Dry milk exports to Europe are drying up.

That's one of many contributing factors to a faltering livestock economy in Nebraska. It's also a precursor to what a Federal Reserve economist describes as the biggest national surge in requests for farm loans from the federal government in 20 years.

"Demand has fallen off the table," said Brian Briggeman, based in Omaha with the 10th District Federal Reserve Bank. "It's just not there for beef products, for pork products."

It's the same story for dairy and poultry producers, Briggeman said.

"Corn and soybean farmers in Nebraska - really, they're OK. Things are certainly uncertain and the times are definitely challenging. But it's not anything like the livestock sector."

As consumers cut back on meat as a mainstay on their menus, the people at the other end of the meat supply line are feeling the effects in what meatpackers will pay them.

At the same time, livestock producers face higher feeding costs and such curveballs as swine flu and bovine tuberculosis.

Briggeman offered his thoughts this week in the bank's Main Street Economist analysis and expanded on them in an interview. He said small business owners are also reporting challenges in getting loans.

Rich Barta said what's happening nationally is definitely happening in one of the nation's most prominent livestock states.

Approved applications for direct operating loans had reached almost $65.8 million in Nebraska by mid-June, said Barta, state farm loan chief in Lincoln for the Farm Service Agency. That's up 72 percent from the same date last year, although it also reflects an increase in the individual loan cap from $200,000 to $300,000.

Meanwhile, approved applications for farm ownership loans were at almost $33.7 million. That's up 28 percent.

"Our volume has certainly been up this year," he said. "And the economic downturn last fall has had an impact in the Midwest, in that some of the commercial lenders have sent some of their customers to us for assistance and substantially increased our loan volume."

Barta said the spurt in loan activity has cut into the agency's available resources.

"We are experiencing some shortages of funding right now," he said. "But Congress is working on a supplemental appropriation."

Economist Briggeman said he watches marketing trends to see how they match up with loan numbers.

"And if you look across the board at livestock, it appears there's a huge contraction in the livestock sector - culling of herds, downsizing, just trying to get supply to meet demand."

A recent report by the Nebraska office of the National Agricultural Statistics Service is a case in point. May placements in cattle feedlots in the state were the lowest since 1998.

At the same time, said Briggeman, "lenders are going through a tightening, de-leveraging period and things are just tough all the way around."

Asked if the government lending numbers suggest that some borrowers had fallen out of favor rather quickly with private sector lenders, Briggeman called that "a touchy subject."

What the numbers do say, from his view, is that "it's a very difficult time, because it's not easy telling a borrower no, and it's not easy for a borrower to come in and take a loan and not really know what's going to happen."

The Farm Service Agency is often referred to as "the lender of last resort," because it takes on borrowers that the private sector doesn't want to finance, either not at all, or at least not alone.

But Barta prefers to call his field staff, which includes outlying offices in Beatrice, York, Syracuse and 28 locations overall, "the lender of first opportunity."

That takes into account, for example, a new Beginning Farmer Downpayment Loan program that offers money at 1.5 percent interest for up to 20 years.

"We want to give beginning farmers the first opportunity to get started farming," he said, "and if an existing farmer is having difficulties, we want to give him the first opportunity to recover."

He noted that Nebraska led the nation last year in total applications for operating loans.

George Beattie, president of the Nebraska Bankers Association, said feedback from his members does not suggest tighter private sector credit to rural borrowers across the board. But he did acknowledge the possibility Nebraska banks are looking to lend a bigger share of their money, at least in the livestock sector, in partnership with the federal government through loan guarantees.

"That lets the bank still be the lender in that relationship," Beattie said, "and have a little less risk."

Reach Art Hovey at 473-7223 or at ahovey@journalstar.com.