By Jesse Newman 

Farmland values dropped across much of the U.S. Midwest in the fourth quarter, according to reports from the Federal Reserve on Thursday, a symptom of continued weakness in the agricultural sector fueled by several years of depressed crop prices.

Average farmland prices in the Federal Reserve Bank of Chicago's district, which includes Illinois and Iowa, fell 3% from a year earlier and slipped 1% from the third quarter of 2015, officials said.

In the St. Louis Fed's district, which is composed of parts of Illinois, Indiana and Missouri, prices for farmland fell 2.5% compared with a year ago, as farm incomes slid, the bank said.

In the Kansas City Fed's district, which includes Kansas and Nebraska, nonirrigated cropland values sank 4% from a year before, while the average price of irrigated land declined 2%, the bank said. Irrigated farmland, which is common in the region, depends on man-made water systems for moisture rather than rainfall.

The three Fed reports reflect a continuing downturn in the U.S. farm economy, which has been marked by listless crop prices and softer demand for agricultural land after prices for both shot higher for much of the past decade. The yearslong farmland boom was fueled by drought and growing demand for grain from ethanol producers and foreign importers.

But last year, U.S. farmers collected bumper corn and soybean crops for the third-straight season, adding to already-plentiful world supplies at a time when a strong dollar and stiff global export competition are damping demand for U.S. supplies. Revenue for farmers has declined as a result, prompting the U.S. Department of Agriculture this week to project that net U.S. farm income will fall this year to the lowest level since 2002.

Midwestern bankers surveyed by the Fed banks in St. Louis and Kansas City said farm income dropped in the fourth quarter, and many lenders in all three districts expect land values to soften further in the current quarter as crop prices and farm profits remain subdued.

"Sustained weakness in corn, soybean and wheat prices has had a particularly negative effect on farm income because these three crops account for about 70% of harvested crop acreage in the Tenth District States," the Kansas City Fed said in its report on Thursday.

Average values for ranchland, used for grazing livestock, were flat to lower in parts of the Midwest, according to the St. Louis and Kansas City Fed districts.

The St. Louis Fed said ranch or pasture land prices fell 5.3% in the last three months of 2015 versus prior-year levels. That figure represents the largest drop since the second quarter of 2014, the bank said. The Kansas City Fed said ranchland values in the fourth quarter showed zero growth amid a sharp drop in cattle prices and reduced profit margins in the livestock sector.

"The downturn in crop and livestock prices helped stretch the slide in agricultural land values for at least another year," wrote David Oppedahl, senior business economist at the Chicago Fed.

The Chicago and Kansas City Fed districts said credit conditions for farmers declined in the fourth quarter, with repayment rates for loans excluding real estate softening, while demand for farm loans stayed strong or notched higher in many areas.

In the Chicago region, Mr. Oppedahl said, an index of loan repayment rates fell to the lowest level since the first quarter of 1999, while the volume of the farm loan portfolio said to have "major" or "severe" repayment difficulties rose to 5%, or 2.1 percentage points higher than year-ago levels.

"No improvements in the short-term prospects of the farm sector were anticipated by the survey respondents," wrote Mr. Oppedahl, adding that Midwestern lenders said "controlling costs and utilizing risk-management tools would be critical to the health of farms in the coming year."

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

(END) Dow Jones Newswires

February 11, 2016 17:36 ET (22:36 GMT)