Farming debt has risen

It is sobering to learn that farming debt in the UK has risen annually by approximately £1bn for the past five years and in the 12 months to September 2015 it rose by a staggering £1.45bn - bringing total debt to £17.5bn.

This is not all doom and gloom because some of this debt has increased because many farmers have made good profits since 2007 and used some of these profits for much needed investment in fixed equipment and land. However, the tide has certainly turned and in the last 18 months or so additional debt has been taken on to finance losses.

In this context Andersons, the farm business consultants, predict that farm debt is likely to rise between £1 and 2bn by autumn 2016.  Securing these funds will be challenging because banks have become increasingly demanding in their requirements.

But with interest rates still at historically low levels, businesses are currently being cushioned from the worst effects of these rising levels of debt although now US interest rates are increasing, the prediction is that Bank of England rates will follow this upward trend in the next year or 18 months. Rates are not expected to rise dramatically, but now may be a good moment for businesses to consider fixing the interest rate on least some of their long term borrowing.

However, if additional debt is to be taken on, the importance of preparing good business plans, budgets and cashflows cannot be overestimated, particularly if it is predicted that losses will be made in the short term.  

Banks will need to be confident that any farmer wishing to borrow more will have the ability to service that debt. It is no longer sufficient to rely on capital value of land and property as the security.

Farmers who cannot convince the banks that they have a firm grasp of the finances of their own business will struggle to secure further debt. This is the moment when such individuals must be careful not to fall into the grips of unscrupulous lenders who may offer finance but at crippling rates which will often end in tears.  

But for those who can secure debt based on realistic short-term budgets and longer term optimism that commodity prices will rise once again to more sustainable levels, there is reason for hope in 2016 and beyond. 

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk

Wish there was something positive to say...

I wish there was something positive to say in the world of agriculture but today farmers are under pressure across all sectors.

This will undoubtedly put severe strain on some farming businesses where the squeeze on cash flow is going to be a problem in the coming months.

Wheat, milk and lamb prices are now down 32, 26 and 17 per cent respectively compared to this time last year.

Meanwhile, although finished beef cattle prices have only fallen by around five per cent, many beef rearing units are really struggling. This is because they rely on making a margin between the price of the young cattle they buy and the price of the finished product, but this spring they have found the price of young cattle has been very strong, leaving them badly exposed to potential losses if the finished beef price does not rise significantly.

The whole situation is further compounded by the Rural Payments Agency (RPA) making a pretty good hash of introducing the new Basic Payment Scheme (BPS) through which farmers receive support payments from the EU.

In the past farmers have become used to receiving these payments in early December but agricultural consultants Andersons are suggesting farmers should not budget to receive this year’s payment until March 2016.

In contrast the RPA chief executive Mark Grimshaw said he would be very disappointed if most claims under the BPS were not paid out by the end of January. Obviously the sooner such payments are made, the better, but even if payments are made by late January this will still be two months later than in the recent past which will put pressure on many businesses.

That is not to say all farmers are struggling and in the milk sector in particular some farmers are still on favourable contracts and are being paid a reasonable price for their milk. In these circumstances good profits can still be made but the gap between the best and the worst milk contracts has widened enormously with the result that some will be losing large sums of money very fast indeed.

However, excluding the lucky few, most farmers are experiencing very challenging times and with the pound remaining strong on the foreign exchange markets this is making our exports less competitive and imports comparatively cheap, which is not helping any of the agricultural produce prices in this country.

Farmers are set for challenging times ahead and at present there are no obvious bright spots on the horizon.  

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells
T: 01749 683381
E: james.stephen@carterjonas.co.uk