During the agricultural crisis of the 1980s, banks' solution for dealing with delinquent farmers was usually foreclosure.

As a result, about 230,000 U.S. farms folded, and 300 banks failed from 1981 to 1987.

Then banks changed their lending policies. Instead of using farmers' equity as collateral, banks began to base loans on cash flow from expected crop and livestock sales.

The shift was supposed to encourage bankers to ride out the rough years and collect loan payments after harvest. What they did not count on was an oversupply of grain, soybeans, and pork pushing commodity prices to their lowest levels in decades.

"We're cash-flow lenders now, and there's no cash flow," said Terry Jorde, president and chief executive officer of CountryBank USA in Cando, N.D.

With farmers struggling to break even, some bankers are using collateral again -- and many are considering it. As Ms. Jorde put it, "We're going back to what they said was the problem in the '80s."

Regulators prodded farm bankers to shift to cash-flow lending after the '80s crisis. Land held as collateral was plummeting in value, so to protect themselves, banks foreclosed. As more banks foreclosed, however, land values dropped further.

"The regulators don't like that we're moving back to collateral lending," said Fred Miller, chief executive officer of the Bank of Anguilla (Miss.), where more than 90% of loans go to farmers. "It's a problem for us, but our crop farmers don't have cash flow now. The only choice for us is to switch back to that system. We run the risk that we'll have to foreclose by doing that, but we've got to protect our interests."

In the '80s, farmers ran up debt by borrowing against equity in their assets, especially land. That worked fine during a period of rampant inflation. But those equity gains and inflating commodity prices masked a major problem: Prices for other items such as farm supplies were increasing faster, said Jim Miller, a government relations representative at the National Farmers Union.

Soon farmers were unable to turn a profit, sending land values into a downward spiral.

"When land values collapsed in the '80s, farmers couldn't support their debt," said Jeffrey W. Walser, a regional economist at the Federal Deposit Insurance Corp. in Kansas City, Mo., and co-author of a forthcoming paper comparing current farm problems with those of last decade. "Prices were less of a factor then. That's the main reason the crises of the '80s and '90s are so different."

Unadjusted for inflation, the Agriculture Department expects cotton and soybeans this year to hit their lowest prices since the early '70s. In December hog prices dropped to levels not seen since 1963, before recovering slightly, but they are still too low for producers to break even, the department says.

"The prices today are more of a cause for alarm than during the last crisis," said Dale Leighty, president of the First National Bank of Las Animas, Colo. "The value of grains is unbelievably low, and it's hard to see when it will get better."

In his paper, Mr. Walser concludes that many of the Midwest's ag banks had more capital and stronger reserves at the end of 1998 than at the end of 1982. However, their loan-to-asset ratios are higher -- a significant factor behind a number of the ag bank failures of the 1980s.

"Banks are stronger going into this downturn, but the problem lenders have is that the loans they're making are not loans that will break even," said Mark Scanlan, agricultural affairs director at the Independent Community Bankers of America.

Still, banks have seen minimal effect from the current crisis. Only one farm bank failed in 1998, and agricultural real estate loan defaults in the first quarter were virtually unchanged from the year earlier, according to the American Bankers Association.

But FDIC research into the 1980s failures shows that it can take two to three years for farmers' problems to turn into lenders' problems.

"This is a much more critical situation than the one in the '80s," said Mr. Miller, who said he believes as many as 25% of Bank of Anguilla's farm customers will not qualify for loans next year. "In the '80s, it was just a shakeout. The good farmers could survive, and the poor farmers were forced out. I don't know if even the strong ones can survive this crisis.

"And if they can't survive, then our community can't survive," he added. "If the community can't survive, where does that leave our bank?"

Many farmers have tried to roll over operating debt from previous years, betting that future earnings will pay off past losses. Regulators, leery of seeing farmers' debt-to-equity ratios rise as they did in the '80s, have discouraged this.

Baker Boyer Bancorp in Walla Walla, Wash., reluctantly has allowed a slight uptick in rollovers among farm customers.

"If farmers have no other way to pay off their loans out of some other resources, then they've got to roll it over into next year's operating line," said Stephen Kimball, the company's chairman and chief executive officer. "If the amount of the rollover is too big, then the bank has to make a decision whether it will continue providing the loan."

Farmers who do not qualify for continued loans or believe there is no future in the business are joining a "quiet exodus" from agriculture, said Mr. Miller of the National Farmers Union.

"In the '80s when the economic balloon burst, we went through a significant painful transition for farmers, lending institutions, and whole rural communities," he said. "What we have now are people making decisions individually or with their lender to get out before all the equity is gone."

This worries Ms. Jorde. In the past decade, about 15% of the people in her rural North Dakota county have moved away. Many of these were farmers.

"They're our customers," she said. "Once they go away, who will our customers be at small banks like ours around the country?" ?

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