* FCS holds some 40 percent of all U.S. ag loans
* System says US ag in better shape than drought of '88
By Christine Stebbins
CHICAGO, Sept 12 (Reuters) - The Farm Credit System, the largest single lender to U.S. agriculture, said on Wednesday it would meet the borrowing needs of rural America and stand by its customers challenged by the worst drought in more than half a century.
"The Farm Credit System remains well positioned to meet the borrowing needs of rural America, notwithstanding the difficult conditions brought on by the drought of 2012," the presidents of the FCS's four regional banks said in a joint statement.
The banks -- AgFirst of Columbia, South Carolina; AgriBank in St. Paul; Denver-based CoBank; and Farm Credit Bank of Texas in Austin -- fund the FCS network of 82 financial associations in 50 states. The System, a U.S. government-sponsored entity (GSE), has more than $230 billion in assets and accounts for 40 percent of U.S. ag loans.
"The System's role is to stand by its customers, in good times and bad, and it will continue to fulfill that need in a safe and sound manner. That includes working collaboratively with borrowers who are experiencing distress related to the drought on a case-by-case basis."
Concerns about the health of the U.S. farm economy escalated over the past 12 weeks as farmers watched their crops wilt in the fields and prices rose to record or near-record prices. Ranchers, cattle feeders, and dairy, hog and poultry producers will be hit hardest as feed costs have nearly doubled.
The U.S. Agriculture Department on Wednesday estimated that the U.S. corn crop will be the lowest in six years and soybeans the lowest in nine years due to drought losses.
But USDA projected farm gate prices for corn would rise to $7.20-8.60 a bushel, compared with $6.25 a year ago. Soybean prices for farmers should be in a range of $15-17 a bushel in coming months, versus $12.45 last season. Wheat and milk prices were also projected to higher than a year ago, USDA said.
Grain cooperatives will also be hurt by lower revenues for storing, drying and blending grains given the drought-stressed crops, FCS said. But ethanol production is expected to consume 4.5 billion bushels of corn in the coming year, down only 5 percent in demand from last season.
"Despite these myriad challenges, we believe that financial conditions for American agriculture are far better than they were in 1988, the last time the nation experienced a drought of similar magnitude. Many producers are coming off several consecutive years of strong profits, which have enabled them to reduce leverage, improve liquidity and invest in new equipment," FCS said.
Fitch Ratings noted last week that roughly half of the four regional FCS banks loan portfolio consisted of long-term real estate mortgage loans secured with farmland, putting them at risk if commodity market prices trigger a correction in record high farmland values.
The FCS, the oldest GSE, was set up by the United States in 1916, long before the better known -- and now troubled -- GSEs such as Fannie Mae or Freddie Mac -- to provide a reliable source of credit to the U.S. agriculture industry.