WASHINGTON -- With crop insurance reform on its way to the White House for President Clinton's signature, agricultural lenders are going to feel more comfortable making loans to farmers.
Tucked inside the Agriculture Department reorganization bill, which gained final approval from the Senate last week, the crop insurance provisions will shield banks from losses when crops fail.
Under the bill, farmers will have to carry basic, low-priced, federally provided protection in order to receive government crop subsidies.
"This is going to take the disaster part out of farming," said James Hart, president and chief executive of Hand County State Bank in Miller, S.D. "It'll make it easier and more comfortable for us to lend, especially since now disaster assistance isn't just subject to the whims of Congress."
Mandatory crop insurance would make bankers more willing to lend to marginal or beginning farmers who might have been rejected without the coverage, according to Phil Bums, president and chief executive at Farmers and Merchants National Bank in West Point, Neb.
"Anytime you do something to remove risk, I think it helps lenders go further out on the limb for a farmer," he said.
Disaster relief will be harder to get in the future because the reform package requires Congress to jump through more hoops before bailing out disaster areas. Federal aid is currently designated as emergency off-budget spending, but the reform package requires that any future crop disaster bills be offset by cuts in spending.
Over the last decade, Congress has approved ad hoc disaster relief bills every year, averaging over $1 billion annually, according to Mr. Bums.
Instead of buying crop insurance, many farmers choose to gamble on getting the federal relief in the case of a crop failure,
"That was a problem because when an ad hoc disaster aid package was being developed, it was up to the states to qualify certain percentages of counties for relief," Mr. Burns said. "If a farmer wasn't included, he didn't get the relief, even if he lost his crop. Now bankers have something more reliable."
The basic federal catastrophic-loss coverage would cost a grower a processing fee of $50 per crop, up to a maximum of $10t3 per farmer per county.
Based on average yield, the basic insurance would pay the grower 60% for the value of the crop if half the crop was lost.
"The good news is that this insurance is virtually free," Mr. Burns said. "We're going to have the comfort that virtually all of our customers will be insured, and that's a real plus."