With crop prices low and government aid diminishing, bankers are pushing their farm borrowers to become sophisticated business managers.

Lenders are asking farmers to analyze their operations and learn to hedge against low prices and bad weather before government price supports run out in 2003. Some bankers, like Michael M. Bass, are even requiring farmers to clearly illustrate their break-even points before the bank will extend credit.

"We want to know at what stage they are profitable," said Mr. Bass, president of $48 million-asset First National Bank in Hugo, Colo. "We're doing it for their own good."

For generations, most farmers' business strategy was simple: They sold what they grew at the market price. After all, if crop prices dropped too low or natural disaster hit, they could always count on the federal government to come through with financial aid.

Now bankers fear that farmers will be ill-prepared when price supports expire and will not have enough cash to pay off loans. So they are becoming active in encouraging customers to use risk management tools, such as futures contracts and crop insurance, that guarantee some income.

"There is a lot more focus now on how the farmer plans to market what he or she produces," said John Blanchfield, manager of the American Bankers Association's agricultural bankers division.

"Farmers can't just sit on their grain and wait for the price to go higher," said Mark Scanlan, agricultural banking lobbyist for the Independent Bankers Association of America.

A scary 1998 has heightened concern among farm bankers. The economic crisis battering Asia, Russia, and Latin America has stifled demand for U.S. agricultural exports, pushing crop prices to near-record lows. Meanwhile, severe weather and disease wiped out crops for thousands of farmers.

By late summer, bankers throughout the West and Midwest were openly fretting that farmers would be unable to repay their loans after the harvest, said Keith Leggett, an ABA economist who surveys farm lenders each quarter. "The sentiment in August and September was that things were pretty bleak," he said.

Congress did approve a one-time, $5.9 billion emergency aid package for farmers two weeks before the November election. But Washington lobbyists said farmers would be foolish to rely on congressional assistance in 1999, a nonelection year.

"I think there's a sense that we dodged a major bullet this year," said the ABA's Mr. Blanchfield, "and we may not be so lucky next year."

Indeed, the worries are far from over. The Department of Agriculture predicts farm exports will fall to $50.5 billion next year, down 6% from the projected 1998 total and 12% from 1997.

To prepare, many banks are encouraging farmers to hedge against low prices and bad weather by purchasing futures contracts, crop insurance, or memberships in farm cooperatives. For example, an Iowa corn grower could have bought a futures contract from the Chicago Board of Trade last week guaranteeing him $2.51 per bushel of corn in December 1999 regardless of the market price.

Then the farmer could buy crop insurance to ensure that he has either corn-or the cash to buy corn-when it comes time to honor the futures contract. Together, the products would guarantee a certain level of income and replace the government subsidy.

Such risk management plans can be complicated, so some bankers are sponsoring classes to teach their farm customers how to develop business plans. John H. Colvin, president of North Salem (Ind.) State Bank, has offered such courses for years but said interest was especially high for last February's class.

"Usually only about 10 people would show up, but last year we had 30 come out in bad weather," he said.

For 1999, Mr. Colvin said he plans to double his offerings, to four sessions. A group of farmers in nearby Crawfordsville, Ind., called him directly to request a private class, he said.

Randy Allen, whose Austin, Tex., firm, RWA Financial Advisors, hedges farmers' risks for a fee, said more bankers are hiring him to teach farmers how to use risk management tools. "Bankers are gearing up because they see the (government's) deficiency checks running out," he said.

Other bankers are referring their farm borrowers directly to crop insurance agents, sometimes making a line of credit contingent on obtaining the insurance. John Scherle, a spokesman for American Agrisurance Inc., the nation's third-largest crop insurance company, said customer referrals from banks are on the rise.

"From a lender's perspective, if you can use the policy to guarantee some revenue, it lets you sleep better," he said.

Bankers are also working to improve the tools farmers may use to hedge their risk.

Crop insurance, for example, came under heavy criticism this year after the coverage failed to help farmers who had been hit repeatedly by poor weather and crop disease. Since current law lets insurers cap coverage by averaging a farm's yields over five years, a bad crop during one or more of these years means less coverage for subsequent disasters.

Also, many farmers bought the slimmest policies because the government does not subsidize premiums for additional coverage. But when these farmers made claims, payouts did not cover enough of their disaster-related expenses.

"We had a whole host of problems that surfaced this fall, and the existing crop insurance program couldn't help," said Mr. Scanlan of the IBAA. "This is high on everyone's radar screen."

Now banking industry representatives are helping draft legislation for the next congressional session that would strengthen crop insurance law. Suggestions to improve the law include changing the way coverage is calculated, giving farmers incentives to buy more coverage, and developing more sophisticated policies to cover lost crops as well as low prices.

Revising crop insurance law in a way that the banking, insurance, and farm industries each find acceptable will be difficult, bank lobbyists said, but all the groups are motivated to improve the program before direct government payments to farmers stop in 2003.

Regardless of which tools farmers use to hedge risk, bankers agree that business plans are catching on among top-producing farmers.

"The industry is moving in this direction faster than anyone realizes," said Mr. Bass, the Colorado banker. "In five or six years, this will be the mainstay."

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