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A Year After Farm Credit Bailout, a Few Weeds Remain

February 19, 1989 GMT

DES MOINES, Iowa (AP) _ As the government fashions a $90 billion rescue for the savings and loan industry, a bailout of the $52.5 billion Farm Credit System has entered its second year at a fractional cost of initial estimates.

A reviving farm economy, supported by generous government subsidy payments to farmers, has helped improve the outlook for what was once considered one of the riskiest federal rescue packages.

Nevertheless, some weeds still plague the 73-year-old independent farm banking system and its 600,000 borrowers.

″The bleeding has stopped, which is good to see,″ said Jeff Plagge, executive vice president of the First State Bank of Webster City, Iowa, and a member of the state bankers association’s agriculture committee.

But he said the Farm Credit System ″has ways to go before I think they are perceived by customers as a stable organization.″

The system, a network of rural banks and credit associations, was created in 1916 to provide a reliable source of credit to farmers, the only way for many to pay for the seed, fertilizer, weed killers and insecticides needed in the spring to get a crop in and carry a farm operation to the fall harvest.

″We need it to survive. We need it to be rehabilitated. We need an institution people in agriculture can depend on for financing or we’re going to see bad days again,″ said farmer Reynold Minski, who raises cotton and soybeans near Lake Providence, La.

At the beginning of 1987, after losing $4.6 billion over the previous two years, the Farm Credit System sought $6 billion in government aid.

By the end of that year, with signs of a revival in farm prosperity under way and systemwide losses cut to $17 million, Congress approved the Agricultural Credit Act, authorizing the sale of up to $2.8 billion in government-backed bonds to provide a capital infusion. If that was not enough, the system could ask Congress for up to $1.2 billion more.

To date, the system has borrowed $690 million, just 11.5 percent of estimated needs only two years ago and 17.25 percent of the maximum assistance authorized.

Although the system eventually will have repay the money, the U.S. Treasury will pay the interest on the debt, now $64.9 million a year, for the first five years of the 15-year bonds and half the interest for the next five years before the system starts paying the interest itself.

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Still worrisome, however, is the uncertain long-term outlook for repayment of the principal, given the roller coaster course of agriculture, and the much bigger price tag associated with bailing out insolvent savings and loans.

″Who will repay the bonds? That is the big question,″ said Son Won Song, chief economist at Norwest Corp., a Minneapolis banking company.

Money wasn’t the only part of the Farm Credit System package.

A board created by Congress to review assistance requests quickly closed the system’s sickly banking operation in Jackson, Miss., because of what it called poor management. Many of the system’s three dozen banks and hundreds of credit associations were consolidated.

″Other than the Jackson situation, most of the worst times are behind us,″ said Daniel Bienz, vice president for disclosure and reporting at the Farm Credit Financial Assistance Corp., a system subsidiary.

Rep. Jim Leach, R-Iowa, a member of the House Banking Committee, credits what he called generous government assistance with stabilizing the Farm Credit System, despite the devastating drought of 1988 that otherwise would have made many struggling farmers even worse off than before.

″The federal government rained dollars in the farm economy. We didn’t get natural rain, we got manmade rain,″ Leach said.

That has some economists worried, too, given the clamor for budget cutting in Washington and selection of farm programs as a likely target.

″If there is a significant reduction in farm income, the ability of farmers to repay is diminished,″ said Neil Harl, an agriculture economist at Iowa State University.

Harl said farm program payments accounted for 94 percent of Illinois’ farm earnings in 1987, 72 percent of Iowa’s and 36 percent nationwide, leaving agriculture vulnerable if federal support is cut.

Marvin Duncan, acting chairman of the Farm Credit Administration, regulator of the system, also expressed caution about the recovery.

″Overall, the system turned profitable last year, but earnings were not particularly high quality,″ he says.

An upturn in farmland values increased the collateral backing many problem loans, enabling banks systemwide to remove hundreds of millions of dollars from reserves set aside for possibly uncollectable debts.

In the four-state Omaha, Neb., Farm Credit Services district alone, $271 million in provisions for bad loans were removed from the red ink side of the books in 1988.

The Omaha district, which covers Iowa, Nebraska, South Dakota and Wyoming, intends to go a step beyond recovery. It has suggested expanding into activities that include checking accounts, credit cards and investment services.

Its Iowa office even has a small program that offers borrowers discounts when buying cars.

″We went down the tubes because we were not diversified,″ said John Scherle, district spokesman.

Regulators and lawmakers are skeptical about such straying from the system’s basic mission.

″I think they are smoking something in Omaha that isn’t grown on the typical Iowa soybean farm,″ Congressman Leach said.

Duncan at the Farm Credit Administration said such programs probably must be approved by his agency, and asked, ″If you broaden the range of offerings do you bring additional risk to the financial stability of the institution?″

Bankers also are alarmed because of possible competition from federally subsidized farm credit agencies and the prospect of even more from S&Ls.

″They had a record that indicated they couldn’t adequately manage a loan portfolio. Now they want to take deposits,″ said Edward Tubbs, Iowa’s banking superintendent.

With a fresh infusion of money, farm credit banks have become fierce competitors for loans in many parts of the country, leading to banker complaints of illegal ″predatory pricing.″ The practice refers to loan- making that undercuts interest rates offered by banks.

Joseph Daly, president of the Farley State Bank in northeast Iowa, said his bank was about to refinance a mortgage at 11 percent interest in early February from a customer who’d paid the Farm Credit System 12.7 percent for years.

When the Farm Credit office heard of the deal, it offered to refinance the loan at 10.5 percent, Daly said.

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″I don’t see how you can cover costs at those rates or cover yourself for another crunch,″ he said. He also accused the system of arbitrary standards, claiming it quoted 11.5 percent as its lowest rate to another farmer.

Marlin Jackson, chairman of First State Bank of Conway, Ark., said that while competition has intensified, the farm credit system has not ″opened the floodgates″ like in the late 1970s when it encouraged farmers to expand at a time of rising inflation and interest rates.

Many farmers later got caught with unmanageable debts when land values and farm prices collapsed in the early 1980s.

″It’s highly competitive (now) for the best credits, but it’s a step well short of cannibalistic-type pricing,″ Jackson said.

Jeff Graves, a vice president at Central Trust and Savings in Eldridge, Iowa, said the government’s assistance to the Farm Credit System is ″like a grandparent giving you free money to run a business.″

But Farm Credit officials said they have new management practices as well as ground to regain from the banks after losing a big chunk of farm debt.

The Farm Credit System accounted for 33.4 percent of the total $192.7 billion in farm debt in 1983 but held 27.4 percent of a total debt of $142.7 billion by the end of 1987, U.S. Agriculture Department figures show, while banks’ share rose from 23.6 percent to 28.7 percent.

Bankers have no right to grouse, said Moe Russell, president of Farm Credit Services of Iowa.

″I’ve got 99 credit officers around the state telling me ‘the banks are undercutting us.’ The point is, the Iowa farmer is the winner,″ Russell said.

Duncan said his agency’s investigations have not substantiated complaints of predatory pricing.

Bankers, meantime, stand an opportunity to win more long-term farm lending with the creation of the Federal Agricultural Mortgage Corp., known as ″Farmer Mac.″ It’s designed to create a market for farm mortgages the same way the Federal National Mortgage Association, ″Fannie Mae,″ did for residential housing. Banks will be able to pool farm mortgages for resale to investors.

While the credit outlook may be brightening, many farmers, especially in the troubled Jackson district of Alabama, Louisiana and Mississippi, are complaining they cannot get loans.

″The availability of credit is one of the hardest problems we face right now,″ said Hugh Arant, who raises cotton, rice, soybeans and catfish in Ruleville, Miss.

Duncan said money abounds for lending. He also said ″farmers often badmouth their industry. Farmers are often the last to admit that improvements are occurring.″

End adv for Sunday Feb. 19.