With crop prices at or near record lows, bankers fear farm borrowers will not earn enough in 1999 to cover expenses and repay their loans. But rather than deny farmers operating credit, many banks are asking for more collateral.

"Clearly farm lenders want to keep working with their farm borrowers, but they want to protect themselves," said Edward Lotterman, a St. Paul- based agricultural economist.

Under normal economic conditions, about 10% of agricultural banks ask borrowers to put up a higher-than-normal amount of collateral, which could include property and equipment.

But in the past six months, that proportion has grown to about 30%, said Mr. Lotterman, a former economist at the Federal Reserve Bank of Minneapolis and now a consultant.

A study by the Minneapolis Fed due out this month is expected to show that as many as half of the bank district's ag banks are requiring more collateral than usual, according to Mr. Lotterman, who did the quarterly survey for six years.

Banks have always required that borrowers put up assets as collateral for loans, of course. But since the farm crisis of the 1980s-when many loans were secured with overvalued farm land-bankers have preferred to base loans on a farm's expected income, not on the value of its land and machinery.

Now with farmers struggling just to break even, bankers are once again looking to farmers' assets.

"Banks are in a situation where the cash flows don't work," said Terry J. Jorde, chief executive officer of Country Bank USA in Cando, N.D. "Banks are forced to do equity lending because we can't pull the rug out from under these guys."

Farmers State Bank in Trimont, Minn., is one lender asking for more collateral. Two farmers who grow corn and beans, for example, were asked to put up additional land, and a third pledged the cash value of a life insurance policy, said Michael Mulder, senior vice president.

By late spring, Mr. Mulder said, he anticipates Farmers State will be asking 40% of its farm borrowers for more collateral.

Cutting off farmers, however, is not an option. If the bank refused to lend, farmers could be forced out of business, and the local economy could be glutted with land and equipment, he said.

"We don't want to overreact" and deny a loan based on one tough growing season, Mr. Mulder said.

Keith Leggett, an economist at the American Bankers Association, said the trend toward equity lending is not cause for alarm, though many small agricultural banks failed in the 1980s after lending on land that lost value.

"The banks are in good shape," he said. "There are some borrowers who do need (to increase their collateral), but this reflects prudent, sound risk management on the bank's part."

Still, some bankers and industry experts said equity-based lending should only be a temporary solution.

James J. Molloy, CEO of First State Bank in Conrad, Iowa, said his bank has shifted toward equity lending this year but will not continue this if the farm economy's slump continues.

Banking consultant Bert Ely, who heads Ely & Co. in Alexandria, Va., agreed that bankers should be cautious. "If the farmers are not cash- flowing, the banks are rolling the dice," he said.

Banks most at risk are those in areas where land prices are falling, said Mr. Ely. Land values fell by as much as 8% in parts of Illinois and Iowa last year, according to the Federal Reserve of Bank of Chicago.

If the farm economy does not improve, banks may have to do more than demand additional collateral. They may, for example, counsel some farm customers to liquidate.

"Everyone is hoping something will happen in the world to raise crop prices," said Mr. Lotterman, the Minnesota economist. "If not, the banks may have to be much tougher next year."

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