U.S. crop price decline cools farmland value boom-Fed


By Christine Stebbins

CHICAGO, Nov 15 (Reuters) - Falling crop prices from abumper 2013 harvest dampened buyer interest in U.S. Plains andMidwest farmland in the third quarter, slowing price gains afteryears of record advances, regional Federal Reserve data showedon Friday.

The Kansas City Federal Reserve, surveying 219 farm bankersin its leading region for wheat, corn and cattle, said farmlandprice gains in the quarter were only 1-3 percent higher onaverage from the second quarter, compared to the usualdouble-digit annual growth seen in previous years.

The St Louis Fed, in its quarterly survey of 47 bankers inthe south-central Midwest and Delta area, said farmland priceseased 6 percent from the prior quarter with more weaknessexpected.

Those findings were in line with the rich crop region eastof the Plains in the heart of the Corn Belt. The Chicago FederalReserve on Thursday said in its own survey of farm bankers inIowa, Illinois and the upper Midwest crop land prices were up 14percent year-on-year but only up 1 percent from the previousquarter as of October 1, with values actually easing 1 percentin the quarter on Iowa, the top corn state.

"While District farmland values increased on the whole inthe third quarter of 2013, this upward trend was not expected tocontinue," the Chicago Fed said.

Fed policymakers, farm bankers, sellers of seed and feed andequipment to farmers, and farmers themselves have been watchingfarmland auctions carefully this fall in the Midwest to pick upany pronounced weakness in the market after the sharp decreasein grain prices from last year's records. Farmland is the basiccollateral for farmer loans and economists have expressedconcern for months that a farmland "bubble" may pop as it did inthe 1980s, hurting what has been one of the healthiest sectorsof the U.S. economy.


While third-quarter surveys by the Fed bankers should allayfears of any sharp break in U.S. farmland prices, the autumnharvest season in the Midwest and Plains is usually when mostfarm owners put land up for sale. Most farm land buying is fromneighboring farmers, who are flush with cash at harvest. U.S.interest rates also remain near record lows, and grain producershave used record prices in recent years - fueled by the biofuelsboom and rising exports to Asia - to retire debt. So analystshave said that the key indicator to watch in the fourth quarterwill be how much land comes on the market.

"Farmland values are holding pretty flat from where theyhave been. Usually the big moves in land values come in thefourth quarter, so we're right in the middle of it," JasonHenderson, a Purdue University agricultural economist and formerKansas City Fed economist, said in an interview this week. "Myscenario as to how I think it's going to play out: we'll get alittle softness. Then those farmers will sit there and decide,'Is this the top of the market or not?' Those who were on thefence thinking about selling, if they think this is the top,then they'll put it on the market."

The Kansas City Fed district includes Kansas, Nebraska,Oklahoma and parts of Missouri and Colorado, a top region ofwheat, corn, cattle, sorghum and grazing. With drought stilllingering in the Plains, the survey of farm bankers saidirrigated cropland values rose 22 percent from a year ago,nonirrigated cropland increased 19 percent, while ranchlandvalues were up 15 percent. Additionally, irrigated cropland,nonirrigated cropland and ranchland values rose 0.9, 2.8 and 2.0percent, respectively, from the second quarter to the thirdquarter of 2013.

The Kansas City Fed said that it will be carefully watchingthe value of farmland in the fourth quarter against cash rents,a key indicator of farmland returns tied mainly to cropprices. The U.S. Agriculture Department projects 2013/14 seasoncorn prices at $4.10 to $4.90 a bushel versus $6.89 last year,with wheat at $6.70 to $7.30 a bushel versus $7.77 a yearearlier and soybeans at $11.15 to $13.15 versus $14.40.

"Farmland value gains have continued to outpace increases incash rental rates, highlighting the potential for a futureadjustment in farmland values," the Kansas City Fed said. "Theratio of non-irrigated cropland values to cash rents,historically less than 20, recently reached 27 in the district.Irrigated cropland values have also risen significantly fasterthan cash rents in recent years."

The St Louis Fed's district, comprising all or parts ofArkansas, southern Illinois and Indiana, Kentucky, Mississippi,Missouri and Tennessee, is a major producer of corn, soybeans,hogs, winter wheat and other cash crops.

"Values averaged $5,332 per acre in the third quarter of2013, down from $5,672 per acre in the previous quarter. Despitethis decline, quality-farmland values remain 9.1 percent higherthan at the same point last year," the bank said, adding:"Bankers expect further erosion in district quality farmlandvalues over the next three months."

The Kansas City Fed, like the Chicago Fed on Thursday, saidtheir district bankers were in general cautious and confidentthat farmland values will hold up as some of the froth ofspeculation is taken out of the market by crop pricesretreating. They said the progress of the stalled U.S. farm billin Congress - especially all-important crop insurance availablefor next year's planting - and the continuing demand for U.S.grains will be key factors as fourth quarter farm land auctionsproceed.

"With less farmland typically for sale before harvest,strong demand for high-quality cropland kept prices elevated.However, some survey respondents noted longer marketing timesand commented that price gains had moderated somewhat," theKansas City Fed said of the third quarter. "While most bankerssurveyed expected farmland values would hold steady, someindicated farmland values could begin a gradual decline as 2014approaches, particularly if income from crop production weakensfurther."

One farm banker in southeastern Nebraska, quoted by theKansas City Fed, summed up the cautious view of Pains lenders.

"With normal grain production in the Corn Belt, farmers'cash flows are going to get much tighter. With lower grainprices, we expect land prices and cash rents to go down 10 to 20percent over the next few years," the banker said.

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