WASHINGTON -- Agricultural lenders may be able to breathe easier when making loans to farmers if Congress adopts the Clinton Administration's crop insurance reform proposal.

The proposed Federal Crop Insurance Reform Act of 1994 would combine crop insurance and disaster funds and make government crop subsidies contingent upon a grower carrying the basic, low-priced, federally provided protection.

The bill, sponsored in the House by the chairman of the Agriculture Committee, E. "Kika" de la Garza, D-Tex., has not aroused opposition in the House, according to industry lobbyists, and has a better than even chance of passing.

Hearing Likely in Senate

Similar legislation has not yet emerged in the Senate, but legislation backed by the administration is usually assured of at least a hearing.

"It's a top priority for us," said Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America. "We left behind briefing papers on the Hill when our members were here for our spring meetings."

Many agricultural lenders would rather rely on crop insurance than the uncertainty of disaster aid to protect the collateral on their operating loans, according to James Hart, president and chief executive of Hand County State Bank, a community bank in Miller, S.D.

"To put it very simply, we would rather lend on a contract than a promise," Mr. Hart testified before the House Agriculture Committee's environment, credit, and rural development subcommittee last week.

'Reliable Backstop'

"A crop insurance policy is an effective and reliable backstop for ag loans; ad hoc disaster payments, which may or may not be there when needed, are not," he said.

In his testimony, Mr. Hart stressed the importance of ending such disaster payments, saying that removing them will create an incentive for farmers to "self-protect" by purchasing insurance and in turn encouraging lenders to do business even with small or marginal operations.

"If a farmer doesn't have insurance on his crop and it fails, the farmer has nothing and we have nothing," said Mr. Hart. "With this package, lenders can put a floor on their cash flow, and it puts farmers and the lender in a position that they know they will get something for the crop if it fails. We're going to feel more comfortable loaning to the marginal farmer."

Many farmers depend upon federal ad hoc disaster relief to recover from poor harvests or crop failures.

When the Mississippi River flooded last year, Congress approved $2.1 billion in disaster payments to Midwestern and Southern farmers, and only 30% of farmers had crop insurance, according to Phil Burns, president and chief executive of the Farmers and Merchants National Bank in West Point, Neb.

"There's been an ad hoc disaster every year since 1986, at an average cost of $1.6 billion annually," Mr. Burns said. "It's a Band-Aid approach to the problem. It's important to bankers that there's something that's available, reliable, and affordable."

Low Cost

Under the administration's bill, basic crop insurance coverage would cost a grower $50 per crop, up to a maximum of $100 per farmer per county. Based on average yield, the basic insurance would pay the grower 60% of the value of the crop if half the crop was lost.

Although the American Banker's Association and the IBAA of have expressed support for the bill, both organizations believe it could benefit from a few changes.

"We'd like to see coverage converted from a yield base to an income base," said Mr. Hart, who serves on the IBAA's Agriculture-Rural America Committee. "The yield-based program is still dependent upon weather. This is not perfect by any means, but we support it 100%."

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