Farmland values in the U.S. Midwest surged 25 percent during the third quarter, the most since 1977, as higher grain and livestock earnings boosted demand for acreage, the Federal Reserve Bank of Chicago said.

Rising net income for corn and soybean growers and improved cattle, hog and milk earnings supported higher land prices from a year earlier in Iowa, Illinois, Indiana, Michigan and Wisconsin, the Fed said Tuesday in a report. Land values rose 7 percent from the second quarter, and 39 percent of the 216 bankers surveyed forecast higher values in the fourth quarter.

“There has continued to be very strong increases in land values this year,” David B. Oppedahl, a business economist at the Federal Reserve Bank of Chicago, said in a presentation at the bank.

Farmland values in Iowa, the biggest producer of corn and soybeans, rose 31 percent from a year earlier, up 11 percent from the second quarter, according to Fed data. Indiana jumped 29 percent in the past year, Illinois advanced 23 percent, Wisconsin increased 17 percent, and Michigan rose 16 percent.

The five-state region has seen land values increase at a 5-percent compounded rate since prices bottomed in 1986, Oppedahl said in the report. About 40 percent of the bankers surveyed expected an increase in farm real-estate loans during the fourth quarter, according to the Chicago Fed.

Falling interest rates for operating and real-estate loans improved credit conditions for agricultural producers in the third quarter, the bank said in the report. Repayment rates on farm loans rose from the year-earlier quarter, while loan renewals and extensions declined.

Loans to buy farm machinery and build grain storage were expected to rise in the current quarter from a year earlier, the Fed said. The value of all livestock loans was forecast to fall in the final quarter of 2011, relative to a year earlier.

U.S. farmland prices will continue climbing as long as agricultural commodities remain high, said Brent Gloy, an agricultural economist at Purdue University.
Farmland is “headed higher” in the short term, Gloy said during a presentation in Chicago. “Prices will go down someday. I just don’t think it’s anytime soon. At some point, they may go down substantially. Remember, we’re dealing with commodity prices, and commodity prices are very volatile.”