The Bank of England has raised interest rates from 0.25% to 0.5%, pushing up the cost of borrowing and adding to financial pressure on farming businesses.
It is the first interest rate rise since 2007 and NFU economist Anand Dossa suggests it could be the start of a gradual increase in rates as the government bids to control rising inflation.
“It is a big concern because farming depends heavily on borrowing to fund investments and improve business efficiency,” said Mr Dossa.
In the past five years there has been a dramatic increase in farm borrowing – up 26.1% to a total of £18.6bn at September 2017, he said.
“For example, the poultry sector is one of the areas where borrowing has increased significantly to finance the improvements needed to meet growing demand.”
He warned that the increase in interest rates would have an additional cost in making sterling more attractive on money markets.
The pound has been at a 30-year low, boosting exports, increasing farmgate prices and raising BPS payments.
“Pushing up the value of sterling may prove to have an even bigger impact on farming, because it will make our exports less attractive,” he explained.
Mr Dossa called on lenders to understand that farming needs stability in the face of further volatility in input prices.
“Input costs have gone up by a total of 7.1% since the Brexit referendum in June 2016. Within that we have seen fertiliser price hikes of 27.3%, energy [prices are] up by 10.1% and feed barley increases of 19.6%,” Mr Dossa said.
“We really need to see banks take this into account and take a considered approach when lending to the farming industry.”
Working with lenders
Mr Dossa also warned farmers that they should be proactive in working with lenders.
“We [NFU] are advising members to take a lead and talk to their banks. Our surveys have shown farmers prefer to stay loyal to a bank but this may be costly and they should shop around for the best finance deals.
“Ask lenders about fixed rate packages, press to know what deals are in the pipeline and calculate how any changes will affect the business – taking into account the impact on cashflow,” Mr Dossa said.
He also suggested using a consultant or accountant to help structure a business plan. “This will help the bank to understand the business needs and it will make your claim more credible.”
A more accurate appraisal of the business will also highlight exactly what funding is needed.
“Having to approach the bank for a second time because you failed to calculate how much investment was needed may incur extra borrowing costs,” he said.
Mr Dossa’s advice was echoed by Gary Markham, director at tax adviser and accountant Land Family Business.
Speaking to Farmers Weekly in September, when interest rate rise speculation peaked, Mr Markham offered a number of pointers on managing risk:
- Speak to your bank manager and ask what fixed rates are doing – if they’re not changing much then it means the financial markets are not panicking about the possible rate rise
- If you have a “reasonable” amount of borrowing, think about putting a third to a half of it on a fixed rate
- If you have a low amount of borrowing, stay on a variable rate because it’s likely to be cheaper
- Look into hedging your crops – selling forward to manage risk
- Match your funding to your investment – don’t use your overdraft to buy something big like a tractor
- If your overdraft is higher than your total variable costs then it’s probably too high and you should look at putting it on a loan