Bankers can expect a fresh blast of competition from the Farm Credit System.

Eleven years after nearly collapsing during a farm crisis, the government-sponsored system is back on its feet and launching an aggressive drive to boost its 25% share of the agricultural lending market.

"It's time now to develop some business," said Marsha Pyle Martin, chairman and chief executive of the Farm Credit Administration, the system's top regulator.

Commercial banks, which have long viewed the system warily, already are feeling the heat.

"They're getting tougher all the time-they're getting bolder," said Duane W. Foelske, senior vice president at $110 million-asset State Bank of Waverly in Iowa.

Adds John M. Blanchfield, manager of agricultural banking for the American Bankers Association: "They're doing a lot of stuff-and our guys don't like any of it."

The system, started in 1916 to increase credit to farmers, is made up of 213 borrower-owned cooperative banks and associations that operate throughout the United States and Puerto Rico. Six Farm Credit banks and one agricultural credit bank distribute low-cost funds to the associations through a variety of intermediaries. Through Sept. 30, the system held about $63 billion of farm loans.

In the view of many bankers, the system is an unfair competitor. They see it as a monolithic government agency bent on stealing customers. And they point out that the system is able to fund itself with bonds that carry the implicit backing of the government.

"We're competing with our own government," said Dennis H. White, chairman of First Bankshares, Valley City, N.D. "They compete head to head with us for agricultural operating loans and cattle loans and real estate loans. But they're able to buy their money a lot cheaper than we can."

Ms. Martin brushes off such criticisms, saying the system is simply an easy target for banks. The system "gets a little more than its fair share of criticism," she said.

Ultimately, she says, the Farm Credit System helps keep food prices down, by giving farmers and ranchers another funding option. She maintains that the cost of credit would rise one percentage point in most markets if the system disappeared tomorrow.

"They are a vital part of the rural credit landscape," said Bret Healy, legislative assistant to Sen. Tim Johnson, D-S.D., who specializes in agriculture and international trade.

Though commercial banks hold a majority of farm debt-about 40%-the industry lost some ground to the Farm Credit System in 1996. It was the first time in 14 years that commercial banks had lost market share.

Meanwhile, the system has been gaining share of farm debt since 1994, after falling steadily from a high of 34% in 1982. An aggressive cost- cutting program, including the closure of 31 Farm Credit banks and associations, helped revive the organization.

Ms. Martin says the government-sponsored enterprise is determined to grow stronger and adds that Congress won't bail it out again. Congress had to step in and save the Farm Credit System in 1987. Since then, the system has been on a capital-building mission, increasing its capital nearly 50% in the past five years.

Now, the agency is on the offensive, trying to drum up business nationwide. Aggressive advertising is becoming commonplace in some markets.

Mr. Foelske, the Iowa banker, said Farm Credit banks in the Midwest are pummeling commercial banks by advertising five-year, fixed-rate agricultural loans and 15-year, fixed-rate farm real estate loans at 7.75%. He said his bank can offer the five-year loan at no lower than 8.5%.

"We're doing the best we can," he said. "We've been able to hold our loans steady. But we're not really expanding our loan volume."

Meanwhile, bankers are anxious about some recent moves by the system to move beyond its traditional turf.

For example, the system has launched a program aimed at giving agribusinesses, such as seed dealers and farm equipment manufacturers, equipment and operating loans and accounts receivable financing. Previously, the system served mainly farmers and ranchers.

The ABA and Independent Bankers Association of America claim Farm Credit's foray into agribusiness lending will cut further into banks' business. The groups are debating whether to appeal a U.S. District Court judge's decision allowing the practice to continue.

"The issue is what role should they play," said Mark Scanlan, IBAA's agricultural lobbyist. "They seem to see their role as one of continually expanding into new markets. That's what the commercial banking industry is objecting to."

To help its members meet the increased competition, the trade group is backing federal legislation that would let banks with less than $500 million of assets join the Federal Home Loan Bank System without meeting the requirement that 10% of assets be in mortgage-related holdings. Under the plan, the banks would be able to use long-term advances from a Federal Home Loan Bank for funding agricultural loans.

The proposed changes are part of the sweeping financial reform bill awaiting a possible House vote.

In another step to become more competitive, a growing number of banks are using the rejuvenated Farmer Mac program, a government-sponsored enterprise that buys agricultural loans from banks. Bankers are using the Farmer Mac program to gain liquidity and provide better interest rates.

Ms. Martin of the Farm Credit Administration said commercial banks could use the system's banks and associations to solve their liquidity problems by participating in loans with them. But she said many commercial banks, particularly in the Upper Midwest, are fearful of such joint efforts because they might lose customers.

John H. Colvin, president and CEO of North Salem State Bank in Indiana, said it has worked with the Farm Credit System to offer credit to farmers who couldn't qualify on their own. Farm Credit has made the long-term real estate loan, and the bank offers the customer a line of credit.

"I think they keep us all honest," he said of the system. "They're good , they're tough. There's a place for them."

J.R. "Bob" Jamison, chairman of Dayton (Tex.) State Bank, puts some of the blame for his Farm Credit competition on his own industry.

"If they were not around, I think there would be fewer farmers because I don't think banks have done a really good job in agriculture," he said.

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