Land prices rising even after year of record drought

American farmers may have suffered an historic drought last year, but the price of their land is skyrocketing.

In Iowa, the US's biggest producer of corn, the land prices jumped 24 percent in 2012 and and have gained 63 percent over the last three years, according to a study by Iowa State University.

The drought and heat wave last year may have severely damaged crops, but ironically it has made crop land ever more valuable.

The higher prices for crops helped compensate for lower yields, for one thing.

Farmers also recovered some $14.7 billion in insurance payments for crop damage, a record sum.

It left farm incomes on average just three percent lower from 2011, and so lingering near their highest level in 30 years. US government forecasters expect overall farming income to gain 14 percent this year.

And that makes the land across this Midwest corn and soybean belt even more sought-after.

"Farmers have cash on hand and with low interest rates, the best place to make investments is to buy more land that they can farm to be more profitable in their operation," said Lyle Hansen, a real estate agent at Audubon, a city in western Iowa.

At an Audubon church hall on a frigid day in early March, Hansen prepared to auction a 127 acre (51.4 hectare) farm suitable for corn and soybeans, the major crops of the area. The owners were a family who wanted to sell the land following the death of their mother in the autumn.

The auctioneer, clad in a cowboy hat with shiny studs on top, spoke at a rapid-fire cadence as he took bids from three people among a small roomful of attendees.

The land ended up selling for $8,800 per acre, or $1.12 million. That was a high price, though still well below the record $21,900 per acre reached in October.

"If you are sitting on some cash, there is no better place to put it in than in agricultural land," said Marvin Jorgensen, one of the attendees, who did not bid this time.

Jorgensen bought his first land in 1949 with $5,000 lent by his father.

Now 85, he owns almost 17,000 acres around the state, which he values at around $120 million.

He never sold a single acre, even during the farm crisis of the 1980s, when a big drop in land values forced some indebted farmers out of the business.

For him, today's prices are not irrational.

"Farmers learned from the past," Jorgensen said. "A lot of the land doesn't have a lot of debt on it. So if the land market goes down, it is not going to force them into selling."

"Is this a speculative bubble that will burst like the dot.com (boom), where it will drop dramatically overnight? I don't think it will," said Mike Duffy, professor of economics at Iowa State University.

"It will be more like a tire that you put a nail in and it gradually goes down,"he said.

Then the market should become more stable, at still-high prices.

"Over the long run, Iowa farmland looks better than the S&P 500," he said, referring to the US stock market benchmark index.