to meet debt obligations, particularly for borrowers using land as collateral on other loans," the Kansas City bank said.
Also on Wednesday, the Federal Bank of St. Louis issued its first-quarter survey for farmland in the southern Midwest and Mid-South, a region that includes eastern Missouri, Arkansas, southern parts of Illinois and Indiana, western sections of Kentucky and Tennessee, and parts of northern Mississippi.
Bankers said farmland values fell 2 percent in the district from the fourth quarter, but the survey provided no year-earlier comparisons because this was only the bank's fourth quarterly survey.
However, many bankers also thought land values and cash rents would continue to rise in the current quarter, if at a tempered pace, the St. Louis Fed report said.
"In the District as a whole, 51 percent of respondents indicated that the financial condition of crop producers improved either modestly or significantly from one year ago. In addition, another 31 percent of respondents indicated no change in the financial condition of crop producers," the St Louis Fed said. "Only 2 percent of bankers identified a decline in land values as the most significant risk in 2013."
The Chicago Federal Reserve, which surveys bankers across the heart of the Midwest Corn Belt, said it will release its banker survey on Thursday.