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(Adds quote from Fed economist in the eighth paragraph, other details throughout.) August 15, 2013, WSJ    By Mark Peters   The farm economy showed signs of slowing in parts of the U.S. during the second quarter, even as agricultural-land values continued to climb, according to new Federal Reserve reports. Regional bankers in a quarterly survey by the Kansas City Federal Reserve Bank said farm incomes fell in the second quarter and declines are expected in the third quarter, too, amid sharp declines in the prices of crops such as corn and soybeans from record highs a year ago. Some farmers also are struggling with lingering drought in Kansas and Nebraska. A separate survey by the St. Louis Federal Reserve Bank found bankers expect a pullback in farm incomes in the third quarter after a modest increase in the second quarter. Farmland prices, which have risen rapidly in recent years amid historically high crop prices, continued to increase in the latest three-month period. But some signs of the market cooling are appearing. The Kansas City Fed reported that non-irrigated cropland values rose 1.8% over the prior quarter on a non-seasonally adjusted basis, showing a further slowing of gains. Still, land values were up 18% from a year ago for non-irrigated land and 25% for irrigated cropland. The St. Louis Fed, meanwhile, saw farmland prices rise 11% in the second quarter to $5,672 an acre, and bankers expect additional gains in the third quarter relative to last year. That followed a 2.3% decline in the first quarter in the region, which includes parts of the Midwest and Southeast. In the Kansas City survey, an increasing number of bankers in the region, which stretches from Missouri to Colorado, said they think farmland values have peaked. But a majority of those expecting declines see a drop of less than 10% over the next year. They also see a limited correlation currently between farmland prices and farm incomes, with low interest rates, overall wealth in the farm sector, and limited alterative investment opportunities playing a larger role. Farm incomes have climbed to levels not seen since the early 1970s when adjusted for inflation, so a lag is likely to occur between falling incomes and their effect on farmland prices. “It may take some time before low incomes translate into relatively lower wealth that would represent a drag on land-value gains,” said Nathan Kauffman, an economist with the Kansas City Fed. U.S. cropland values have surged in the past four years, with federal data released earlier this month showing a nearly 80% gain in the Midwest and a 125% jump in the Great Plains over that period. Driving the rise in land prices and incomes has been historically high corn and soybean prices, but expectations for a record corn crop and a near-record soybean crop this autumn have caused prices to plummet this year. U.S. corn futures are trading more than 40% below the record settlement price of $8.3125 a bushel last August. Bankers in the Kansas City survey reported a pickup in operating loan demand in the face of rising input costs, but loans for farm machinery and other equipment may fall. Mr. Kauffman said debt levels on average aren’t raising concerns, but groups such as young farmers and those who expanded rapidly during the recent boom have considerably higher leverage. Write to Mark Peters at mark.peters@wsj.com Continue reading →