CHICAGO, Feb 13 (Reuters) - Farmland values in the Midwest mostly edged higher in the fourth quarter of 2013 with the market tone improving from the weakness the prior three months and easing some concerns about a potential farmland "bubble" that has worried bankers and policymakers.
In quarterly surveys of farm bankers in the Midwest issued on Thursday, the Federal Reserve banks of Chicago and St. Louis said that most farmland prices in the central Corn Belt edged up in the October-December period from the prior three months.
"Agricultural land values rose 3 percent from the third quarter to the fourth quarter of 2013," the Chicago Fed said, based on a survey of 186 farm bankers. "A majority of respondents anticipated farmland values to remain stable during the January through March period."
Cash rents, another key indicator of farmland value, were also steady to higher as farmers negotiated contracts in the fourth quarter that will cover the 2014 season, according to the St. Louis Fed. Values were buoyed by a gain in farm incomes in the quarter, including crop insurance payments and much larger harvest supplies even at lower prices.
The Chicago Fed's district includes most of Iowa, Wisconsin and Michigan as well as northern Illinois and Indiana, a region responsible for about one-third of U.S. corn and soybean production as well as large amounts of dairy, pork and cattle production.
Farmland values in the central United States are closely tracked by government economists as a gauge of the U.S. economy and health of the banking system.
In recent years, both crop and farmland prices have set records as the boom in biofuels and food exports fueled demand. But the sharp drop in second-half 2013 grain prices ahead of the record corn harvest had bankers fretting that farmland prices could also plunge.
A similar so-called bubble popped in the 1980s, causing massive farm failures. Most farmers' loans are collateralized by their land.
The Fed surveys, reflecting the annual fourth-quarter Corn Belt land auctions and rent negotiations, should relieve some of those worries. Farmer balance sheets are generally in great shape after five years of record income. Interest rates remain near record lows.
CAUTION STILL PREVAILS
But bankers in the Fed surveys said nervousness remains and credit conditions were tightening.
"Fifty-six percent of the responding bankers anticipated farmland values to be stable from January through March of 2014; 41 percent anticipated them to be lower; and just 3 percent anticipated them to be higher," the Chicago Fed said.
"Combined with expectations of diminished farmland purchases by farmers in 2014, these survey responses cast a pall over the spectacular growth in agricultural land values of the past few years," the bank said.
The St Louis Fed's results from 49 bankers - tracking Arkansas and parts of Illinois, Indiana, Kentucky, Mississippi, Missouri and Tennessee - were comparable.
After easing in the third quarter, average crop land values bounced back by about 11 percent in the last quarter to $5,868 per acre. Cash rents also rose 5 percent in the fourth quarter compared to the third quarter.
However, for the second consecutive quarter, the St. Louis Fed said, "more bankers expect quality farmland values to decline over the next three months relative to a year earlier."
The doubts about future strength in farmland prices were tied to questions about 2014 farm income.
"Corn, soybean and wheat prices for the fourth quarter of 2013 were lower, on average, by 35 percent, 11 percent and 18 percent, respectively, than their prices of a year ago," the Chicago Fed said. That, plus assumptions about higher farmer costs for fertilizer, fuel and seed this year, supported the bankers' caution.
"Given the current level of crop prices, it will be a challenge for some to keep from falling behind," said David Oppedahl, a Fed economist and author of the bank survey. "It's going to be a challenging year."
One key area to watch will be Iowa, the No. 1 corn, soybean and hog growing state. Hit hard by drought for a second year in 2013, Iowa farmland prices slipped 1 percent in the fourth quarter and finished 2 percent lower for the full year, the Chicago Fed said.
That was seen as a reflection of land productivity: Iowa's 2013 corn harvest was just 15 percent higher than 2012, when the Midwest saw the worst drought in half a century. Illinois corn output in 2013, by contrast, was up 63 percent and Indiana's up 74 percent.
As of late January, the Chicago Fed said $2.22 billion in crop insurance payments had been issued to its district, about 23 percent of the national total of $9.60 billion. Iowa was accounting for 61 percent of those payments after losses.
Given the caution about land values and returns in the coming year, the Chicago Fed said, "credit availability was somewhat more restricted than a year earlier," and "six percent of reporting banks required larger amounts of collateral for non-real estate loans."
Most grain farmer balance sheets remain strong, however, reflecting the recent years of record grain prices and land values. Less than 2 percent of farm customers in 2014 in the northern Midwest would not again qualify for farm loans, the Chicago Fed said.
On Friday, the Kansas City Federal reserve will issue its banker survey for Plains farmland values.