HONOLULU - An agriculture expert urged bankers to be more vigilant in underwriting farm credits, warning that banks could be hurt by falling farmland prices.

Bill Helming, economist and owner of Shawnee, Kan.-based Helming Consulting Services Inc., said he believes some bankers are underwriting loans on the basis of land values instead of cash flows.

"I see a wreck coming," he told a group of about 50 bankers attending the Independent Bankers Association of America's convention in Honolulu this week. "I see a lot of what I saw in 1980 and 1981. I see a squeeze coming over the next five to seven years."

Mr. Helming warned bankers that farming is a shrinking business and farmers should be evolving into low-cost providers that sell "value-added" food products like beef, chicken, pork, French fries, and vegetable oil.

He also said that grain producers face fierce competition from other countries where land and labor costs are cheap, and that the milk industry is headed for a shake-up.

Meantime, ag bankers will face additional challenges as Congress and President Clinton cut the federal budget. Mr. Helming and other agriculture experts believe farm programs and subsidies will be slashed in the 1995 farm bill.

"We are going through a watershed time in farm policy," said Marvin Duncan, professor of agricultural economics at North Dakota State University. "The intellectual underpinnings of the farm program are coming under serious question. I think that farm programs of the . . . traditional nature are dinosaurs."

It is anyone's guess how much will be stripped from agriculture, but the experts assured bankers that there will be cuts.

"Ag does show up, and it is becoming a big issue," said Alan Ott, director of the subcommittee on general farm commodities for the House Agriculture Committee.

Mr. Ott said if agriculture is cut by $10 billion as some estimate, "let's grab it and run with it. I think it will be much deeper than that."

Mr. Ott said agriculture continues to have a strong lobby and backing from powerful House and Senate leaders, but that won't save it from cuts.

Bankers are concerned with the bill's prospects but don't know yet how it will impact their businesses.

The bill "is a real concern," said William L. McQuillan, president and chief executive of the City National Bank, Greeley, Neb. "We don't feel agriculture should take any more cuts than anybody else. What I am telling my customers now is, stay abreast of the farm bill."

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The normally nonalarmist Federal Reserve Board Governor John P. LaWare gave an uncharacteristically stark remark to reporters here on Tuesday.

Asked what he thought about some states threatening to "opt out" of the federal interstate branching law, Mr. LaWare said flatly, "I think it's a big mistake. I think it will hurt the economies in those states."

Nine states in the central and western regions of the country are considering legislation that would prohibit branching by banks based outside the state.

Mr. LaWare also gave his prediction for how many commercial banks will be left in the United States when the consolidation is over: between 6,000 and 7,000, he said, down from about 10,500.

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Douglas Harris, senior deputy comptroller of capital markets at the Office of the Comptroller of the Currency, said he wishes that sometimes the agency would put more bite into its warnings.

Mr. Harris, who is responsible for setting safety and soundness guidelines in national bank investment practices, was asked by a banker whether the OCC considered the impact of some of its statements on the markets, such as when it issues a warning on structured notes, a type of derivative, and then the market value of structured notes declines as a result.

"The simple answer is yes," Mr. Harris said. "I would say we watered down our message on the structured note advisory (issued last July)."

Mr. Harris said the OCC considers how the press and the public will interpret such warnings, especially given the acute attention the press devotes to the derivatives issue.

"We are concerned about overreaction in the media," he said. "But - and this is a personal statement - I think the message we gave (in the structured note warning) was too watered down."

The structured note advisory warned that some banks - banks Mr. Harris said this week were by and large small banks - might not understand the liquidity and interest rate risk embedded in the securities.

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