* District farmland values seen staying strong in Q1
* Chicago, Kansas City Feds to issue land surveys this week (Adds USDA comments, farmland details, background)
CHICAGO, Feb 13 (Reuters) - Farm income and land values in the southern Midwest and mid-South regions of the central United States were steady to firm in the fourth quarter of 2012, with more strength expected in early 2013, the Federal Reserve Bank of St. Louis said in a quarterly survey of agricultural bankers.
"The District's relatively strong performance in the fourth quarter contrasts sharply with the widespread anticipation in the previous survey that last summer's drought would significantly lower income and capital spending," the bank said, based on its survey of 61 agricultural banks. "Many bankers cited the effect of crop insurance in alleviating the expected negative impact of the drought."
The bank's Eighth District covers the southern half of Illinois, eastern half of Missouri, Arkansas, northern Mississippi and western Kentucky and Tennessee - a big wheat, corn, soybean and cotton region.
The U.S. Department of Agriculture estimates that crop insurance claims from last year's drought, the worst in half a century, will reach $21 billion nationally.
"Illinois farmers have been the recipients of 23 percent of the $13.7 billion in claims that have already been paid out on the 2012 crop," the Fed survey said.
The Fed said that district bankers continue to report an upward trend in land values and cash rents.
"Compared with the previous quarter's survey, bankers reported that land values (quality farmland, ranchland or pastureland) increased by an average of 4 percent," the bank said. "As in our previous two surveys, bankers expect land values and cash rents to continue to rise."
FARM BOOM HANGS OVER FARM BILL DEBATE
The USDA on Monday said that 2013 U.S. net farm income is expected to rise about 15 percent to $128.2 billion, based on booming grain and meat exports as well as biofuels demand. Those fundamental factors have driven a six-year commodity boom and led to record grain and farmland prices. But that outlook for farm wealth is hanging over congressional wrangling that has delayed a new 5-year farm bill, analysts say.
"American agriculture continues to endure an historic drought with tremendous resolve, and last year was an important reminder of the need for a strong safety net," U.S. Agriculture Secretary Tom Vilsack said.
The St. Louis district survey will be followed by quarterly banker updates from the Chicago Federal Reserve on Thursday, for the central and northern Midwest and the heart of the Corn Belt, and from the Kansas City Fed on Friday for the central and southern Plains states, the top hard wheat and cattle region. The reports are followed closely by the central bankers and policymakers, given the importance of the farm economy for U.S. growth. U.S. farm assets are expected to top $2.7 trillion in 2013 with farm equity rising to $2.46 trillion, according to USDA.
The St. Louis Fed said district spending was firm in the fourth quarter but may soften from that pace in early 2013.
"With fourth-quarter income at higher-than-expected levels, household spending, outlays for capital expenditures, and loan repayment rates in the fourth quarter were also stronger than expected across the District. By contrast, loan demand, while still positive, turned out to be a bit softer than initially expected," the Fed said.
"For the District as whole, bankers also expect household spending to remain close to year-ago levels, but lean toward a decrease in capital spending in the first quarter of 2013 relative to a year ago," the bank said.
Tax provisions allowing accelerated depreciation on qualifying farm asset purchases expired at the end of 2012, which may have contributed to the boost in farmer spending on equipment and to general agricultural bank lending in the fourth quarter. Rising fertilizer and seed costs also enticed some farmers to pre-pay for 2013 inputs, it said.
For farmland transactions, district bankers said about 73 percent of land in the fourth quarter was bought by farmers, with most of the rest by investors for leasing rather than residential or recreation purposes.
"Bankers indicated strong competition between commercial banks and the Farm Credit System to finance the land purchases, with a slight edge toward the Farm Credit System," the Fed said. (Reporting by Christine Stebbins; Editing by Peter Bohan, Maureen Bavdek and Dan Grebler)