Many rural bankers believe that farmland values will continue to rise this year.

One-third of bankers and market participants surveyed by the Federal Reserve System say they expect farmland values to go even higher in 2012, says Jason Henderson, Omaha branch executive for the Federal Reserve Bank of Kansas City.

“A lot of it is going to be driven by the incomes that (the farmers) generate,” Henderson told AgriTalk radio on Friday. And that is dependent on crop yields and prices.   

He acknowledged there are risks in this scenario.

One of the risks is that economic growth in developing countries like China could slow, which could hurt grain exports, he said. Another risk is that farmers will produce more in the future, which could ultimately lead to lower prices, he added.  

Given all of the uncertainties and volatility in the market, the fundamental question will be the new plateau in terms of crop prices, he said. After factoring in crop prices, yields and cash flow, the question then becomes what percentage of income is going back to finance land.

Low interest rates should continue to underpin asset values, including farmland values, he said.

Record farm incomes in 2011, along with strong farmland values, have been a blessing for rural banks.

“We are seeing stronger returns on assets and profitability at rural banks,” Henderson said. “They’ve enjoyed stronger profits than their metro peers over the last couple of years with the strong farm incomes," he added.

“Farmers are paying off the loans that they’ve had. They’re using a lot of cash to make some of their investments... and that’s provided a lot of liquidity for rural banks,” he said.