Commercial banks will continue to lose market share in farm lending to the government-sponsored Farm Credit System, according to projections by the U.S. Department of Agriculture.

A report by the USDA's Economic Research Service projects that commercial banks' share of farm loan outstandings will increase 3% this year, to $64 billion.

But the industry's market share will probably drop, while the Farm Credit System's increases, the report said.

The system's share of yearend outstandings is expected to edge up from 25.3% to 25.7%. Commercial banks' share is expected to fall from 39.6% to 39.4%, according to the USDA.

"The Farm Credit System has been a burr in the saddle of traditional agricultural lenders for a long time," said Robert J. Wingert, executive director of the Community Bankers Association of Illinois.

The projected decline in commercial banks' share is consistent with a slight downward trend that bankers attribute to continued tough competition from the government-backed Farm Credit System.

The Farm Credit System was reorganized and revitalized in the wake of the 1980s' farming crisis. Commercial bankers say that since then they have found it increasingly difficult to compete against Farm Credit System lenders.

The system, a nationwide cooperative system of Farm Credit banks and associations providing credit to farmers, offers competitive interest rates and has gone after older, established farmers, who have traditionally borrowed from commercial banks.

Originally capitalized by the federal government, the system is now self-funded and owned by its members. But Uncle Sam still provides capital assistance through government-guaranteed bonds and insurance for bonds, notes, and other obligations issued by the system's member institutions.

Mr. Wingert said the Farm Credit System may be gaining further ground due to consolidation in the banking industry.

"If a traditional big bank is acquired by a bigger, urban bank, there's usually a decrease in emphasis on agricultural lending," he said.

Joseph Kavan, division president and general counsel for Farm Credit Services of the Midlands, Omaha, agreed that consolidation in the commercial banking industry may provide opportunities for lenders in the Farm Credit System.

"Farmers and ranchers are very down-to-earth people, and they don't like to talk to a box," he said. "With all of the consolidation, people start looking around, and maybe they say: Hey, Farm Credit is where I want to be."

However, other Farm Credit representatives are reluctant to say they're winning and commercial banks are losing when it comes to loan market share.

Neil Conklin, vice president and chief economist for the Farm Credit Council in Washington, said it's unclear whether the Farm Credit System is drawing customers away from commercial banks. He suggested that commercial banks may be purposely moving away from agricultural lending.

Mr. Conklin also said banks gained a large percentage of the market share when borrowers moved away from the Farm Credit System during the 1980s. To expect continued market-share growth alongside a competitive, reorganized Farm Credit System would have been unrealistic, he said.

"I think it's natural to see some slowdown," Mr. Conklin said.

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