President Bush's proposed 2002 budget has farmers and the banks that lend to them worried.
First, the Department of Agriculture budget includes no money for income assistance to farmers hard hit by low commodity prices. Last year the department's budget set aside nearly $2.5 billion in emergency funds to help cash-strapped farmers repay loans and meet other obligations. "If you look at agriculture over the last four years, the only way anybody has made any money is through government payments," said Dennis McMillan, senior vice president at $1.3 billion-asset Busey Bank in Urbana, Ill.
Without that safety net, "these banks can't make loans," said Lyle D. Frederickson, senior vice president at $100 million-asset First Capital Bank in Phoenix.
Second, the Business and Industry Guaranteed Loan program, an economic development initiative for nonfarm rural businesses, would be reduced from $1.5 billion in 2001 to $1 billion in 2002. The cuts would come at a time when bank demand for these loan guarantees is at an all-time high. Last year more than $900 million in Business and Industry loans went unprocessed because the program ran out of money before the fiscal year ended.
The Bush administration said it omitted income assistance for farmers in this year's budget for two reasons: commodity prices appear to be improving, and the complete budget has a $1 trillion "reserve" fund that could be used to support agriculture or any other program. John M. Blanchfield, director of the American Bankers Association's Center for Agricultural and Rural Banking, said past administrations have not always built farm subsidies into budgets because those subsidies are considered emergency spending.
James E. Kullmer, vice president at $33 million-asset Benton County State Bank in Blairstown, Iowa, said he is confident that the government will come up with the money if farmers run into cash-flow problems this year. In fact, the Senate expects as much: It included $9 billion for aid in its budget.
The reduction is "a concern, and we want farmers to have that extra income, but the government has always come through when it's had to," Mr. Kullmer said.
Still, Mark K. Scanlan, director of agricultural finance with the Independent Community Bankers of America, said the trims could not come at a worse time. Besides low crop prices, farmers are grappling with higher energy expenses.
"Their production costs are going to be higher," Mr. Scanlan said. "Their potential to make a profit will be less, and some farmers will probably go out of business regardless of the size of the package."
Anxiety is highest in the Midwest, where many farmers rely almost entirely on government subsidies for income. In Iowa, for example, government payments make up about half the net farm income, said Marc J. Meyer, president of $85 million-asset Wells Fargo Bank in Adel, Iowa. He said the prospect of cuts is making farmers and lenders alike uneasy about how debts would be paid.
"Due to record low commodity prices, we are very much in need of supplemental payments," Mr. Meyer said. "It does make us more conservative in our lending in both the short term and the long term."
He added that while only 25% of his bank's portfolio is in agricultural lending, the rest goes to businesses dependent on farmers. Main Street businesses where farmers shop will suffer without that income, he said.
Bankers also worry that the so-called reserve fund will put new hurdles before farmers needing aid.
All the President Bush will do "is create another bureaucracy to determine who gets the money," Mr. Frederickson, the Phoenix banker, said.
As for the Business and Industry Guaranteed Loan program, the $1 billion in the Bush budget is the same amount allotted in the Clinton budget two years ago and still well above 1996 and 1997 levels. But because the program - which guarantees 80% of loans made to businesses in areas with less than 50,000 people - is more popular than ever, bankers seemed surprised that it would be targeted for cuts.
Tom Olson, president of $16 million-asset Lisco State Bank in Lisco, Neb., said the Business and Industry loans help diversify rural economies and relieve the stress brought about by low commodities prices. Last year the program helped save or create more than 29,000 jobs in rural communities, according to the Department of Agriculture.
Thomas G. Zernick, the community bank president in Lansing for $4.8 billion-asset Republic Bancorp, Owosso, Mich., said the program has to get even more funding to encourage more economic development in these communities.
"It needs to go the other way so the states can fund rural development," he said. "It gets the banks to lend in rural areas where they might not lend without the guarantee."