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By Carey Gillam

(Reuters) - Farmland values appear to be holding strong and farm balance sheets remained solid despite a devastating drought that wreaked havoc on corn and soybean crops, dried up waterways and scorched pastureland, one of the largest lenders for U.S. agriculture said on Wednesday.

"We're watching it pretty closely ... but we're certainly bullish on the industry," Roger Sturdevant, executive vice president of Bank of the West and head of its Agribusiness banking division, told Reuters in an interview.

Bank of the West has about $62 billion in assets and is ranked as the second-largest bank lender to U.S. agriculture with about $3.2 billion in agricultural loans.

The agribusiness division serves customers across the country with an emphasis in the western and Midwestern regions of the United States. The bank specializes in banking services for field and row crop operations, livestock ranchers and feedlots, dairy producers, food processors and vegetable crops, wineries and vineyard operators, among other industry segments.

Sturdevant said the bank is particularly wary of any negative fallout from the historic drought that gripped more than half of the nation this summer.

Times are hard for U.S. cattlemen, who have been forced to liquidate herds for lack of adequate pasture and water. Corn farmers have seen typical yields cut in half or worse by scorching heat and limited rainfall and dairies and poultry and swine producers have struggled to find affordable feed for their animals.

Still, Sturdevant said farmers and ranchers generally appear to be holding up and are headed for some relief in 2013.

Grain producers are faring the best, he said. High prices for wheat, corn and soybeans, coupled with a broad crop insurance safety net for producers who lost crops to the drought, should see those farmers end the year with healthy incomes.

Many livestock producers facing a squeeze should see a return to profitable margins in the first and second quarters of 2013 as tight meat supplies drive demand - and prices - higher, Sturdevant said.

The U.S. Department of Agriculture is forecasting a drop of about 2 percent in total red meat and poultry production next year.

One concern is that land values will erode, he said. Farmland values have skyrocketed in many parts of the country, particularly in the U.S. Midwest and Plains, where strong demand for corn and soybeans has been driving double-digit gains in land valuations.

For the first half of the year, farmland values were up sharply over a year ago in those regions, but the rate of growth appeared to be slowing.

"It's probably still too early to tell, but so far we're not seeing it," said Sturdevant.

More will be known as farmland sales typically pick up after the fall harvest, he said. Turnover of farmland is currently running about half the normal rate, he added.

Many industry experts have expressed concerns about a land price "bubble" that could pop at any time, but Sturdevant said he did not fear a bubble due to low farm debt and the fact that rising values are largely tied to solid fundamental factors of strong demand, particularly for corn, and high grain prices.

He said this year's drought underscored how critical water is to farm lending.

"Every loan we make we have a discussion about access to water, the cost of water, water rights, etc...," he said. "It's going to be increasingly important as it becomes more scarce. Water is key."

(Reporting By Carey Gillam)

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