Few bankers know much about elk lending or emu finance.

But a program run by the state treasurer's office has Iowa bankers brushing up on their zoology to figure out how to lend to alternative farmers.

To diversify Iowa's economy, which depends largely on grain, cattle, and hogs, the state provides low-cost deposits to banks lending to offbeat agricultural producers.

The deposits are priced at below market rates to allow bankers to lend at about two percentage points below the market rate for business loans, while still maintaining a healthy margin.

Though the program was started during the agricultural crisis of the mid-1980s, its growth has exploded over the past three years.

300 Banks Participating

This year, 301 loans valued at more than $12 million have been made by the 300 banks participating in the linked deposit program. In 1990, Iowa banks held only 108 loans valued at less than $4 million.

"It's a good program; we don't have to work for the funding, [the treasurer's office] hands it to us on a silver platter," said Gustave Kerndt, president of Kerndt Brothers Savings Bank in Lansing.

The loans have been made to enterprising farmers cultivating crops as diverse as African violets and black walnuts, to ranchers raising antelope and even Vietnamese potbellied pigs.

Marginal Borrowers Aided

The lower interest rates have enabled banks to qualify some marginal borrowers.

Mr. Kerndt, for example, made a $26,000 loan to a farmer who needed a piece of land to cultivate wildflower seeds but lacked the cash flow to pay for the loan at market interest rates.

The treasurer's office has received word of fewer than a dozen defaults, though the actual figure could be higher.

A good portion of the loans have been made to vegetable and fruit producers. But loans to breeders of large flightless birds--such as ostriches, emus, and rheas--account for nearly $3 million dollars, or a quarter of the amount lent through the program this year.

Worried About Pyramid Scheme

Because the market for products made from these feathered critters has yet to develop, the treasurer's office is cautioning bankers eager to take advantage of this financing boomlet.

"We are concerned that it is turning into a pyramid scheme," said Lynn Bedford, the program's administrator.

Indeed, bankers lending to ostrich and emu breeders are well aware of the credit risk involved with exotic creatures. Though the Dallas-based American Emu Association estimates that a fattened bird could fetch as much as $1,200 on the slaughter market, few bankers accept the birds as collateral.

"The last thing we want to end up with is a bunch of ostriches," said Mr. Kerndt.

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