WEST LAFAYETTE, Ind. — Land values declined in the Midwest over the past year, according to the most recent Federal Reserve Bank of St. Louis survey.

The average value of quality farmland was down 2.5 percent in the first quarter of 2015 compared to the same period a year ago, according to the survey of agricultural banks in the Eighth Federal Reserve District.

The study also found cash rents declined 3.3 percent from the previous year. A majority of bankers expected the downward trend in land values and cash rents to continue into the second quarter. The Eighth District includes parts of Illinois, Indiana, Kentucky and Tennessee.

The survey’s findings aren’t a surprise given the decline in commodity prices and the tightening of margins, said Craig L. Dobbins, a professor of agricultural economics at Purdue University.

"Those kinds of outcomes from land surveys will be the norm for a while here," he noted. "In most markets, when things are going up sharply, there’s a tendency for buyers to be a bit optimistic and the market may shoot past where it should be. The question now is, how big will the correction be with this? I think it will play out over a period of time."

Commodity prices and interest rates are always key factors in land values, he said. Interest rates are still low but some analysts are saying those rates could be heading up. The value of the dollar has strengthened, which puts agriculture at a disadvantage because the industry is very export-oriented, he explained.

"Farmers make up a significant portion of buyers in the (land) market," Dobbins said. "When they get cautious, demand overall isn’t as strong as it was when corn was at a higher price."

Land values and buyer interest both seem to depend on the quality of the property, said R.D. Schrader, president of Schrader Real Estate & Auction Co., based in Columbia City, Ind.

"Higher-quality soils seem to be hanging in there," he noted. "Those pricing levels haven’t seen a lot of fall-off. On poorer-quality land, though, there is some fall-off. There also continues to be quite a bit of (buyer) competition out there. For poorer soils, people are looking to buy, but at a different level than in the past."

The value of the land is a product of its return – and the return on $3.50 corn is less than $7 corn, he pointed out. Despite the decline in commodity prices, there is still a substantial amount of cash available, as farmers have saved over the last few years, he added.

"The problem isn’t where they are today, but how profits will be this year and in the next couple of years," Schrader explained. "Farmers have to consider how much more they’re willing to invest and how much is it worth to them."

Land inventory is pretty tight and demand is still steady, both of which contribute to keeping prices up. "If we’re coming off the mountaintop, we’re still awfully close to that mountaintop," he said. "Prices are still strong compared to five, 10, 20 years ago."

Potential buyers may be showing a bit more caution in making land purchases, said Pat Karst, vice president for Halderman Real Estate Services, based in Wabash, Ind.

"We still have big audiences at our auctions but people aren’t quite as aggressive," he explained. "We can see where their stopping point is. Two years ago they were much more aggressive."

Demand for land has dropped slightly, Karst noted. "Land values come down when buyers run out of cash, and I think that’s happening. Some guys, though, have kept their powder dry and are saying they’ve bought their last $10,000 farm. They’re financially sound.

"At what point do they enter the market – a 10 percent decline, a 20 percent decline?" he asked.

Traditionally, most farmland sales occur between harvest and planting, Karst said. Halderman is working with landowners who know they will be selling to get their property on the market this summer or in the early fall, he said.

"They want to be on the market when others aren’t," he noted. "They’re thinking prices are going down. Land value is a product of what it earns. With the start of the crop we’ve had this year nationwide, we’re probably going to need a drought somewhere, especially in Illinois and Iowa, in order to make a dent."

Dobbins will begin work this month on Purdue’s annual Farmland Value Survey. The study will look at values over the past 12 months. Land will be categorized as top, average or poor, depending on productivity, location and other factors.