The average value of U.S. pastureland rose 4.5% through the start of this year to $1,150/acre, USDA says. That’s another new nominal high, but pales against the blistering cropland market, where values swelled 14.5%.

Pasture prices are being pulled higher by a combination of low interest rates, continued conversion of grassland to row-crop production, and increased demand for pasture as a cheaper feed alternative in the face of high grain prices. In addition, record-low interest rates have expanded both the number of qualified potential buyers of land, and the price they can afford to pay.

Pasture price inflation would likely be steeper if it wasn’t for the ongoing contraction in the national beef herd. With the number of beef cows down 3% from last July, there are 900,000 fewer cows competing for grass this year – a record low since the government began collecting data in 1971.

Regionally, pasture value changes varied widely. Price movements ranged from a 22% spike in the Northern Plains and 9% in the Corn Belt, to 5% in both the Southern Plains and Mountain states regions.

Pasture prices in the Southeast, Appalachian and Pacific states continue to notch down, deflating 7%, 1.5% and 1.2%, respectively, for the 12 months through Jan. 1. Pasture parcels in the Southeast are now trading 32% under the region’s 2008 market peak. The Georgia pasture market has been hit hardest, where prices are off 44% from 2008.

Pasture price increases are strongest in the Northern Plains, where high grain prices continue to propel the value of all tillable land. In Nebraska, the country’s third biggest corn-producing state, pasture values spiked 24.5%, to an average $660/acre. This robust gain still trails the 39% rise in Nebraska cropland values, and suggests buyers may be bidding up pasture tracts that have the potential to be converted to row-crop production. Over the last decade, Nebraska’s irrigated cropland acreage has swelled 18% to 8.6 million acres.

Surveys of market conditions through this year’s first half indicate that pasture values continue to inflate at a double-digit pace. In the West Central Plains and Mountain states, pasture values rose an average 10.4% in the January-June period across Kansas, western Missouri, Nebraska, Oklahoma, Wyoming, Colorado and northern New Mexico.

Buyer demand appears strongest in the western Mountain states, where pasture tracts are trading at an estimated $441/acre, or nearly 15% above year-end 2011 levels, according to the Federal Reserve.

In the Midwest and Mid-South, pasture values range from $4,000/acre in southern Indiana to $1,567/acre in northern Mississippi, according to new quarterly survey launched in June by the Federal Reserve Bank of St. Louis.

In the North Central region, pasture values are up 11% for the 12 months through June. Prices range from $434/acre in Montana, $453 in North Dakota, $1,673 in South Dakota, $1,791 in Minnesota and $2,281 in Wisconsin, according to the Federal Reserve Bank of Minneapolis.

The fading 2011 drought in Texas is helping fuel a modest rise in ranchland values. Grass and range lands are slowly recovering and producers appear to be taking a conservative approach in rebuilding their cattle herds.

Through June, Texas ranchland values were up 5-7% from a year ago. Bankers say pasture prices range from $470/acre in the Northern High Plains to $3,461/acre in central Texas.

Sales activity remains muted. There were just 4,520 rural Texas land sales last year, down from 4,747 in 2010 and substantially under the 8,005 sales in 2005 when the market peaked, notes Charles Gilliland, Texas A&M University research economist.

In central Texas, some landowners are now receiving production payments from the Eagle Ford Shale oil and gas development. “People are bringing million-dollar checks into little country banks,” Gilliland says. “They are all looking for something to do with the money.” So far, market observers say ranch owners are investing in improvements, such as new fencing, ponds and grass plantings.

Cropland conversion

The conversion of native rangeland to row-crop land in the Plains continues to push up pasture values and lease rates. One epicenter of conversion activity is Texas’ Northern High Plains. Institutions and private investor groups have converted more than 35,000 acres of grass to center-pivot irrigated cropland over the last 24 months, says appraiser James B. “Nardie” Vine, Jr., of Vine and Associates in San Antonio.

The sod-busting frenzy is centered in Dallam, Hartley, Sherman and Hansford counties. More than 50,000 acres of range in the area have been purchased in the past 12 months by buyers who intend to develop the land for irrigated crop production, says George Clift, owner of Clift Land Brokers in Amarillo. “Farmers are in a very aggressive mode to buy undeveloped land with irrigation potential,” he adds.

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In the Northern Plains, some 770,000 acres of rangeland were converted to crop production in the decade through 2007, according to a 2011 USDA study. Grassland conversion has been active in seven North Dakota and South Dakota counties in the Hyde-Hand area (Beadle, Edmunds, Faulk, Hand, Hyde, and Sully in South Dakota, and Stutsman in North Dakota). The study, which examined the role of crop insurance and other government farm programs in spurring conversion, doesn’t include the impact of the recent rise in commodity prices that began in 2007.

In South Dakota, rangeland and pasture values inflated 20.5% for the year through Feb. 1, according to South Dakota State University. Native rangeland averaged $737/acre, while tame pasture prices averaged $1,218/acre. Rental rates for private rangeland and pasture varied from nearly $62/acre in the east-central region to $11.65/acre in the southwest region, according to the SDSU survey.

(For more charts from this story, click here to download a PDF.)

Moving south to Nebraska, rents across the Sandhills range from a high of $50/cow-calf pair/month in the eastern Sandhills to a low of $25 in the west, says Cort Dewing, director of field operations with the Nebraska Board of Educational Lands and Funds, which manages more than 950,000 acres of pasture leases. The agency originally planned to raise 2013 lease rates 10-12% across the Sandhills, based on spring market data. Now, due to the drought, the state land board expects to hold 2013 rates steady. A final decision is expected early next year.

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“We are in a healthy environment for pasture and the value of it should be good because the cost of gain in the feedlot is high,” Dewing says. Lease rates in north central Nebraska – Brown, Rock, Keya Paha, and Cherry counties – are running at the upper end of $35-$40/cow-calf pair/month, he reports.

Conversion pressure may also be helping drive this area’s tight grass market. Keya Paha County has seen significant cropland development in the last few years. “If you have any number of cattle that are looking for pasture it makes a difference,” Dewing says.

In neighboring Kansas, quality bluestem pasture is selling at $1,500-$2,000/acre, says Richard Griffin, with Griffin Real Estate and Auction Service in Cottonwood Falls. That’s up sharply from a year ago, when the top of the market was $1,400/acre. In August, a section of grass in Chase County fetched $2,030/acre at auction.

“Three years ago, we had sale after sale and you would get to $1,000 and it would quit right there,” Griffin recalls. “That’s how much the market has changed. Money is cheap, and it doesn’t hurt to have the highest commodity and cattle prices ever.”

Even the storied Flint Hills aren’t immune from the conversion craze. In July, 160 acres of grass in Butler County on the western edge of the Flint Hills brought a steep $3,000/acre at auction. The buyer plans to convert it to cropland, Griffin says.

Net lease rates to landowners in the Flint Hills region are running $70-$80/head for the April 15- Oct. 15 grazing season, says Mike Holder, Chase County Extension agent in Cottonwood Falls. That’s up 10% from a year ago. Producers typically aim for 200 lbs. of gain during the 90-day grazing season. However, this summer’s extremely hot, dry weather will likely mean cattle achieve only two-thirds of that target. That could increase cost of gain 10¢/lb. from 40¢/lb. to 50¢/lb. – still a good bargain in today’s high grain-price environment.

Sidebar: Tips on pasture rent

Agricultural commodity prices have risen sharply over the past two years, fueling significant increases in cash rent bids. We advise both landowners and tenants to make inquiries with local farm loan officers and county Extension agents to inquire what rental rates they’re seeing both on leases in which there is no change in the owner or tenant, and in leases in which there is no legacy relationship.

Surveys of market conditions through this year’s first half indicate pasture rents are up 10-31% from a year ago across the West Central Plains, while rates softened 4% in Colorado, New Mexico and Wyoming. Ranchland lease rates range from $62/acre in Nebraska, $50/acre in western Missouri, $24/acre in Kansas, $17/acre in Oklahoma, and average $13/acre across Colorado, northern New Mexico and Wyoming, according to bankers surveyed by the Federal Reserve.

At midyear, bankers say pasture lease rates in the North Central U.S. ranged from up 9-12% year over year in South Dakota and Minnesota, to down 6% in North Dakota. Bankers says rents averaged $75/acre in Minnesota, $50/acre in South Dakota, and $19/acre in North Dakota.

Across the Midwest and Mid-South, pasture rents range from $65/acre in southern Illinois, $58/acre in western Tennessee, $55/acre in western Kentucky, $53/acre in eastern Missouri, $41/acre in Arkansas, and $40/acre in northern Mississippi, according a June survey by the St. Louis Federal Reserve Bank.

A midyear survey by the Illinois Society of Professional Farm Managers and the University of Illinois estimated the average statewide charge for pasture rents at $40/acre. We’ve seen hay ground leases ranging from $84/acre in Montgomery County to $130/acre in DuPage County.

A final caveat: Every land parcel has unique characteristics, so don’t rely on survey data as a precise benchmark for establishing rent rates on individual land parcels. These results are more useful as a guide to local trends.

Mike Fritz is editor and publisher of Farmland Investor Letter®. Reach him at m_fritz@charter.netor visit www.farmlandinvestorletter.com.