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

By Christine Stebbins

CHICAGO, Nov 15 (Reuters) - Falling crop prices from a bumper 2013 harvest dampened buyer interest in U.S. Plains and Midwest farmland in the third quarter, slowing price gains after years of record advances, regional Federal Reserve data showed on Friday.

The Kansas City Federal Reserve, surveying 219 farm bankers in its leading region for wheat, corn and cattle, said farmland price gains in the quarter were only 1-3 percent higher on average from the second quarter, compared to the usual double-digit annual growth seen in previous years.

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

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

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

Fed policymakers, farm bankers, sellers of seed and feed and equipment to farmers, and farmers themselves have been watching farmland auctions carefully this fall in the Midwest to pick up any pronounced weakness in the market after the sharp decrease in grain prices from last year's records. Farmland is the basic collateral for farmer loans and economists have expressed concern for months that a farmland "bubble" may pop as it did in the 1980s, hurting what has been one of the healthiest sectors of the U.S. economy.


While third-quarter surveys by the Fed bankers should allay fears of any sharp break in U.S. farmland prices, the autumn harvest season in the Midwest and Plains is usually when most farm owners put land up for sale. Most farm land buying is from neighboring farmers, who are flush with cash at harvest. U.S. interest rates also remain near record lows, and grain producers have used record prices in recent years - fueled by the biofuels boom and rising exports to Asia - to retire debt. So analysts have said that the key indicator to watch in the fourth quarter will be how much land comes on the market.

"Farmland values are holding pretty flat from where they have been. Usually the big moves in land values come in the fourth quarter, so we're right in the middle of it," Jason Henderson, a Purdue University agricultural economist and former Kansas City Fed economist, said in an interview this week. "My scenario as to how I think it's going to play out: we'll get a little softness. Then those farmers will sit there and decide, 'Is this the top of the market or not?' Those who were on the fence 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 of wheat, corn, cattle, sorghum and grazing. With drought still lingering in the Plains, the survey of farm bankers said irrigated cropland values rose 22 percent from a year ago, nonirrigated cropland increased 19 percent, while ranchland values were up 15 percent. Additionally, irrigated cropland, nonirrigated cropland and ranchland values rose 0.9, 2.8 and 2.0 percent, respectively, from the second quarter to the third quarter of 2013.

The Kansas City Fed said that it will be carefully watching the value of farmland in the fourth quarter against cash rents, a key indicator of farmland returns tied mainly to crop prices. The U.S. Agriculture Department projects 2013/14 season corn 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 year earlier and soybeans at $11.15 to $13.15 versus $14.40.

"Farmland value gains have continued to outpace increases in cash rental rates, highlighting the potential for a future adjustment in farmland values," the Kansas City Fed said. "The ratio 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 faster than cash rents in recent years."

The St Louis Fed's district, comprising all or parts of Arkansas, 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 of 2013, down from $5,672 per acre in the previous quarter. Despite this decline, quality-farmland values remain 9.1 percent higher than at the same point last year," the bank said, adding: "Bankers expect further erosion in district quality farmland values over the next three months."

The Kansas City Fed, like the Chicago Fed on Thursday, said their district bankers were in general cautious and confident that farmland values will hold up as some of the froth of speculation is taken out of the market by crop prices retreating. They said the progress of the stalled U.S. farm bill in Congress - especially all-important crop insurance available for next year's planting - and the continuing demand for U.S. grains will be key factors as fourth quarter farm land auctions proceed.

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

One farm banker in southeastern Nebraska, quoted by the Kansas 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 grain prices, we expect land prices and cash rents to go down 10 to 20 percent over the next few years," the banker said.