Iowa bankers are buying up a record number of tax-free state revenue bonds to finance low-interest loans for beginning farmers.

The bankers, who are participating in the state's Beginning Farmer Loan Program, have already bought the $24 million of bonds allotted for this year's program and are now dipping into the bond supply set aside for next year.

"It gives the beginning farmer a break," said Duane Foelske, a senior vice president at State Bank of Waverly. "Not all of them would qualify without it."

In the program, which has counterparts in 23 states, beginning farmers apply for loans to buy land or make improvements to their farms. If the farmer qualifies for the loan and meets the program's requirements, the bank buys a tax-free bond from the Iowa Agricultural Development Authority to fund the loan. The state agency writes the loan to the farmer, then assigns it to the bank.

The bond's tax-free status allows the banker to pass on interest rate savings of about 1.5 percentage point to the borrower.

Banks want to buy more bonds for the program this year than in previous years thanks to a new marketing program and a relaxation in eligibility criteria for the loans, said Steve Ferguson, executive director of the Iowa Agricultural Development Authority.

Under the new rules, beginning farmers may qualify for the program even if they are buying land from a family member, which previously was not allowed. The program also has increased the acreage a borrower may own.

Bankers who participate in the "aggie loan" program in Iowa say it's well run and offers borrowers better opportunities.

At State Bank of Waverly, $3.6 million of the $12 million agriculture loan portfolio is supported by the program's tax-free bonds.

"There's no guarantee with these loans," said the bank's Mr. Foelske, "but the tax exemption allows us to do it at a lower rate."

With bankers requesting more bonds than the Iowa agency can issue, it has tried to find bonding authority allocated to other state agencies but not used.

Mr. Ferguson said he secured an extra $2.6 million of bonding authority but bankers still want more. Now the agency is "preselling" its 1998 bonding authority.

"We are concerned that we're going to use up all of next year's money by the end of" this year, he said.

Illinois also has exhausted its bonding authority for the 1997 beginning farmer program. David Wirth, director of the Illinois Farm Development Authority, said his agency toughened its requirements for the bond-backed loans but demand continued to exceed supply.

"It's a very important program, certainly in this state of agriculture where the operations continue to get larger and more corporate," said Paul Pogue, president of North Adams State Bank in Ursa, Ill. "It's another mechanism we have to assist the small-business farmer."

Both Iowa and Illinois agencies are lobbying their states' lawmakers to earmark more bonding authority for the popular loan programs, but the agency directors admitted it would be tough to get more.

Iowa and Illinois are among 24 states that have bond-backed young farmer loan programs, but the competition is fierce among state economic development agencies for authority to issue tax-free revenue bonds within the limits set by the federal government.

"We don't have that glamorous aspect," said Mr. Wirth, comparing the farmer loan program to other contenders for the tax-exempt financing.

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