Running farm banks like businesses. Control of credit may move from local farmers to central authority

The financial well-being of many farmers in the United States is likely to depend on two key issues: the need for a farm-credit bailout and control over cooperative lending institutions. The chief regulator of the Farm Credit System, the cooperative financial organization many farmers rely on as a source of money to sustain them between planting and harvest, has called upon Congress and the White House to make plans for a financial rescue. Many observers estimate that such a bailout would be the largest in US history.

The second issue, though it has received much less attention, concerns control of the credit system which for 50 years has made loans to farmers and agricultural cooperatives.

According to a confidential internal report obtained by the Monitor, the regulators have a plan to restructure the system dramatically .

This report, the final one in an extensive forward-looking study known as Project 1995, recommends centralizing the assets and authority of the loosely connected network of 800 lending institutions that make up the Farm Credit System. These institutions would still be owned cooperatively by the farmers who borrow from them. But the plan envisions most of the control of the cooperatives passing from local boards to the Farm Credit Administration, nominal regulating agency for the cooperatives.

Besides this, the confidential report underscores that the system's deep problems were known several months ago. In the March 1985 report, the authors wrote: ``Farm Credit System leadership must recognize and appreciate the gravity of the immediate situation and the even greater vulnerability of the system'' in the future. Several pages later, they add, ``The system study of financial stress will confirm that four FICBs [out of 12 Federal Intermediate Credit Banks] are in serious financial condition and that the system does not have workable solutions for these.''

Nevertheless, it was not until last week that Donald Wilkinson, governor of the Farm Credit Administration, stated that the system could not survive without federal help. At a press conference in Washington, he said that unassisted the system would face liquidation in 18 to 24 months. The Farm Credit System holds more than one-third of the $213 billion debt run up by the nation's farmers.

According to the report, the system must change because agriculture and the financial environment are changing. It adds that the structure of independent, locally controlled lending institutions will no longer be viable.

There are two reasons. On the one hand, it says, the US is moving toward a dual-track agriculture system where there will be more large farmers and more part-time farmers, but a lot fewer midsized farmers, who now make up the bulk of the agricultural community.

On the other hand, the report says banks and other lending institutions are becoming increasingly deregulated and could well prove to be tough competition for the cooperatives as a source of farm loans in the future.

``We're going to have a farm business,'' says Daniel Padberg, an agricultural economist at Texas A&M who served as a full-time adviser to Project 1995.

``It's going to be structured quite differently,'' Mr. Padberg says.

In the next 15 years, he adds, 1 million farmers could be lost because of the changes that are now going on in agriculture.

Many outside critics agree that changes need to be made if the Farm Credit System is to survive.

``For them to continue to be competitive in the rapidly changing banking system, it seems to me they need to have broader powers,'' says Jim Riley, economist with the National Cattlemen's Association.

Production agriculture has grown too risky to concentrate all loans there, he says. And as an increasing number of rural banks disappear or are gobbled up, rural borrowers other than farmers will need to take out loans somewhere. Mr. Riley says they should be served by the Farm Credit System.

What appears to be emerging is a battle between those who accept this new view of farming and those mostly family farmers who want to retain the system's traditional structure.

Some borrowers are angry over the proposals offered in the report of Project 1995.

``These facts have been kept secret from everybody,'' says Luman Holman, a Texas farmer and executive director of Grassroots, an association of dissatisfied farm-credit stockholders.

``The people who own the system are finding their employees want to run the system,'' Mr. Holman says.

Most borrowers appear to agree that change is needed, but they are skeptical that a drastic overhaul is required.

``I think they're going to need some help,'' says Ted Kendall, president and general manager of a large corporate farm in Jackson, Miss.

``And I'm not opposed to that,'' he says. ``[But] I don't think we need to overreact and restructure'' the system.

``It doesn't matter what the structure is,'' says Don Neal, a West Texas rancher.

The problem, he adds, is that loans were made in the '70s that are no longer justified in the changed economic conditions of the 1980s.

But the current sense of crisis may well push borrowers to embrace the idea of dramatic restructuring.

``I have fought that [centralization] all my life,'' says Robert J. Webb, a Simpson, Ill., farmer.

``I do believe in grass-roots control. But when you're losing the farm, what are you going to do?'' says Mr. Webb.