Community banks are catching on to a once-obscure government bond program that makes it easier to lend to young farmers.

Under the 18-year-old program, banks may buy tax-free "aggie" bonds from their home states, using loans to farmers with assets of less than $150,000 to supply the income stream for bond payments. The program has grown by 66%, to $73 million, since 1995 when Congress amended the law to relax eligibility requirements.

"I've got more demand than I can meet," said David Wirth, executive director of the Illinois Farm Development Authority, the agency that administers the bond program in Illinois.

Indeed, the program has become so well-liked that the National Council of State Agricultural Finance Programs-of which Mr. Wirth is a board member-is asking Congress to abolish states' authority to set caps on their bond issuance.

Abolishing the caps would let more community banks participate in the program because they would not be turned away when a state reaches its limit. Iowa, for example, has sold all of its $24 million in bonds budgeted for 1998 and has already committed $8 million of its 1999 bond allotment.

Currently, 19 states sell aggie bonds to community banks. Banks hold the bond as an asset, at identical terms to the loans which are passed through to the state agency in payment.

Because banks pay no tax on the bond income, they can fund loans more cheaply and offer customers a 1.5-percentage-point discount on the interest rate, which helps them compete better against aggressive Farm Credit System lenders.

"It's the best program I've ever seen," said Roger A. Lind, vice president of Bank Midwest in Jackson, Minn. His bank has made $3 million of aggie bond loans and has $250 million of assets overall.

Banks' chief targets are young farmers, who generally have fewer assets than established farmers. The payoff can be a lifetime's worth of business, bankers said.

"If I give them a cheap loan, it's really a bond forever," said Mr. Lind.

Mr. Wirth, who plugged the aggie bond program at the American Bankers Association's agricultural bankers convention here last week, agreed.

"You try for young farmers with a successful family history," he said.

"You're not just focusing on this loan or that account but a whole lifetime relationship."

Since programs designed to help family farms are popular with Washington lawmakers, Mr. Wirth said, he is "cautiously optimistic" that Congress will revise the bond program next year so it can grow to meet demand.

"It's a good song to sing-young farmers and small banks," he said.

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