WASHINGTON -- Let's say a local farmer comes into a branch and wonders if your bank would be interested in lending a few hundred thousand dollars so he can produce an experimental, ecologically friendly alternative agricultural product for which there is now no market.

What if Uncle Sam is standing by the farmer's side?

A tiny U.S. Department of Agriculture division is vetting such projects and investing in them. Its aim is to help commercialize new uses for nonfood, nonfeed farm products, to provide rural jobs, and to diversify the farm economy.

The young agency, called the Alternative Agricultural Research and Commercialization Center, acts as a venture capitalist for fledgling companies.

So far, it has helped finance several seemingly wacky products, such as a lip balm made from a desert plant, boards made of wheat straw, oil-spill cleanup products made of waste wool, and granite-like furniture produced with soybean meal blended with old newspapers.

"When banks have a person or company in their area who has a new product or new technology related to agricultural or forest products, they now have the ability to go to us at AARC and we will work with them on a matching basis to fund the commercialization of this technology," said W. Bruce Crain, AARC's director.

AARC support can help banks make safer loans to local start-ups.

The program can help banks in several ways, said Lee M. Reeve, chairman of AARC's board and also a bank director.

Bankers lending money for such projects may sleep easier because they know that to win AARC support, the entrepreneur's project has already been evaluated for its business prospects and its scientific merit.

"We've tried to at least separate the grain from the chaff here," Mr. Reeve said. "If they've already got a 50% match and we put in some funds also, then maybe that becomes a lot more palatable to their local bank."

In addition, lending to AARC projects would often help banks, "get some Community Reinvestment Act brownie points," said Mr. Reeve, who is a director at $130 million-asset Fidelity State Bank in Garden City, Kan.

Banks in agricultural markets may find projects using new farm products attractive as federal crop subsidies drop, which could cause financial problems for the farmers who typically borrow from them.

Mark Scanlan, an agricultural issues lobbyist at the Independent Bankers Association of America, said the AARC projects are "another option that banks could explore if they are trying to stimulate some business in rural areas."

So far, the center has funded or invested in 45 projects, which are expected to provide returns to the government within a few years. Eventually, the agency itself will be self-funding.

Mr. Crain said his organization will "help commercial banks, thrifts, and other financial institutions in funding this activity." AARC funds can also be used in conjunction with Federal Home Loan Bank programs, he said.

Mr. Crain said $65 million in private-sector capital -- most in the form of bank loans -- is already committed to AARC program projects. Mr. Crain is familiar with the kinds of projects financial institutions can best use because he was a lobbyist for the Savings and Community Bankers of America until early this year.

"You've got public/private partnerships creating new uses for agriculture and providing rural jobs," said Mr. Crain of the two-year-old agency.

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