The U.S. farm sector “has historically been associated with a significant amount of volatility,” she said. And, “a boom period can give way to a reversal that can result in falling commodity prices, falling incomes, and falling land prices. Under such a scenario, farm operators can suddenly find it very difficult to make ends meet and service their outstanding debt.”

The boom years of the 1970s were followed by just such a downturn in the 1980s, Bair noted, and nearly 300 farm banks failed between 1987 and 1993.

With low capitalization rates and higher farm income, farmland values have surged, said Brian Briggeman, economist for the Federal Reserve Bank of Kansas City.

From fourth quarter 2009 to fourth quarter 2010, farmland values surged in the Chicago, Minneapolis, Kansas City, and Dallas Federal Reserve Bank regions, ranging from 4 percent to 23.7 percent.

“Historically low capitalization rates help support these cropland values,” he said.

Research by the bank indicates that rising interest rates and a return to higher capitalization rates could bring a reduction in farmland values of nearly one-third.

If farmland values should fall by one-third, Briggeman said, “farmers could lose a significant amount of wealth. This would impair farmers’ balance sheets by eroding farm wealth.”

Joseph W. Glauber, chief economist for the USDA, noted that while farmland values have risen sharply over the past five years, “increases appear to be generally consistent with the rise in farm income and low interest rates, and comparisons to the 1970s seem unfounded.”

The agricultural sector is in better financial shape than in the 1980s, he said, and long-term factors for farm income remain positive, with strong domestic and foreign demand for ag products.

Though real interest rates are expected to rise, they likely will remain below levels of the 1980s and 1990s, he said.  Net farm income has been volatile, which could lead to volatility in farmland values.

While budget cuts could affect land values, “payments are a small portion of net cash income,” Glauber said.

Current land values appear to reflect current high returns in agriculture, said Brent Gloy, director of the Center for Commercial Agriculture at Purdue University.

Farmland “is not obviously overvalued, and values don’t appear to have diverged from reality,” he said. But at the same time, “this doesn’t mean that a downward movement is impossible.”

Values are dependent upon interest rates remaining low and/or sustained growth in agricultural income, Gloy said. “It is possible that a bubble is in the early stages of formation.”

Substantial increases in farmland values from this point would be based upon optimistic scenarios for future growth and/or reduced real rates of interest.