Northwest Farm Credit Services, of Spokane, has reported second-quarter net income of $18.5 million, down sharply from $31.2 million in the year-earlier quarter.

For the year's first six months, the federally chartered ag-lending cooperative posted earnings of $35.6 million, compared with $59 million in the first six months of 2008.

"Our second-quarter reduction in earnings is due to an increase in provision for loan losses of $23.8 million," says President and CEO Jay Penick.

In its provision for loan losses, the cooperative sets aside money to cover loans it believes might not be repaid. Through the first six months of 2009, Farm Credit set aside $51.1 million for that reason, far more than the $3.4 million it set aside in the first six months of 2008.

Most of those loan problems were tied to the ethanol and dairy industries, says Penick. He says ethanol plants were hurt when the price of corn, which many use as feedstock, rose sharply last fall. Then, the price of gasoline and other conventional fuels came down, making them more competitive against ethanol than they had been.

"The plants that are in production are showing a positive return now," and the industry has stabilized, although half of the ethanol plants in the five-state area Northwest Farm Credit serves are on "hot idle" status, which means they're no longer in operation, but could be restarted quickly if demand warranted it, Penick says.

Dairy producers have been hurt badly by a big drop in exports to China of dry milk products and must reduce their herds, he says.

"For all of agriculture, the real issue is that in this downturn, consumption has been reduced," Penick says. "Agriculture must adjust supplies to the demand that's there."

Other than for ethanol and dairy producers, most other producers Farm Credit serves have stabilized, thanks partly to a fall in the prices of diesel fuel and fertilizer, which are key cost items, he says. "All of the input costs for the most part have come back down in the middle of 2009."

Wheat growers, who produce the predominant crop in the Inland Northwest, are holding their own, and have strong protection through insurance programs that cover impacts from both yields and prices, he says. Also, it appears that this year's wheat harvest will be of average size, which won't boost supply too much.

The co-op is well positioned to work with growers as they get through troubled times, Penick says. Its total capital increased to $1.15 billion as of June 30, up 4.1 percent from a year earlier, and its total assets climbed to $8.4 billion, from $7.6 billion. Net loans climbed to $7.97 billion, from $7.15 billion.

The co-op's return on average assets through the first six months of 2009, meanwhile, fell to 1.24 percent, down from 1.69 percent in the first six months of 2008.

Northwest Farm Credit provides financing, related services, and crop insurance to farmers, ranchers, agribusiness, commercial fishermen, timber producers, and rural homeowners in Washington, Idaho, Oregon, Montana, and Alaska.