Stephen Carr: Are the banks mad?

News from the Bank of England that UK farmers have increased their borrowing by £889m over the past 12 months has, understandably, been welcomed by everyone across the industry.

This healthy 9% increase on a year ago means that the industry now has total borrowings of £9.7bn and, as one leading banker put it: “With any luck we can break the important psychological “£10bn barrier” in the next few months and – after that – who knows where this industry can go.”

Confirmation that British farmers have been borrowing an extra two-and-a-half million pounds a day over the past year solves the long-standing mystery of why it’s become so difficult for UK house buyers to get a mortgage all the money the banks had, has already been lent to farmers.

Just how keen financial institutions are to throw cash at farmers was made clear by Fred Crunch, National Agricultural Specialist at Negative Equity Corp, one of Britain’s leading banks.

As he prepared to leap from the upper window of the bank’s city skyscraper he said: “Since the house price bubble has burst we’ve had to write off 10 trillion pounds, so we’ve desperately been looking for somewhere else to lose – I mean lend – money.” As he checked to ensure that there was no one walking on the pavement 600ft below he added: “Having researched agriculture thoroughly we’ve decided that farmers, who’ve enjoyed a huge rise in their farmland values without any corresponding increase in their income, are a perfect target for increased lending.”

Other banks have been lending to farmers to facilitate the purchase of increasingly expensive farm machinery. Bill Monthly, head of leasing at online bank, knows a thing or two about how to encourage farmers to think they can afford to lease a New Holland CR9090 combine (list price £346,000).

Sitting in his virtual reality office world of computer screens he can prove to anyone how an investment in the latest rotary milking parlour or state-of-the-art 350hp tractor can so boost productivity, on any farm, that only a fool would not take up his generous offer of finance.

Looking at what might have caused such a healthy boost to farmers’ borrowings, another leading player in the farm lending field, Will Speculate of Sub-Prime Banking Inc, commented that “It now requires a second mortgage for a farmer to buy a single tonne of fertiliser, let alone a lorry load, so there’s obviously going to be demand for additional lending to provide farmers with additional working capital.

“As a bank, we’re happy to match fertiliser purchases tonne-for-tonne with piles of borrowed cash. As we like to say at Sub-Prime Inc: ‘Spread the lending risk like manure – three feet deep across every farm in the UK’.”

So far the value of shares in Sub-Prime Banking Inc. has only declined by 99% this year and it’s believed that senior management at the bank are now pinning their hopes on eradicating the last 1% by pursuing a very aggressive lending policy to cash-strapped farmers.

All in all, British banks have had a busy year shovelling money at farmers. As Mr Speculate, of Sub-Prime, neatly puts it: “If you removed the SFP from UK farming’s trading account the underlying profitability of the industry as a whole is absolutely zero, but banks can’t afford to get bogged down with such fine details.”

The underlying profitability, or the ability to repay debt out of tax-paid income after personal drawings, is less important to banks than the value of the security they hold against the debt. All the time land values hold up, farming’s very own credit crunch remains postponed – for now.

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