WINNIPEG, Canada - Farming is changing, and farm banks will have to change their underwriting practices to keep pace.

That was the message delivered by agricultural economists and lenders at an agricultural finance conference here last week sponsored by the American Bankers Association and the Canadian Bankers Association.

Driving the change is a shift - primarily by small and midsize farmers - away from commodities such as corn, wheat, and hogs and toward niche farming. For bankers, this means that underwriting guidelines will focus more on intangibles, such as a farmer's business ability, and less on the farmer's finances, according to Edward L. Tubbs, chairman of the $180 million-asset Maquoketa State Bank in Maquoketa, Iowa.

"The variables are still the same, but the emphasis will be different," Mr. Tubbs said. "You have to look at the individual a lot more and the balance sheet a lot less." And what has so many farmers scrambling to find a new crop to plant? It is a problem most bankers can readily understand: narrowing margins.

The price for a bushel of corn dropped 43% from September 1995 to last month, to $1.55, according to the Agriculture Department. Soybean prices fell 23%, to $4.54 a bushel.

"We are going to have to accept the fact that margins are razor thin," said Mark Drabenstott, director of the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City. "Farms are getting bigger to compensate."

Fewer owners of small and midsize farms will be able to make a living from agriculture alone, said David Kohl, who teaches agricultural economics at Virginia Polytechnical Institute in Blacksburg. And as farmers move further away from commodity production, he said, underwriting standards will become much less defined.

"Bankers are going to have to take factors like management ability and marketing skills into greater account," Mr. Kohl said.

In the face of these new realities, some larger banks are already beginning to change the way they evaluate their customers.

Kerry Keeler, who heads the risk management division at $160 billion-asset Toronto-Dominion Bank, said it has altered its underwriting guidelines to include more than the borrower's cash flow and assets.

"We're trying to look beyond the balance sheet," he said. "We're trying to find the low-cost producer, and management is the key."

As a case study, Mr. Keeler cited an Ontario farmer who approached Toronto-Dominion last year with a plan to move from commodity farming to "product farming" - that is, offering a high-quality, market-ready product directly to retailers.

Direct-marketing a specialized product offers the prospect of significantly higher returns but is harder than selling commodities. But the farmer "had a good business plan, so we went ahead and loaned him the money," Mr. Keeler said. "Now he's doing very well.

"And he's mine for life. He'll never go to another bank."

Larry Martin, chief executive officer of the George Morris Center, an agricultural economics consulting firm in Guelph, Ontario, said the example is important because farmers "will go into several niches in order to create a product that is different from the commodity."

Mr. Martin told the story of a friend, another Ontario farmer, who used to grow a commodity crop, yellow corn. Now he grows a variety of red sweet corn instead, and sells it- for a much higher price - directly to consumers, who visit his 100-acre farm in search of an "agricultural experience."

"Under these circumstances," Mr. Martin said, "success requires excellent marketing skills, quality control, relationship management, and the ability to find the next niche - because eventually, the present one will be commoditized."

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