The surge in farmland prices, which doubled in a decade amid an agricultural boom, should cool in the coming year as prices bump against the ability of cropland to pay for itself, said a panel of experts on Wednesday.
A combination of low interest rates and high commodity prices sent levels sky-rocketing. Nebraska cropland values soared by 38 percent during 2010, while Iowa was up 28 percent and Indiana up 27 percent, say Federal Reserve regional banks.
A 160-acre farm near York in eastern Nebraska sold for $12,000 an acre in February, a record for land in the state.
Soaring prices have prompted fears of a price bubble that could ruin farmers' finances in an economic downturn. So far, farmers and lenders have been cautious and land prices are justified by likely returns.
"Our expectation would be slower growth in farmland values," said Jason Henderson of the Kansas City Federal Reserve Bank and who monitors agricultural credit. Farmers have avoided dangerous debt loads, he said, and the question for the future is "how much stamina is there" for restraint in a competitive market.
Brent Gloy, agricultural economist at Purdue University, said a string of profitable years gave farmers the money to chase land when it came on the market. Prices are reaching the level that buyers need corn prices to average $5 a bushel, a historically high level, to earn enough from the land to pay for it. "The potential to get ahead of ourselves is high," he said.
"My sense is the farmland market is, hopefully, ready to slow down," Gloy said of the one-year outlook. "I don't think it's going to soften at all."
Ken Keegan, chief risk officer for Farm Credit Services of America, an agricultural lender in four Midwestern states, said volatile market prices and tight global grain supplies would be key factors in land prices.
The Omaha-based lender takes a conservative approach to lending that assumes corn prices will average $4.60 a bushel over the long term and capitalization rates will average 4 percent. And it limits its share to 65 percent of a loan that would be feasible under those parameters.
"If there is a bubble, it is not a debt-fueled bubble," said Keegan, which would limit the impact of a price deflation.
"Most lenders are being very cautious," he said.
Nationwide, farmland values hit $2,350 an acre in 2011, up 6.8 percent from 2010 and double of $1,150 an acre in 2001.
Farmers had record net cash income in 2011, following a buoyant 2010 although income is forecast to fall this year, in step with crop prices. The farm-sector boom that began in 2006 has allowed farmers to upgrade their equipment and erect enough grain bins to expand on-farm storage capacity by 10 percent average farmland value
2011 $2,350 Source: USDA