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LAMMA 2019

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Finance: Borrowings ratchet up as producers feel pinch

As times get tougher, producers are increasingly turning to the banks to tide them through the current crisis. Peter Hollinshead talks to Oliver McEntyre, national agricultural strategy director at Barclays Bank, the principal sponsor of the Livestock Event, about how he sees things changing.


Farm incomes have plummeted and agricultural borrowings are said to have doubled in the last 10 years – as one of the major high street lending banks how concerned are you about what can only be desribed as a crisis in agriculture?

Obviously we are one of the first people to know when there are financial strains on a business, and it all comes down to communication between us and our customers. There are some real challenges out there for all sectors at the moment, not just dairying, but while we do have concerns we believe the long-term future for the industry is positive, but that’s not to underestimate what some individual farmers face at this time.


Alright, we’ll come onto those challenges in due course but, somewhat unusually, both horn and corn are down together so what is the extent of the industry’s bank borrowing at the moment?

UK farming debt at the minute to all UK banks is sitting at about £17.5 billion which is an increase of about 7% year on year, so the industry is quite heavily borrowed, and set that against the credit balance of £6bn, then the industry is a net borrower to the tune of £11bn. However, across the industry the asset base is estimated at over £200bn on land and buildings, so as an industry it is quite lowly geared.

And, of course, that is one of the things that encourages you to lend money to agriculture, but do we know what Barclays’ exposure is to agriculture as a bank?

In 2016 already, Peter, our lending is up on 2015. We’re seeing increases in debt across the sector as an average nationally at 7%, and our debt levels are increasing by 10-12% which demonstrates our support to the industry.

Let’s move on to the dairy sector specifically. How many people have you had coming to you over the last year, say, desperately looking for help to keep them afloat through these critical times and, just as crucially, what do you say to them?

We talk through the options with them and their future goals. We have seen an increase in our dairy customers needing assistance and guidance from the bank, and there are plenty of things we can do to help them through capital repayment holidays on mortgages and loans and increasing working capital.

Can you give me some estimate of the increase in terms of actual dairy farmers coming to you wanting help?

We have seen overdraft – working capital – lending increase by 10% across the agricultural sector and for the dairy sector that figure is nearer a 20% increase for working capital facilities.

By the same token, how many with loans outstanding have had difficulty servicing them?

We see a number of very demanding cases at times and businesses which are under real pressure, but as always we sit down with our customers and their consultants and try and work our way through.

Let’s look at it in more stark terms as ordinary people would. One measure would be how many forced sales and foreclosures have you had over the last year?

Considering the pressure the industry has been under for the last two years, really our default level in the agricultural sector is extremely low, and part of the reason is because we look at things proactively with our farming customers and we try to find solutions before we get to that point.

Even as a cold measure of the industry’s performance can you give me a figure of how many dairy farmers have come to you over the last year who are unable to see a viable future financially?

You only have to look at the number of dispersal sales there are at the moment to see some people are taking that choice to exit the dairy sector. They have decided enough is enough with the low milk price and they are not prepared to carry on making losses.

But can you give me a rough figure for those people who don’t see a viable future in dairying when they have a loan to service with you?

No, Peter, it’s market sensitive.

Ok, let’s look at the two sorts of borrowing – first the shortfall in working capital where the milk cheque is insufficient to service incoming bills – is this the most common scenario and what view do you take here bearing in mind milk prices don’t look like improving much in the near future?

You are right, Peter, this is the most common scenario and it is also the first sign the business is under financial pressure. What we tend to do is increase the working capital for a period of time to give the farmer and perhaps his consultant time to assess the business to see where any savings can be made, to cut costs and make the decision on how they want to go ahead for the future.

Yes, it is that period of time that is crucial which would beg the question as to when you see prices improving, if at all, as I presume if they are not making a living now and prices don’t improve much the prospects are not very good?

It comes down to the objective of each individual business – there are businesses that are cash negative each month and if they want to stay in business and weather this storm and have a viable, longterm business plan we will support them through that.

And presumably most of that working capital extension is through increasing their overdraft, isn’t it… what does it cost to increase overdraft?

It depends on risk factors such as management ability and past performance, and a whole range of factors as any lending organisation would take into account when lending money.

Yes, but you still haven’t given me a figure there have you?

There’s a broad range, but I suppose at the lower end of the market you could be seeing 2.5-3% over base.

So that is 3-3.5%, is it?


Good. Then there’s the other borrowing element for investment… this presumably has slumped has it not?

We have seen a bit of a drop off… the industry is tremendously driven by confidence so it is only natural we would see some people being a little more cautious at the moment. However, we are supporting a number of customers to invest in efficiencies to try to drop their cost of production to make them more viable in the longer term.

You say dropped off… just give me a measure if you would of that decline over the last year of people coming forward for an investment loan… has it halved?

No, it hasn’t halved.

Can you give me a figure?

I can’t give you a figure specific to investment… except as I say our debt levels to agriculture are actually up between 10-12% and the national year-onyear figure if 7%.

What about those already borrowed at say 8% – a loan here of say £1m would require £80,000 pa on interest alone without any capital repayment – that’s around £1500 a week which will take a heck of a lot of finding for most people in the current climate, would it not?

You are quite right that the money is going to take some finding. However, whenever we lend we stress test it against things such as movements in feed price and movements in milk price, and, as a responsible lender, we only lend money where we can see serviceability and viability in the long term.

That assumes your calculations are spot on and had allowed for the dramatic drop in milk price we are currently seeing?

Nobody can get everything right all of the time, and as for the dramatic drop in the milk price I don’t think anyone saw it coming.

Incidentally, in relation to this what is your prediction on milk prices rising... and I should gently remind you that you told me that last autumn would be the turning point when we met before?

Thank you for reminding me, Peter. I think there were a lot of people who thought autumn would be the turning point. I think we are going to see a flat market and then when we get to the tail end of the year we may see increases in the market.

And you say you are happy to lend to milk producers for investment purposes, is that because you have half a hand on the deeds of the farm?

We lend money against serviceability not against security, so it would be extremely irresponsible of us to go out and lend say 60-70% of the value of someone’s farm without us being able to demonstrate they can pay us back in a fair and equal market.

Yes, but if your serviceability sums, almost by happenstance, are proved to be wrong, then your fall back situation is that you often have that security of farm deeds behind you?

That is correct but it is no different than any other mortgage, whether it be business or personal.

Yes, but I suppose what I am saying is your lending to the dairy industry in particular is perhaps not as risky as it might be owing to the better security you get from farm properties vis a vis what you might get lending to other industries?

You are quite right, the quality of the security we have in the agricultural sector gives us a great deal of confidence but that is reflected in the risk margins and fees the sector as a whole pays, and as a group these tend to be the lowest of any industry sector in the UK.

We are seeing several big herds being dispersed, presumably because of the squeeze, and cow prices seem to be holding up with these cows presumably going to those on better contracts. Are you seeing a two-tier industry in your dealings?

There is such a huge range of milk contracts and there are people on far higher prices, and you can only assume that those people investing in more cows have the milk contract which allows them to increase production without penalty and can clearly make a profit, or have a business plan that shows increasing numbers will drop their cost of production.

When you make any commitments now, what sort of milk prices are you building into your feasibility studies?

It’s very individual and depends what contract each farm has. So as a general rule we will look at the figure they are on now and stress test it with a penny or two off and a penny or two increase, and we also do it for feed, interest rates and things like that.

What percent of your borrowings would be on aligned contracts?

As we have national coverage it would be in line with the figures you see quoted in the press at between 10 to 20%.

Let’s broaden it out if we may. In your view, what is the milk price producers will need to produce at in future to stay globally competitive?

Every producer really needs to get their cost of production as low as they can, and that must be relentless and not when the market is down.

Yes, but the question is what do you see producers need to produce at in the future to stay in the global market place, and secondly you talk of constantly bringing costs down, which is quite right, but what do you see them doing to bring costs down further?

There are all sorts of things a business should be looking at and I am a huge believer in benchmarking, and sometimes it’s not about reducing costs but understanding why your costs are higher and knowing whether there is something you can do about it.

In your meetings up and down the country, are you finding it is the smaller producers with say 100 cows that are feeling the worst of the draft, or the bigger 500-cow units with hired staff and little or no flexibility to mitigate their ongoing overheads?

We are seeing it across the spectrum – we have people from 50, 60, 80 cows right up to those milking 500 and above. You are not insulated from cash flow pressure and tough industry prices just because you are a big farmer.

What I suppose I was thinking was that the small family farm will have often taken on less debt in the first place and secondly cut their cost in terms of drawings from the farm to match their income?

Yes, you are right, and family labour can often be key in helping profitability, and likewise the larger producer will have labour bills and additional costs, and some of our farmer customers who have really expanded in the last four to five years are seeing cash flow pressures.

I note you have a new title, do you not, which is the national agricultural strategy director. Well done on that, but what is your strategy for going forwards?

We have a mandate to lend more money to the agricultural sector in a responsible and considered way, either to support businesses through difficult times or to help farming businesses develop and become more efficient, and we are always looking for opportunities to do that.

Right just finally, if I may… in any belt tightening activity promotional budgets are usually the first to suffer. We are seeing free entry to the Livestock Event this year which is an unusual move which I can only presume is to encourage visitors. Are you signed up to continue as major sponsor next year?

I think the free entry is a great initiative. The profile we get from indicating our support for the sector is positive and we will sit down with the RABDF after the event, as we always do, and our marketing and sponsorship for 2017 will be decided in the autumn as it always is.

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