Midwest farmland values rose for the fourth consecutive quarter, posting the largest increase in two years, as high crop and livestock prices fueled a surge in agricultural income, the Federal Reserve Bank of Chicago said.

Farmland increased 10 percent during the three months ending September compared with the same period a year earlier, the Chicago Fed said in a report last Thursday, citing a recent survey of Midwest agricultural bankers. The survey didn’t provide dollar values.

Land prices recovered from a 2009 slump as stronger exports and tighter global grain supplies sent corn, soybean and wheat prices to multiyear highs. Values may continue rising this quarter amid stepped-up demand to purchase farmland, said David Oppedahl, an economist at the Chicago Fed.

“Expectations that farmland values will rise during the fourth quarter of 2010 dominated expectations that they will fall,” Oppedahl said in the report. According to the survey, 49 percent of respondents anticipated higher fourth-quarter values, while 49 percent expected stable values.

The 10-percent gain was the biggest year-over-year increase for any quarter since a 14-percent rise during the third quarter of 2008. This year’s appreciation still lags the market upswing of 2007-08, when values rose 14 percent to 16 percent, and the mid-1970s boom, when quarterly land prices soared as much as 34 percent, according to Fed data.

About 60 percent of respondents expected higher demand among farmers to purchase farmland this fall and winter, Oppedahl said. With the value of “good” agricultural land rising so quickly, “there were reports of more farms put up for sale than in recent quarters,” he said.

In an e-mail Friday, Oppedahl said there wasn’t a lot of farmland for sale earlier this year, “so demand exceeded supply for some markets and types of land.”

Whether farmland continues appreciating in 2011 “depends a lot on the changes in corn and soybean prices,” he said. If grain prices retreat further, “it's unlikely farmland values will keep rising.”

In trading Friday, December corn futures in Chicago fell 21 cents to $5.20 ¾ a bushel, the contract’s lowest settlement since Oct. 7. The price is down 14 percent from a 26-month high at $6.05 hit Nov. 9.

Iowa farmland led gains during the third quarter, rising 13 percent, the Chicago Fed said. Indiana and Michigan values rose 11 percent and 10 percent, respectively, while Illinois increased 8 percent. Wisconsin values rose 3 percent after declining in the second quarter, when dairy market conditions were weaker.

According to a USDA report in August, Iowa’s cropland averaged $4,100 an acre this year, up 1.2 percent from 2009. Illinois averaged $4,820 an acre, up 3.2 percent, and Indiana averaged $4,030, up 2 percent.

Michigan averaged $3,300 an acre, down 2.1 percent, and Wisconsin averaged $3,610, down 1.1 percent, the USDA said.

This year’s values compares to a depressed market in 2009, when farmland fell in three of four quarters as cattle and hog prices eroded and the overall economy sagged. In 2010, net cash farm income nationwide is expected to climb 23 percent, to $85.3 billion, Oppedahl said, citing a U.S. Department of Agriculture estimate.

Two weeks ago, corn averaged $5.12 a bushel on central Illinois cash markets, up 41 percent from a year earlier, according to the USDA. Soybeans in central Illinois averaged $12.38 ½ a bushel, up almost 29 percent.

The full Chicago Fed report is available here.