Article

by Carey Gillam

CHICAGO, May 9 (Reuters) - Rising prices for farmland in the U.S. Midwest and fears that values may be creating an artificial bubble are driving some investors to the sidelines, though strong farm balance sheets are sustaining interest in many sectors, investment experts said on Monday.

Surging prices for key row crops, such as corn, soybeans and wheat, are helping support rising values that jumped more than 10 percent in the U.S. Midwest last year and have continued to climb. But if crop prices should plummet, land values could fall rapidly.

Farmland values have jumped more than 50 percent above their 2000 levels in inflation-adjusted terms, with investors competing against farmers for accumulation of high-quality land.

Banking officials have said the situation bears close watching, and institutional investors are cautiously heeding the warning, said Shonda Warner, CEO of Chess Ag Full Harvest Partners, an investment fund focused on North American farmland.

"There is some uncertainty," she said on the sidelines of the World Agriculture Investment Conference in Chicago. "People are worried. Some are sidelined."

Bill Goodbar, managing director of the investment banking firm Agricapital Corp., said he viewed some of the prices commanded for land in key growing states as questionable.

"It is starting to feel a little frothy. You start to wonder if $7,000 an acre is justifiable," Goodbar said.

Yet many active players in the farmland market said relatively low debt levels, strong crop prices, climbing cash rents for farmland, and persistent demand were supportive of the gains.

"The farm sector has a strong balance sheet that should be able to withstand a shock in earnings," said Jeff Conrad, president of Hancock Agricultural Investment Group, which oversees 240,000 acres of U.S. farmland and $1.5 billion of agricultural property for institutional investors.

"We can debate what the future might look like, but based on the factors I see today, the sector seems secure and should have the ability to withstand some adversity," Conrad said.

Interest Grows in Berries and Nuts

While the U.S. Midwest, home to millions of acres of prime corn and soybean land, has been a hotbed for investment activity, western farms growing berries and nuts are gaining investor interest.

Cropland for permanent crops such as blueberries, blackberries, almonds, walnuts, olives, and grapes is strong, said David Harmon, manager of Oregon-based West Coast AgFund.

"We're handpicking investors now," Harmon said.

A weak dollar continues to favor export demand for U.S. commodities, and farm gate profits are expected to be near record levels this year.

But volatility is inherent in the market, both for crops and the land they are grown on, cautioned agriculture economist Dan Basse, with AgResource Co.

"Farmland values have gone up dramatically this year," said Basse. "This is a cyclical business. There are lots of chances for surprises."

(Reporting by Carey Gillam; Editing by Cynthia Osterman)