The value of good farmland in several U.S. Midwestern states fell by a dramatic 6 percent in the first quarter, the biggest decline since 1985, the Federal Reserve Bank of Chicago said on Thursday.

Falling prices for crops hurt farmland values, and the deep U.S. recession also had an impact by cutting into demand for recreational land and rural housing, economist David Oppedahl said in the Chicago Fed's latest AgLetter.

Values still eked out a slim gain of 2 percent, on average, compared with a year earlier, with the biggest increase coming in Wisconsin.

The number of farms sold, the acreage sold and the amount of farmland for sale in the quarter were all below levels from 2008, Oppedahl said. Even so, credit conditions strengthened in the quarter, albeit in a spotty fashion, he said.

The demand for non-real estate loans and the availability of funds were higher than in the same period a year ago, and loan repayment rates edged up as well.

Respondents expected higher demand for operating loans and loans guaranteed by the Farm Service Agency in the second quarter.

Interest rates for agricultural loans in the Fed's Seventh District tracked other U.S. interest rates in reaching historically low levels recently.

For the quarter, rates on new operating loans averaged 6.2 percent, and from 6.74 percent a year ago, and those for real estate loans averaged 6.14 percent, down from 6.41 percent. The average loan-to-deposit ratio was 76.2 percent.

Even as land values stalled, cash rental rates for farmland logged the third largest quarterly increase since 1981, knocking down the District's price-to-earnings (P/E) ratio for farmland, Oppedahl said.

The slower adjustment of agricultural cash rents relative to land values reflected the presence of lags in repricing rental rates, he said.

For example, some farmers had to make decisions about renting land for the 2009-10 crop year before they knew the full extent of a slump in corn and soybean prices last fall.

The Fed's Seventh District stretches across Illinois, Iowa, Indiana, Wisconsin and lower Michigan.