Farmland prices in major US agricultural states defied weakening farm incomes to maintain strong gains – in some cases, accelerating – although many bankers feel they may now "have peaked".
Farmland prices in Plains states including Kansas, the top wheat-growing state, and Nebraska, a major corn and soybean producer "surged further" during the April-to-June quarter, the US central bank said.
Prices of non-irrigated farms were 18.3% higher than a year before, with those of watered land soaring 25%, faster than the 21% growth recorded in the first three months of the year.
"Despite expectations of weaker farm income, district farmland values continued to set records," the Federal Reserve's Kansas City bank said.
The period "marks the ninth consecutive quarter in which irrigated cropland values have risen more than 20% year over year", with lingering dryness in some area increasing the premium over land without access to water supplies.
Weak income prospects
The increase defied dents to farm income from weaker winter wheat yields and prices, and falling cattle values, "although an uptick in hog prices improved profitability for some hog producers", the bank said.
And prospects for farm takings remain "weak for the rest of the year throughout the district", given weaker prices of corn and soybeans, harvested in the autumn.
"Not only would lower crop prices reduce farm income, but persistent drought in parts of the district could limit yield potential, particularly in areas without irrigation," the Fed said.
"With lower expected prices and the possibility of a poor harvest," lenders contacted for the Fed survey "expected farm income to be less than last year in each state in the district", which also includes Colorado, Missouri, New Mexico and Wyoming.
However, it was a dearth of other investment opportunities, for farmers enriched by a strong period for farm incomes, rather than hopes for agricultural returns which was incentivising land purchases
"Bankers indicated that expected farm income was not the main factor contributing to the value of farmland," the Fed said.
"Instead, bankers cited the overall wealth level of the farm sector, supported by several years of strong income, as the primary driver of farmland values.
"Low interest rates and a lack of alternative investment options were also noted as significant factors."
Nonetheless, lenders expressed doubts as to how long this effect might last in the face of weakened revenue prospects.
"While most bankers expected farmland values to remain at current levels, an increasing number of respondents felt farmland values may have peaked," the fed said.
"More bankers also expected farmland values to drop after harvest likely due, at least partially, to expectations of lower farm income," although the decline was expected to be less than 10% over the next year.
Weaker farm prosperity has already become evident in farm credit markets, with loan demand rising for the first time in three years, and repayment rates on borrowings weakening too, and expected to keep falling.
The data follow a debate at an investor call by Deere & Co on Wednesday at which analysts persistently questioned forecasts by the tractor maker that cash farm receipts, a key indicator of machinery purchases, will fall only slightly in 2014, despite tumbling crop prices.