Agricultural lending, a bright spot for banking amid the enduring credit crisis, may be losing some luster.

Though healthy in the third quarter, farm credit conditions are expected by bankers and economists to weaken in coming months as agriculture income shrinks amid falling crop prices and narrower profit margins on ethanol production.

A November survey by Creighton University in Omaha said that farm banks probably will see anemic loan growth in 2009, hurting a rare area of notable strength for banks during the past year. Economists do not expect a crash in agriculture lending, given that crop farmers have had some of their most profitable years on record in this decade and some agriculture operations are likely to use profits from the past two years, coupled with new loans, to continue investing in equipment and land.

"The balance sheet of the American farmer has been very strong," Roger Sturdevant, an executive vice president at BancWest Corp.'s Bank of the West and the head of its agribusiness division, said in an interview last week. But the "drop in grain prices will cause some belt-tightening."

Economists say overall demand for agriculture loans is bound to deteriorate at both community banks and national companies with large agriculture loan books in the Midwest Corn Belt, including Bank of the West and Wells Fargo & Co.

Bank of the West, a San Francisco unit of Paris-based BNP Paribas, entered the Midwest four years ago and has since expanded its farm lending portfolio by more than 50%, to $4 billion. Wells, also a San Francisco bank, expanded its agriculture book about 10% in the past three years, to more than $5 billion. Farm Belt community banks surveyed by Creighton University said their lending grew about 15%, on average, in 2007 alone.

Neither Wells nor Bank of the West broke out from their commercial books specific third-quarter data for farm loans, but each said agriculture lending held steady in the third quarter. At a minimum, however, each company is bracing for a decline in demand from crop farmers — the backbone of Midwest agriculture.

"It would be unreasonable not to expect" a dip in demand, Wells' senior agriculture economist, Michael Swanson, said in an interview last week. "I would have to think there would be a change in attitude among farmers."

Mr. Swanson, who is based in Wells' Minneapolis offices, noted that corn prices hovered around $3.50 a bushel last week on the Chicago Board of Trade, nearly 40% lower than last spring. During the same period, production costs — equipment, seed, fertilizer, weed control, and labor — as well as the cost of farm land have not declined. Corn prices could rise again, he said, but farmers cannot bank on a rise back to peak 2008 levels, meaning that income in the year ahead may not keep pace with costs.

In a November research report, agricultural economists Richard Taylor and Won Koo at North Dakota State University in Fargo wrote that total farm production costs, 56% higher this year than in 2004, would not decline next year and could depress farm income in 2009 and 2010. They forecast that corn producers, on average, need a price of $3.60 a bushel to break even next year.

The specter of falling incomes in 2009 probably will lead farmers and agriculture businesses to delay plans for new equipment or land purchases, the economists said. Commodity prices steadily rose during the past three years as India and China created new demand for food and fuel. At the same time, Wall Street bought into the notion of distilling corn into ethanol for use as a gasoline additive, and as gasoline prices soared, so did profits on the production of ethanol. U.S. farmers, obliged to meet demand, ramped up corn planting in 2007 and 2008 to the highest levels since World War II.

But as foreign economies slumped in recent months, gasoline prices fell, and demand for U.S. food declined, driving down corn prices. Some ethanol producers, however, betting that corn prices would continue rising, had locked in prices for their corn buys at summer levels. After corn prices fell this fall alongside ethanol prices, these ethanol producers got hammered.

A case in point is VeraSun Energy in Sioux Falls, S.D. It filed for bankruptcy Oct. 31 and since has shuttered four ethanol plants. Industrywide, at least 27 plants have been shut in the past year. VeraSun had, until November, been the largest buyer of corn for ethanol use in Iowa and Illinois, the nation's largest corn-producing states.

"We're certainly not pursuing any new ethanol arrangements," Mr. Sturdevant of Bank of the West said.

Already, signs have appeared of the economy's downturn curbing farm lending.

The nation's largest agriculture lender, the Farm Credit System, a government-sponsored enterprise, said its gross loans fell 2.5% in the third quarter, to $162 billion, "primarily due to a reduction in agribusiness loan volume." In its earnings report, the system's president, Jamie B. Stewart, said that falling commodity prices during the quarter "resulted in customers' reducing their borrowings."

Creighton University's monthly survey of community bankers in Colorado, Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska, North Dakota, South Dakota, and Wyoming produced an index reading of 22.1, a record low and down from October's 34.4. A reading below 50 indicates contraction.

The survey measures business sentiment in farm, retail, manufacturing, and other sectors. But Ernest Goss, the Creighton economist who does the survey, said in an interview last week that skepticism among farmers weighed on the latest reading.

Mr. Goss' farm equipment sales index, a component of the larger survey, contracted for the second straight month, to 43.4 from 47.2 in October, indicating that demand for equipment loans is rapidly waning. "There is generally this feeling that, with ag commodity prices down and most production costs still up, there is going to be a lot less money coming in for farmers," he said. "And when that happens, especially at a time when you also have a national recession, farmers tend to be very cautions about spending, about taking out loans they don't have to take out."

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