(DTN) Like the lonely Maytag repairman, rural bankers are finding it's hard to peddle loans when farmers are flush with cash.

A typical 1,200-acre Illinois farmer likely earned a healthy net farm income of $200,000 in 2011, representative of much of the Corn Belt. Those banner farm incomes helped operators reduce short-term loan volumes by 40% last year, according to a Kansas City Federal Reserve report released Wednesday.

"We've been hearing anecdotally since last summer that when farmers walked in the door at their bank, they'd pay off their operating loans," said Jason Henderson, Omaha branch executive and an economist for the Kansas City Federal Reserve. "It helps their farm balance sheets, lowers their debt and lowers their leverage ratios. And they're still able to make investments."

Strong farm incomes sent Corn Belt and Great Plains land values surging 20% to 40% through the third quarter of 2011, the Fed said. But lenders are also reporting substantially fewer short-term loans for livestock and operating expenses.

More conservative debt loads are coming at a good time given the spikes in cash rent and input costs, Henderson added. "With volatile farm prices, there's a potential to strain margins this year, and the first line of protection is to have a larger line of working capital."

Based on Federal Reserve call reports, overall demand for farm loans continued to languish in late 2011 as operators prepaid crop inputs in cash. Loan repayment rates at agricultural banks were markedly higher in the Chicago, Minneapolis, Kansas City and San Francisco districts. Capital spending on items such as equipment, grain bins and irrigation remained strong in all Federal Reserve districts except Dallas, which is gripped in a severe drought.

"Ironically we have historically low rates, but so far farmers have resisted the temptation to turn to debt," Henderson said. Average interest rates for operating credit at agricultural banks averaged 5% at year-end, he noted, down from the more normal 9% rate in 2007. The Federal Reserve also announced Wednesday it will likely keep interest rates near zero through the end of 2014 instead of the earlier announced 2013, due to the weak U.S. economy.

If many operators actually do reduce their overall debt significantly, it would mark a major about-face in credit habits. Data from 2011 for the 2,500 Minnesota farms monitored by the University of Minnesota's Center for Farm Financial Management isn't in yet, but since 2003 operators have increased their total liabilities and operating notes every year.

In southwest Minnesota, farm records show the average farm carried a debt of $967,750 at the end of 2010, up 56% since 2003.

The Federal Reserve's report of a major debt reduction "is not a surprise if someone is close to retirement and not interested in buying land or equipment," said Robert Craven, the Center for Farm Financial Management's director. "But we're actually seeing an awful lot of new equipment being purchased out here."

One explanation is that Federal Reserve surveys do not include loan data from seed dealers and equipment companies, so it's possible that nontraditional lenders may be picking up some of the banks' lost business, Henderson added.

Farm real estate volume at commercial banks gained just 0.6% in the third quarter compared to a year earlier. In contrast, the Farm Credit System reported 4.4% growth in mortgage volume during the same timeframe.

"There's huge competition for loan demand among lenders, and a huge difference in rates they offer," Henderson said. Farm Credit System and commercial lenders offer lower rates than small country banks on average, perhaps 1% point or more, Federal Reserve reports show.

But Henderson thinks the Fed's data shows American farmers may be headed on a more conservative streak. "Agriculture is in a very healthy position with strong profitability, even among the livestock sector," he said. "The risk is we know agriculture is a boom-bust industry. So the question is, how long will the good times last?"

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