With the ax poised over government farm subsidies, agricultural lenders - and their customers - are rethinking some long-held assumptions about their business.

"Everyone's just going to have to improve their management skills and marketing," said David Erwin, vice president at $65 million-asset Lena State Bank in Illinois, which finances corn, bean, and livestock producers.

Like many, he believes the government eventually will end subsidies for grain producers.

But because new policies won't be set until the 1995 farm bill is passed - likely later this year - agricultural lenders can only speculate on exactly how changes in subsidies will affect their borrowers and themselves.

"The most likely scenario is a decline in government farm program payments," said Michael Boehlje, a professor of agricultural economics at Purdue University.

"The challenge to the lender is to assess what that means," he said. "We have been suggesting that lenders pull out of their portfolio a representative set of customers and do some 'what if' analysis."

One proposal in Congress would retain current program structures but reduce subsidies. Another would base future subsidies on past payments, with no relation to current price or yield.

If that scenario passes, "more of the risk will be shifted to farmers and their lenders," said Arthur Barnaby, a professor of agricultural economics at Kansas State University. "I don't think it's the end of the world if we go to this policy. I do think there's going to be a real learning curve. If you had to relearn your job after working there for 30 years, it would upset you."

Mark A. Edelman, an agricultural economics professor at Iowa State University, said changes in subsidies will affect bankers in different ways.

"The response of specific community bankers is going to depend on the importance of agriculture, not only in their own portfolio but also in their rural economic community base," he said.

Still, expecting lower farm subsidies, agricultural lenders say they and their customers must be better prepared to use other types of risk management, such as options, to make up for that lost safety net.

Bankers should request farm marketing plans in addition to cash flow statements, Mr. Barnaby said. "If (farmers) don't have a written plan, I can almost guarantee (they) won't follow a consistent risk management strategy."

Farm marketing is the use of options and futures contracts to mitigate the affects of fluctuations in commodities prices.

Many agricultural lenders say farmers aren't doing enough in this area, perhaps because they haven't been convinced that there is a real need for it yet, said John S. Nye, executive vice president of Citizens Bank of Kansas in Kingman.

"They've always had this safety net of the program and deficiency payments, and always had that little old thought in the back of their mind, If we miss a wheat crop, there'll be a disaster program," Mr. Nye said.

But many banks are working to educate themselves and their farm customers on farm marketing, holding sessions like the one that Cresco Union Savings Bank, Cresco, Iowa, has planned for next month.

Farmers who have relied on government payments to make up for lost income will walk through hypothetical scenarios using options to affect prices.

"They need to change their ways to survive," said Gordon Koehler, senior vice president. "This has a big impact on the lending institution. It has a big impact on how loans perform."

University agricultural extension offices and boards of trade are good information resources, bankers said.

DeLynn Barton, senior vice president of State Bank of Southern Utah, Cedar City, has already seen his sheep producers affected by a government phase-out of wool subsidies, though the incentives came from tariffs, not taxes.

The government also is phasing out mohair and honey subsidies.

"There's greater risk based on the conditions in the open market," Mr. Barton said. "A sheep producer will have to be better capitalized in order to qualify for loans. It will be harder for younger, newer applicants to qualify."

Because wool is not traded on the commodities market, producers can't consider the same types of marketing options that other kinds of producers can.

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