THE value of farmland in the heart of the US Corn Belt saw a 17 per cent year-over-year increase in the second quarter of 2011 - the largest second-quarter jump since the 1970s, according to the Federal Reserve Bank of Chicago in Illinois (Chicago Fed).
The bank's district represents Iowa, Illinois, Indiana, Wisconsin and Michigan - some of the top corn- and soybean-producing states in the US.
High crop prices as well as strong livestock and milk prices have prompted farmers and investors to buy land, the bank said. Low interest rates have also boosted demand.
Within the district, only in Wisconsin was the year-over-year increase in farmland values smaller in the second quarter than in the first quarter of 2011.
Agricultural land values climbed 20pc or more in a year in Indiana and Iowa and almost that much in Illinois.
An August 4 US Department of Agriculture report put the average price of Illinois farmland at $5800 per acre in 2011, an increase of 18pc over the 2010 average price of $4900.
According to a survey of 226 agricultural bankers in the district, the value of "good" agricultural land increased 4pc in the second quarter compared with the first quarter of 2011, Chicago Fed business economist David B. Oppedahl wrote in the district's latest "AgLetter."
A Federal Bank of Kansas City (KC Fed) survey of 246 bankers in the 10th District - Kansas, Missouri, Nebraska, Oklahoma and mountain states - found that farmland values in the district rose further, although the pace of farmland value appreciation slowed.
Non-irrigated and irrigated cropland values in the 10th District climbed 2.3pc and 3.9pc, respectively, from levels in the previous quarter to remain 20pc above year-ago values. District ranchland values edged up only 1pc from the first to second quarter and held at 11pc above year-ago levels.
Price projections
In the Chicago Fed's Seventh District, more than 60pc of survey respondents forecasted farmland values to stabilize in the third quarter of 2011, yet about one-third still expect farmland values to move higher. Specifically, only 2pc of responding bankers expect farmland values to fall in the third quarter of 2011, 36pc anticipate higher farmland values and 62pc expect no change.
Jason Henderson, an executive with the KC Fed's Omaha, Neb., branch, and Maria Akers, associate economist for the Kansas City, Mo., office, said, "Noting the slowdown in value gains since the end of last year, three-quarters of survey respondents felt that farmland values would level off in the coming months."
Farmers and non-farm investors continued to compete for quality acreage, with some contacts indicating that sales of marginal ground have also picked up, authors of the 10th District report said.
"The number of farms on the market remained low but could increase after the fall harvest," they added.
In a recent evaluation, University of Illinois agricultural economist Gary Schnitkey noted that capitalized values have closely tracked with actual farmland prices since the mid-1980s.
"In 2010, farmland prices were below the capitalized value by $438," he said. "In 2011, the $5800-per-acre farmland price was $221 above the capitalized value of $5579 per acre. The switch to price being above the capitalized values suggests that farmland prices are increasing (more quickly) than their discounted returns. However, the $221 higher farmland price in 2011 is not without historical precedents. Between 2005 through 2008, the average farmland price in Illinois exceeded capitalized value."
From a historical perspective, Schnitkey said the last time the farmland price exceeded the capitalized value by a large margin was in the early 1980s, immediately prior to the large decline in Illinois farmland prices that occurred from 1982 through 1987.
"Currently, the situation in 2011 is not like the 1980s. This suggests that either farmland returns have to decrease or interest rates have to increase before farmland prices fall," Schnitkey said.
He admits that these are disquieting economic times. Economic data suggest sluggish economic growth, raising the possibilities of a double-dip recession, he said.
"These economic headwinds likely provide support for US farmland prices," Schnitkey said. "An economic downturn likely would reduce non-farm asset returns compared to farmland returns. The threat of inflation in the future places pressure on farmland prices as farmland and other real assets are perceived as safer stores of wealth than financial assets during inflationary times. The threat of long-run instability places a premium on real assets over financial assets. This suggests that a more stable general economic outlook would lead to less aggressive growth in farmland prices."
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