Central Illinois banker David Combs turned to the U.S. Department of Agriculture last summer for a government-guaranteed loan because a farmer wanted to consolidate debt at a better interest rate.

Mr. Combs, president of the $91 million-asset First National Bank in Taylorville, Ill., was rebuffed, however -- as were hundreds of other bankers nationwide. The government program that backs billions of dollars of farm loans per year had been tapped dry, and Mr. Combs missed out on the farmer's business.

Bankers and their association lobbyists now worry that this cupboard soon will be bare again -- perhaps by Christmas -- despite the President's signature last week on an agricultural bill that appropriates funds meant to last 12 months. The $70 billion measure includes $3 billion for loan guarantees in fiscal year 2000, compared with $2.8 billion allotted in fiscal 1999, which ended Sept. 30.

"The bottom line is that they need to put even more money into those accounts," said Mark Scanlan, agricultural affairs director at the Independent Community Bankers of America. "There's going to be big demand this fall and next spring. There's not going to be enough money to cover the loan demand."

Almost 5,000 banks in the past two years have used the program operated by the Agriculture Department's Farm Service Agency to minimize their lending risk. Bankers worry that low commodity prices, which plagued farmers nationwide in 1998 and 1999, along with this year's Northeast drought and Great Plains flooding, could lead to increasing defaults.

The guarantee program offsets much of that risk because the Farm Service Agency backs 90% of most loans. It also helps farmers obtain better rates.

With demand at an all-time high, the government-guaranteed fund ran out of money twice last fiscal year. This required Congress to appropriate emergency funds to keep it running.

"You don't have to be a rocket scientist to see that the amount appropriated this year, coupled with the ongoing strong demand, will put severe pressure on these funds," said John Blanchfield, manager of agricultural banking and rural development at the American Bankers Association.

Officials at the Farm Service Agency did not respond to repeated requests for interviews. But Mr. Blanchfield and others said they are surprised the agency did not request more money from Congress.

Bankers groups already expect that they will have to ask Congress for money this fall because agricultural lenders don't believe the problems facing farmers are going away anytime soon. The Agriculture Department already projects that farm income this year will be the lowest since 1995 and could fall again next year.

"This year was just the tip of the iceberg," said Mr. Combs, the Illinois banker. "Next year will be even worse."

Guaranteeing loans is relatively cheap by government standards. The bill signed by the President includes $8.7 billion for cash payments directly to farmers. However, Congress needed to set aside only $123 million to pay for the estimated defaults and other costs associated with guaranteeing $3 billion of loans.

Bankers worry that their farm customers could face great strain if the government runs out of guarantee money before early spring when farmers make planting decisions.

"Getting those operating funds when they're needed is very critical," said Michael Grove, president of $39 million-asset First National Bank of the Rockies in White Sulphur Springs, Mont. "Farmers have a limited window when they can plant and need to make plans based on the funds available."

Without government-backed loans, farmers might be out of luck because many banks won't chance defaults on operating loans, which can range from $100,000 to $200,000.

"Our farmers' ability to repay is definitely lower today than it was several years ago, which increases the risk we face," said Marc Meyer, president of the Adel, Iowa, office of $1.7 billion-asset Brenton Bank. "To make loans in times like this, we need a partner to guarantee that risk."

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