By Carey Gillam
(Reuters) - Crop-withering drought is eating into U.S. farm income, slowing the rise in farmland values and raising the likelihood farmers will borrow more money in the third quarter, according to a Federal Reserve Bank report issued on Wednesday.
Farmland values across an area of the U.S. Plains, which includes Kansas, Oklahoma, Nebraska and parts of Missouri, rose less than 3 percent during the second quarter, roughly half the rate of growth at the beginning of the year, according to the Federal Reserve Bank of Kansas City.
The slower growth could indicate formation of a "plateau" in what has been skyrocketing prices for farmland, said Jason Henderson, vice president and Omaha Branch executive with the Federal Reserve Bank of Kansas City.
"We've seen slower gains now. Bankers expect this slower pace of growth to continue to the end of the year," said Henderson. "After this rapid growth over the last few years, we might be forming a plateau."
The pace and pricing of seasonal fall land sales will give bankers a better idea of the farmland value trend, he said.
Despite the slower pace of increasing value, farmland values in the Federal Reserve's 10th district, which also includes Colorado, Wyoming and parts of New Mexico, were up 26.4 percent for non-irrigated land over a year ago. Irrigated land values were up 28.2 percent and ranchland values were up 16.2 percent over this time a year ago.
Nebraska had the largest year-over-year rise, with cropland prices up more than 35 percent and ranchland values almost 27 percent higher than this time a year ago.
In Kansas, a top producer of U.S. wheat, non-irrigated farmland value was up 23.5 percent; irrigated land was up 25 percent and ranchland was up 18.3 percent over a year ago.
Oklahoma bankers reported the smallest year-over-year gains in farmland values - 15 percent for non-irrigated; 10.9 percent for irrigated and 10.6 percent for ranchland - as many areas of the state endured a second year of extreme drought.
Farmland values are expected to hold at current levels during the rest of the growing season, the Federal Reserve report said.
Strong demand for farmland has boosted interest in more marginal tracts of land with production potential, the report said. Although the number of farmland sales remained low during the growing season, some bankers expect the number of sales to rise after harvest.
The drought has hit U.S. livestock producers particularly hard, the Fed report said. Higher feed costs and lower cattle prices from forced herd liquidations have cut cattle profits, and rising corn prices are also increasing costs for hog, dairy, and poultry enterprises.
Financial losses to ranchers spill over into the economy and is hard for an area to recover from, said Todd Adams, CEO of Adams Bank & Trust in the western Nebraska town of Ogallala.
"The ranchers have been hit the hardest, Adams said. "Even if they get good rains you wonder if the pasture will come back for next year. And when they sell off their momma cows... they are getting rid of what acts as their factories. Every day they just go out and watch a little more of your livelihood burn away."
Access to water is increasingly a key component of land valuation as farmers and ranchers struggle through another season of drought, Henderson said.
Despite the weaker outlook for farm income, loan repayment rates were expected to hold near year-ago levels, bankers said.
Strong U.S. winter wheat production was a boost for many farmers in the Plains states. In addition, land lease revenues for mineral rights continued to rise.
(Reporting by Carey Gillam; Editing by Bernadette Baum, Dan Grebler and M.D. Golan)