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Will farm lending be squeezed as the commodity downturn continues?

Borrowing to UK agriculture is continuing to rise, but will those with lendings struggle to gain further finance in the coming months?


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Lending to UK agriculture has grown immeasurably, and relatively unchecked, in recent times.

 

Many farmers have been able to use the increasing price of land and other assets to secure loans against, including for investments, while other industries were forced to tighten their belts.

 

Amid arguably one of the worst downturns the farm sector has faced, outstanding debt ballooned a further 8 per cent in the year to November 2015 to more than £18 billion.

 

And some farmers are expressing concern bank lending criteria could be tightening and could even lead to the plug being pulled on financial support to those in agriculture.

 

Simon Eales, senior sales and agricultural manager with the Agricultural Mortgage Corporation, said: "We believe lending will continue to rise, although we would not be surprised if the rate of growth slowed in 2016 when compared with 2015."

 

The UK’s major agricultural lenders were swift to say they would help cash-strapped farmers hit by delays to Basic Payment Scheme payments.

 

Despite these commitments, experts agreed the opening months of 2016 could see lending become a more difficult proposition for some businesses, with those already under pressure feeling the pinch from lenders.

 

Andrew Suddes, regional consultancy manager for the north at Promar International, said: "There is some feeling banks are becoming more nervous about their exposure in certain parts of the agricultural sector.

 

Banks becoming nervous

Banks becoming nervous

"Each business’s credit score is driven by historic accounting performance and bank account behaviour. These are still used as the primary drivers of bank lending decisions but, increasingly, banks are taking views on sectors and sub-sectors when viewing new propositions.

 

"For example, in the dairy sector, we are noticing banks taking more interest in milk contracts held by individual businesses."

 

Jimmy McLean, chairman of agriculture at Royal Bank of Scotland, suggested the bank was looking carefully at its lending to the UK farm sector.

 

He said: "I think the first thing to say is we are very much open for business and our overall approach to the sector is not changing.

 

"However, having said that, none of us can be complacent. We have some sectors where it has been difficult for a while and for others like dairy it has been difficult for two years running.

 

"We will continue to support the sector but that does mean there will be a number of individuals who will come under increased pressure."

 

Industry exits inevitable

Tips: How to secure farm finance in an increasingly difficult environment

With experts suggesting farm lending could become more difficult for some over the next few months, what can you do to give yourself the best chance of securing funding?

 

Click here to view the article.

This was a theme underlined by Rob Hitch, partner at Dodd and Co chartered accountants and business advisers, who claimed there would be farm businesses which were already well borrowed which would find accessing cash difficult. He claimed industry exits were ’inevitable’ due to difficulties in accessing finance.

 

Robert Law, who farms about 1,600 hectares (3,950 acres) on the Hertfordshire, Cambrideshire, Essex border, bought land last year and said there was a split between tenants and owner occupiers when it came to finance.

 

"I think farmers have to be very wary banks are happy to lend if they have your deeds in the drawer," he said.

 

He claimed many tenant farmers faced higher rates than those who owned land.

 

"Small businesses who cannot put up the security will struggle," Mr Law added.

 

Despite claims the rate of growth in farm lending could slow and many farm businesses may struggle increasingly for finance, the fact remains the total borrowings by UK farmers continue to rise. The NFU pointed to the way this ongoing trend was stifling the growth of the farm sector.

 

NFU economist Anand Dossa said: "We worked out for every £1 billion [borrowed] at an average rate of 3.7 per cent that is £90,000 interest every day taken out of farming businesses and the rural economy.

 

"It is not just about commodity prices and [delayed] Basic Payments, but how those impacts resonate for the next 24 months."

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