Article

by Carey Gillam

KANSAS CITY, Missouri Farmland values appear to be holding strong and farm balance sheets remain solid despite a devastating drought that wreaked havoc on corn and soybean crops, dried up waterways and scorched pastureland in parts of the United States, one of the largest lenders to U.S. agriculture said.

"We're watching it pretty closely ... but we're certainly bullish on the industry," Roger Sturdevant, executive vice president of Bank of the West and head of its agribusiness banking division, told Reuters in an interview on Wednesday.

Bank of the West has about $62 billion in assets and is ranked the second-largest bank lender to U.S. agriculture, with about $3.2 billion in agricultural loans.

Current loan/lease commitments for agribusiness at the bank, which has customers across the country with an emphasis on the western and Midwestern regions, are over $6.5 billion, with outstanding balances of over $4 billion.

Times are hard for U.S. cattlemen, who have been forced to liquidate herds for lack of adequate pasture and water due to the historic drought that gripped more than half the nation this summer. Corn farmers have seen typical yields cut in half or worse by scorching heat and limited rainfall, while dairies and poultry and swine producers have struggled to find affordable feed for their animals.

Still, Sturdevant said farmers and ranchers generally appear to be holding up and are headed for some relief in 2013.

Grain producers are faring the best, he said. High prices for wheat, corn and soybeans, coupled with a broad crop insurance safety net for producers who lost crops to the drought, should see those farmers end the year with healthy incomes.

Many livestock producers facing a squeeze should see a return to profitable margins in the first and second quarters of 2013 as tight meat supplies drive demand - and prices - higher, Sturdevant said.

"At some point, product demand will support higher prices sufficient to cover increased feed costs," he said, adding that pork and poultry producers are faring better than beef producers as cattle prices are expected to remain higher than chicken or pork.

The U.S. Department of Agriculture is forecasting a drop of about 2 percent in total red meat and poultry production next year.

NO FEAR

Many industry experts have expressed concerns about a land price bubble that could pop at any time, but Sturdevant said he did not fear this due to low farm debt and the fact that rising values are largely tied to solid fundamental factors of strong demand, particularly for corn, and high grain prices.

Farmland values have skyrocketed in many parts of the country, particularly in the U.S. Midwest and Plains, where strong demand for corn and soybeans has been driving double-digit gains in land valuations.

For the first half of the year, farmland values were up sharply over a year ago in those regions, but the rate of growth appears to be slowing.

"It's probably still too early to tell, but so far we're not seeing (a major slowdown)," said Sturdevant.

More will be known as farmland sales typically pick up after the fall harvest, he said, adding that turnover of farmland is currently running about half the normal rate.

Sturdevant said this year's drought underscored how critical water is to farm lending.

"Every loan we make we have a discussion about access to water, the cost of water, water rights, etc," he said. "It's going to be increasingly important as it becomes more scarce. Water is key."

(Reporting by Carey Gillam; Editing by Joseph Radford)