Northwest Farm Credit Services, of Spokane, has reported first-quarter net income of $17.1 million, down from $27.8 million in the year-earlier period, after setting aside much more to cover potential bad loans than it did in the year-earlier quarter.

The Spokane-based federally chartered ag-lending cooperative says it set aside $27.3 million in the first quarter for potential loan losses, reflecting "increased stress" that certain sectors of agriculture have come under. In the first quarter of 2008, the cooperative set aside just $2 million in its provision for credit losses to cover loans that might go bad.

"The association's strong financial position and continued solid earnings provide the association the opportunity to work with our customer-stockholders as they navigate these economically challenging times and allow us to remain a reliable and dependable source of credit," says Jay Penick, Northwest Farm Credit's president and CEO. "The association's overall portfolio continues to have a low level of delinquencies and strong credit quality."

The cooperative expects markets to be soft for wheat growers, who make up the Inland Northwest's biggest agricultural sector, but they have enough risk-management tools available, including crop insurance, that they will be able to maintain a balance between the adversity they face and their ability to operate, Penick says.

"We see that industry holding its own," he says.

In its latest quarterly Market Snapshots report, Northwest Farm Credit said that with the exception of the cherry and wine and vineyard industries, the general health of the Pacific Northwest's other agricultural sectors was trending downward.

"The challenges to the general economy are starting to show up in agriculture, particularly with depressed prices in the dairy, ethanol, nursery, and poultry industries," Penick says. "We see over the next 12 months a significant decrease in demand, and that's not just in agriculture."

Ag producers are going to have to adjust their production levels to combat downward price trends, Penick says. He says that will create challenges for some producers, who "have to hit that sweet spot for their own production" in terms of efficiency.

Yet, he says, production and consumption levels must come back into balance, or prices will erode further.

"Everything that agriculture produces has to end up at the consumer," he says. For example, he adds, "There's significant oversupply in milk and cheese because of reduced consumption."

In the coming months, Penick says, Northwest Farm Credit will tell its customers, "'It's a difficult time to expand. If you do expand, you need to do a majority of that out of retained earnings, and not out of borrowed capital. This is not a time to 'leverage up' your balance sheet.'"

The association expects that its own asset growth will slow in 2009, likely to a rate of 5 percent to 6 percent, down from almost 19 percent in 2008, Penick says.

Even though the association had $8 billion in assets as of the end of the first quarter, up from $7 billion a year earlier, "from Jan. 1 to now, our asset base has been very flat or down a little," he says.

"We'll be just like everyone else in making sure we are as efficient as possible," while still striving to provide good service, Penick says.

During the first quarter, the cooperative had a return of 1.44 percent on average assets, down from 1.72 percent in the year-earlier period.