When Congress created the Agricultural Development Bond Program in 1981, the aim was to encourage banks to lend to young farmers and ranchers who, because of their limited credit histories, had little access to capital.
But nearly a quarter century later the "aggie bond" program, as it is commonly called, has failed to catch on in most states, and advocates say that if not updated it may fade away in states that do use it.
Jeff Ward, the executive director of the Iowa Agricultural Development Authority, said that even in states that offer aggie bonds, many banks view them as having too many restrictions to be worth their while.
In addition, he said, though aggie bonds allow banks to offer loans at low rates, they do not provide the same peace of mind as a government guarantee - the tool of choice when lending to young farmers.
"Bankers have to make a choice: Do I give the kid a 2.5% interest rate break, or do I protect the bank? Most choose to protect the bank," Mr. Ward said.
Still, Mr. Ward - whose agency helps find financing for young farmers - hopes banks nationwide will be able to use aggie bonds if a bill introduced in Congress in February becomes law.
He said the bill would knock down hurdles that have discouraged banks; it would let them make larger aggie-bond loans and use them in conjunction with federal programs. It also would remove limits on the number of aggie bonds a state can issue.
The banking industry supports the proposal. Without such changes, they say, the aggie-bond program is impractical for many banks because rising land prices make the loan limitations and eligibility requirements too restrictive. Also, competition with other development programs limits the availability of aggie bonds in many states, lenders say.
Aggie bonds work like this: A borrower applies for a loan from a bank, which submits the application to the state along with information to show that the borrower is a beginning farmer, as defined by amount of land owned and net worth. The bank then buys an aggie bond from the state for the amount of the loan, and the state assigns the loan to the bank as repayment for the bond.
Though technically the state makes the loan to the farmer, the bank handles all the cash. The bank receives interest on the loan tax-free, because it is technically the interest on the bond, but takes all the credit risk and is on the hook if the borrower defaults.
The tax break allows banks to discount the interest rate on the loan, so loan repayments are less onerous for the borrower.
Michael H. Firestine, a senior vice president for agricultural lending for Lebanon Valley Farmers Bank, a Lebanon, Pa., unit of the $10 billion-asset Fulton Financial Corp. in Lancaster, said the interest rate breaks are important for financing young farmers.
"In the capital-intense industry called farming, you have to give the farmer every break you possibly can," Mr. Firestine said.
But the federal government permits states to issue only so much in tax-free bonds for development. Because states are more interested in using such bonds to build factories or shopping centers - which generate more jobs than farming - they allocate very little if any of their development bond allowance to aggie bonds.
In fact only 17 states have active aggie-bond programs, and the number of aggie bonds being used is declining. In 2003, the amount of loans issued with aggie bonds was $39.4 billion, 35% less than two years earlier, according to the National Council of State Agricultural Finance Programs.
The maximum size for a loan that uses an aggie bond is $250,000 - too small for most farmland, Mr. Ward said.
Other restrictions abound. A borrower's net worth must be under a threshold determined by the state, typically around $300,000. Borrowers cannot own a plot of land that is bigger than 30% of the median-size farm in their home county or worth more than $125,000. They must also use the loan to buy land so they can farm it, not as an investment. Finally, the borrower must be an individual, not a partnership or corporation.
Also, the Internal Revenue Service has said that under current law, loans made under the aggie-bond program cannot be paired with any other federal programs, such as Farm Service Agency guarantees that cover up to 95% of the loss of principal and interest on a farm loan.
Mr. Firestine said including guarantees would encourage banks to lend to beginning farmers, who are typically higher-risk borrowers.
Jason Henderson, a senior economist with the Center for the Study of Rural America at the Federal Reserve Bank of Kansas City, said bankers and farmers support improvements to the aggie-bond program because the population of farmers is aging. Of the roughly 1.2 million full-time farmers, he said, more than half are 55 or older, and only 5.7% are under 35.
"There's huge concern in the industry about where the next generation is going to come from, because they can't afford the fixed costs," Mr. Henderson said.
Twenty-five years ago Mark W. Leonard borrowed $60,000 to buy livestock and equipment under Iowa's aggie-bond program. Later he was an agricultural lender for three banks.
Now he runs a Holstein, Iowa, finance company called Agcom Financial Services that makes loans and advises banks on putting together beginning-farmer loan applications that would come under the state's aggie-bond program. He said the bond program has helped a number of his borrowers stay in the business, by cutting their debt burdens.
The rate break is "an equivalent of an additional income stream direct to their bottom line," Mr. Leonard said.
Mr. Leonard said he wants beginning farmers to have the same help getting into business. At his urging Rep. Steve King, R-Iowa, a longtime friend, introduced a bill in February that would make four changes:
First, it would raise to $450,000 the maximum that beginning farmers could borrow.
Second, it would eliminate the value limit on previously owned farmland, so that beginning farmers who have inherited farmland could borrow at lower rates.
Third, it would allow pairing aggie-bond loans with Farm Service Agency guarantees from the federal government.
Fourth, the bonds would no longer be counted against a state's allowance for industrial development bonds. This would allow some states to start issuing aggie bonds and others to expand their programs.
The bill's supporters have to keep pushing it, Rep. King said. "As the number of co-sponsors goes up, the chance of getting a hearing goes up."
Rep. King said he does not expect the bill to move through Congress as stand-alone legislation. He said he hopes to get enough co-sponsors to get a hearing for the bill in the Ways and Means Committee and then attach it to a larger tax bill later in the congressional session.
The bill has 14 co-sponsors and is awaiting a Ways and Means hearing. The American Bankers Association and the Independent Community Bankers of America have pledged their support.
Mark K. Scanlan, the ICBA's director of agricultural finance, said Congress is preoccupied with larger issues - as it was in 1999 and 2001, when similar aggie-bond bills stalled. Sometimes beginning farmers just do not appear on the radar screen, he said.
But if the bill were attached to a larger finance bill and somehow passed, it would be a boon to bankers, Mr. Scanlan said.
If more money were available, he said, more banks would use aggie-bond loans. "It helps to have that enhancement to back up the loan decisions."
John M. Blanchfield, the director of the ABA Center for Agricultural and Rural Banking, agreed. Making even one provision of Rep. King's bill law would help banks, he said.
