Strong balance sheet helps agriculture through credit crunch

Agriculture is better placed than other industries to weather the credit crunch, say lenders.

Strong land prices are one reason good-quality arable land is now fetching anywhere between £5000 and £10,000/acre. But firm commodity prices – particularly in the arable sector – also mean farming is attractive to lenders.

“Compared with other areas of the economy, especially the retail mortgage market, we’re not finding any issues with finding finance for agriculture,” Lloyds TSB’s head of agriculture, Peter Sobey, said.

AMC regional agricultural manager for the south west, John O’Meara, agreed. “The agriculture sector has always been attractive to banks because of its strong security. Now, agriculture seems to be goingagainst the general mortgage market.”

Don’t be complacent

A similar view was shared by HSBC‘s Martin Coward, who said that although agriculture was generally seen as lower-risk by the banks, farmers should not be complacent. “The industry borrows relatively modestly in relation to its balance sheet (land and assets), so the gearing ratio used by lenders is relatively low, even despite escalating costs.

“But there will be some impact [of the credit crunch and rising costs], particularly where businesses are struggling with viability. Pricing is likely to reflect this higher risk.”

Also, anyone with borrowings based on the London Interbank Offer Rate (LIBOR) – the rate banks use to borrow from each other – rather than the Bank of England base rate, could find interest costs rising more dramatically. “For example, last Friday, the LIBOR rate was 0.75% above base rate, whereas six months ago the two were very similar.”

Terms of lending

He advised farmers to ensure they were clear about their bank’s terms of lending and to check whether interest rates were linked to LIBOR. “If it is, it’s probably then worth calculating what the cost of breaking that agreement would be.”

It was vital growers fully got to grips with the cost of borrowing, as 2008/09 would see a considerable increase in costs, Mr Sobey added. “Many sectors are under intense pressure, so good housekeeping is vitally important. This means good cost control and checking any investment is the right thing to do.”