Agriculture: Farm Lenders Brace for a Market with Fewer Subsidies

As Congress belatedly puts the finishing touches on the 1995 farm bill, agricultural lenders are gearing up for the changes it will bring.

The House and Senate bills now in conference committee agree in their major features. Both measures call for phasing out price supports on many crops over seven years. They also would eliminate government control over what farmers plant and what land they keep idle.

President Clinton is expected to sign the final bill.

The legislation is basically "realistic about what we need to do," said Larry Stutz, president and chief executive officer of $25 million-asset First National Bank in Alma, Kan.

"Everybody's complaining about government being too big and having its nose in everybody's business," he said. "The price that we have to pay is to give up the subsidies. I think doing it over a period of time is the best way to do it, so we can make the market adjustments we need to make."

Such adjustments might not be easy, experts say, as lenders would be dealing with entirely new assumptions on risk and pricing. For instance, Kansas agriculture consultant Bill Helming predicted that 33 million acres that now are idle would be farmed once federal restrictions on cultivation were removed.

Don Shurley, an agricultural economics professor at the University of Georgia, said the phasing out of subsidies could drastically change how banks underwrite loans.

"Obviously, this is going to affect the cash flow and the debt servicing ability of most farmers. Have the banks given some thought as to how this is going to affect their loan portfolio in terms of bad debt and so forth?

"Without government programs and payments, will it have an impact on their loan decisions? I don't have an answer to that. In some cases the existence of government programs has allowed banks to make loans that in the absence of that would be too risky."

Lenders have said that farmers have become to more familiar with using commodities marketing tools such as futures and options.

"The farm customer is going to have to become more marketing-oriented," said Dave Taylor, vice president at $92 million-asset First State Bank, Webster City, Iowa.

Nonetheless, farmers "have come a long way," he said. "They're much more in tune with what's available."

His farm customers have had good yields and have gotten good prices lately, so they have been less concerned about government payments, he said. But the cyclical nature of agriculture is sure to change that.

"From a cash flow standpoint it's kind of a nonevent this year," Mr. Taylor said. "Obviously, that will change in coming years."

Farmers and their lenders are eager for a final farm bill, as they already have begun examining financing for this year's production without knowing what federal pricing programs will be.

However, the legislation, dubbed the "Freedom to Farm" bill, needs to have differences in its House and Senate versions reconciled before it goes to the President.

The Senate passed its version of the farm bill on Feb. 7 by a vote of 64-32. On Feb. 29, the House passed its bill by a 270-to-155 vote.

Both versions would eliminate subsidies for crops including wheat, corn, cotton, and rice through seven years of declining payments.

"Farmers got the best deal that they could get, given everything that was being discussed going into this," said John Blanchfield, head of the American Bankers Association's agricultural banking division. "When you look at what were the alternatives, dropping them like a hot potato was on the table."

The House also closely voted to maintain government payments for seven years for peanut and sugar programs. The payments wouldn't decline over time but would be less than they have been.

Although peanut farmers would see a 10% reduction in price supports, "Given the attacks on the program, I think the farmers are pleased with what we ended up with, because it could've been worse," said Mr. Shurley of Georgia, which producers half the nation's peanuts.

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