The U.S. Farm Credit System, a government sponsored enterprise and major lender to U.S. agriculture, reports its fourth-quarter net earnings for 2011 rose 9.7 percent, reflecting a robust agricultural economy.

The System, which funds its lending to farmers and agribusiness by issuing debt securities to domestic and foreign investors, earned $946 million for the last three months of 2011, compared with $862 million a year ago.

Overall 2011 earnings were up $445 million, or 12.7 percent to $3.940 billion.

"Strong global and domestic demand for crops and livestock, an extended period of low interest rates and the healthy credit quality of the System's loan portfolio contributed significantly to the 2011 results," Jamie B. Stewart Jr., CEO of the Federal Farm Credit Banks Funding Corp, which funds FCS' securities, said in a statement.

"The System's capital to assets ratio increased to 15.6 percent at Dec. 31, 2011 from 14.5 percent at Dec. 31, 2010," he added.

Full-year earnings reflected increases in net interest income of $369 million and noninterest income of $33 million as well a $237 million drop in the provision for loan losses.

Offsetting these partially was increased noninterest expense of $143 million and provision for income taxes of $51 million.

Net interest earnings were $6.259 billion for 2011, a 6.3 percent rise from $5.89 billion.

"Loan growth flattened during 2011 due, in part, to the strong financial positions generally enjoyed by agricultural producers, which decreased the demand for agricultural credit. A continuation of this trend could place pressure on net interest income levels in future periods," Stewart said.

FCS reported provision for loan losses of $430 million, compared to $667 million in 2010. Those losses were mostly due to stress in the livestock, ethanol, dairy and poultry sectors -- all consumers of pricey grain.

Stronger fourth-quarter earnings were a result of lower provision for loan losses of $115 million and noninterest expense of $17 million. That was partically offset by a $4 million decrease in net interest income, a $39 million decrease in noninterest income and a $5 million increase in the provision for income taxes.

Net interest income was $1.563 billion for the quarter, compared with $1.567 billion a year earlier.

Quarterly provisions for loan losses were $78 million, down from $193 million in 2010.

Gross loans fell $687 million, or 0.4 percent to $174.664 billion at Dec. 31, 2011, versus $175.351 billion a year ago.

The decline was linked to farmers delaying delivery of grain to cooperatives, thus reducing financing needs to hold big crop inventories.

FCS's accruing loan volume was $171.926 billion at the end of the quarter, down from $172.122 billion in 2010. Nonaccrual loans were $2.738 billion, versus $3.229 billion for the same period.

The outlook for farm income remains strong. USDA estimated 2011 U.S. net cash farm income at $108.7 billion, up $16.4 billion from 2010. The agency's forecasts 2012 farmers' net cash income to decrease to $96.3 billion, a $12.5 billion decrease from 2011, but $16 billion above the 10-year average. (Reporting by Christine Stebbins; Editing by Lisa Shumaker)