By Jesse Newman

Farmland values dipped slightly or remained largely unchanged in the second quarter across much of the U.S. Midwest, reflecting a continued cooling in the market following a multiyear rise in prices, according to Federal Reserve reports Thursday.

The average price of farmland in the Federal Reserve Bank of St. Louis's district, which includes parts of Illinois, Indiana and Missouri, dropped 0.4% in the second quarter from the previous quarter, the bank said.

In the Kansas City Fed district, prices for irrigated cropland and farmland without irrigation systems rose less than 1% over the same period, with year-over-year gains moderating in states like Kansas and Missouri.

The reports illustrate a further easing in the U.S. farmland market, which began last year after farmers harvested the largest corn crop in history and the third-largest U.S. soybean crop, causing commodity prices to drop sharply. Crop prices had soared for much of the previous five years, fueled by drought and rising demand for corn from ethanol processors and foreign importers. The gains pushed agricultural land values so high that some analysts warned of a bubble.

This year, near-perfect weather in the Midwest is fueling expectations for a second consecutive bumper harvest, resulting in precipitous drops in corn and soybean prices and forecasts for reduced incomes for farmers. Corn futures prices at the Chicago Board of Trade have fallen 15% this year after plunging 40% last year. Corn is trading at about $3.60 a bushel, down from the record of more than $8.30 a bushel in 2012.

"Land prices have definitely pulled back a bit," said Mike Day, 45, whose familyfarms more than 4,000 acres near Decatur, Ill.

Mr. Day said a nearby parcel is currently selling for $2,000 or $3,000 less per acre than it would have a year ago, in part because growers in his region aren't gobbling up land like they used to.

"Farmers need to keep some working capital in their pockets," he said. "We're producing a crop that probably isn't going to pay us back this year."

Agricultural lenders surveyed by the St. Louis Fed said the average value of quality farmland in the district fell to $5,473 an acre in the second quarter from $5,496 an acre in the first quarter. Prices fell 3.5% from the same time last year and 6.7% from their peak in 2013.

For the fourth survey in a row, a larger share of rural bankers in the district said they expect quality farmland values to decline in the next quarter relative to the same period last year.

Lenders in the Kansas City Fed district said they expected average farmland values to hold steady throughout the rest of the growing season. Average prices in the region have been buoyed in part by strong year-over-year gains in states like Oklahoma, Wyoming and Colorado, where farmers sometimes lease land for energy production.

Ranchland values in the Kansas City region also crept higher, increasing more than 2%, due to strong demand for pasture from livestock producers, whose revenues have climbed this year thanks to low prices for corn-a primary ingredient in livestock feed-and record prices for cattle and pigs. Prices for cattle have surged because of tight U.S. supplies following a yearslong drought in the southern Great Plains.

Overall, the economic picture in the Farm Belt is worsening. The U.S. Department of Agriculture projected in February that net U.S. farm income would sink 27% this year to $95.8 billion, the lowest since 2010. Last year's total of $130.5 billion was the highest since 1973 on an inflation-adjusted basis.

While Kansas City Fed economists said years of strong profitability among crop farmers could provide a buffer against lower incomes, they also noted several warning signs, including a dip in farm-loan repayment rates in the second quarter and rising demand for operating loans that farmers use to purchase supplies such as seeds and fertilizer.

"While past profits and crop insurance may help mitigate shrinking margins in 2014, financial stress for crop producers could mount in 2015 if net returns don't improve," Kansas City Fed economists wrote in their report. "Looking forward, loan quality might become more of a concern."

Write to Jesse Newman at jesse.newman@wsj.com

(END) Dow Jones Newswires

August 14, 2014 12:48 ET (16:48 GMT)

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