CHICAGO, Ill. — Midwest farmland values rose an average 15 percent on a year-over-year basis (July 1, 2011 to July 1, 2012) and 1 percent in the second quarter of 2012 despite severe drought conditions, according to a Federal Reserve Bank of Chicago (FRBC) rural bankers’ survey.

“Drought became the biggest storyline over the summer for Midwest agriculture, and indeed, it contributed to less rapid increases in farmland values during the second quarter of 2012,” said David Oppedahl, FRBC business economist.

Based on the responses of 205 agricultural bankers, the FRBC’s second-quarter survey Farmland Values and Agricultural Credit Conditions report tracked farmland values for the Seventh Federal Reserve District, which includes northern Indiana, northern Illinois, Iowa, Michigan and Wisconsin.

Oppedahl said the rise in the value of “good” Midwest farmland was 1 percent in the second quarter, compared to the first quarter of 2012, which was the smallest quarterly increase in the past two years.

“With 22 percent of the respondents anticipating higher farmland values for the third quarter of 2012 and only 4 percent anticipating lower ones,” he said, “the drought did not seem to have stifled all the momentum of rising agricultural land values.”

The survey, released Aug. 17, stated an average acre of Iowa farmland jumped to 24 percent between July 2011 and July 2012; Illinois rose to 15 percent and Indiana jumped to 12 percent. (Michigan’s percentage wasn’t recorded for this survey). Wisconsin was the only state that matched its year-over-year increase for the first quarter of 2012, remaining at 13 percent.

Several respondents said demand for higher-quality farmland still outpaced the supply, Oppedahl said. “Responding bankers predicted that as the drought continues to spread across much of the district during the third quarter, farmland values would likely level off but not face much downward pressure from the drought’s effects,” he explained.

While only 4 percent of respondents forecast farmland values to decline in the third quarter of 2012, 22 percent forecast a raise.

“With over 70 percent of the respondents expecting stable agricultural land values for the third quarter of 2012, the consensus was for farmland markets to move sideways,” Oppedahl said. “Even so, the drought threatens to reduce the district’s output of corn and soybeans dramatically.”

Troy Louwagie, accredited land consultant and licensed real estate broker in Iowa and Illinois at Hertz Farm Real Estate Services in Mount Vernon, Iowa, said, “2012 has been an interesting year in agriculture,” especially since “we started the year out planting a record amount of corn and had concerns of a record crop that would severely drop commodity prices.”

But he pointed out this all changed with the extremely dry weather in May, June and July. “There was and still is much uncertainty as to what our final yields will be for corn and soybeans this fall. Iowa farmland prices leveled off and we have seen more variability over the past couple months.”

He said high-quality farms are still selling at record highs (in eastern Iowa, it has sold for $9,500-$10,500 an acre), while medium- to low-quality farm values have softened.

“I believe this uncertainty will carry into this fall until we know our actual yields,” he added. “Much of the strength in the high-quality land has contributed to high commodity prices this fall and for 2013. 

Farms being purchased today will be paid from profits from 2013 and beyond. Farmers are eternal optimists.”

He said the FRBC survey accurately reflects Iowa farmland values, which show good strength over the last year but have slowed in the second quarter – and mirrors Iowa State University’s annual farmland survey, released Nov. 1, 2011, which showed an increase of 32.5 percent for the year.

“Many of our sellers continue to be estates and/or heirs from estates,” Louwagie said. “We are seeing a few more farms come on the market due to the higher prices and concerns that capital gains tax will increase after the first of the year.

“I believe we will continue to see more farms come on the market as we head into fall. These late rains definitely helped the bean yields and helped fill the kernels, and add a little test weight. We are all hoping that 2013 will be a good year for everyone.”

According to the survey, 65 percent of respondents said their banks had more funds available, which once again improved from a year ago, and 1 percent reporting said they had less. One respondent said, “Farmers have become depositors, not borrowers.”

But Oppedahl said the drought “put a damper on prospects for agriculture in the district,” with a few responding bankers thinking repayment problems would “creep up because of the drought.” 

As a result, respondents anticipate the district’s overall non-real estate agricultural loan volumes to decline in the third quarter of 2012, compared with the same quarter of 2011.

Such volumes in Indiana and Wisconsin, however, are expected to increase, the survey stated.