Farmland values were 16 percent higher on average at the end of the first quarter of 2011 over the same quarter of 2010 in the Seventh Federal Reserve District, an analysis showed this week. The last time a jump larger than this occurred was in 1979, and this year’s jump was the largest since 2007, noted David Oppedahl, business economist with the reserve district. 

The farmland values being reported about are for Iowa, Northern Illinois, Wisconsin, Northern Indiana and Michigan. The quarterly report was compiled from surveys submitted by 220 district bankers. 

Land cash rentals for ag land in the district also jumped an average of the same exact 16 percent, according to Oppedahl. This would indicate that if landowners paid more for land they expected to receive higher rentals to cover their higher land expense. And those who didn’t buy land rode the good farm economy uptick expecting higher land rental for their land.

Reports show that farmers have been taking advantage of forward contracting for higher grain prices, and some of that projected higher income has gone to bid up farmland. Farmers, rather than investors, have been accounting for a large majority of the acres purchased. Potential for high land prices in auction bidding broke loose more farmland offered for sale than had been the case in previous quarters.

Oppedahl reported that more than half the reporting bankers expected farmland values to continue rising during the second quarter of 2011. The bankers helped with the price rise-up because they were making more money available than a year earlier and more money appears to be available for the coming months.   

“Illinois, Indiana, and Iowa led the way with year-over-year increases in the value of ‘good’ agricultural land of 17 percent, 19 percent, and 20 percent, respectively,” Oppedahl wrote. “Michigan and Wisconsin farmland values showed solid gains of 11 percent and 9 percent, respectively.”

It obviously was the good farmland that bidders were trying to capture for maximum return on investment with high yielding crop potential. Lower-rated ground did not come close to keeping pace in value. The quarterly increase in district farmland values was only 5 percent when all land values were averaged, but this number was still more than double the quarterly increase of a year ago.

“Cash rental rates for agricultural land in 2011 rose sharply relative to 2010—the only year over the past five that had an increase of less than 7 percent,” Oppedahl explained. The overall district cash rent increase of 16 percent from 2010 was the average of the following state cash rental rate increases: 14 percent in Illinois, 15 percent in Indiana, 16 percent in Iowa, 18 percent in Michigan, and 20 percent in Wisconsin. This increase was the second largest, behind that of 2008, since tracking of district cash rents began in 1981.

With both land price and rental rates going up equally for good land, “the unchanged price-to-earnings ratio (P/E) indicated relatively balanced demand to purchase versus rent farmland,” the economist noted.

Oppedahl provided a summary look forward. “The rapid increase in agricultural land values may not be over, according to survey respondents. For the second quarter of 2011, 56 percent of the responding bankers expected farmland values to continue rising in their areas and 2 percent expected a decline. Respondents anticipated that the volume of non-real-estate farm loans would decrease during the period from April through June of 2011 compared with the same period of 2010. The bankers forecasted smaller volumes for operating, feeder cattle, dairy, and FSA guaranteed loans. Farm machinery, grain storage construction, and real estate loan volumes were expected to increase in the second quarter of 2011 compared with the second quarter of 2010. Also, there was an indication that dairy loan volumes in Wisconsin were poised to rise after several challenging years.”