Arable costs drive farm lending to new high

UK agricultural borrowing hit a record high of £11.1bn during the third quarter of 2008, figures released by the Bank of England on Tuesday (4 November) have revealed.

The total was £950m (9.4%) more than the same period in 2007 and 4.5% more than the £10.6bn at the end of Q2 in June this year – the previous record.

Barclays Bank’s Euryn Jones said the increase was largely due to increased overdraft borrowing in the arable sector. “Our own figures show borrowing by arable farmers is up by over 10% on this time last year, whereas the dairy sector has seen a 5-10% fall and beef and sheep are fairly stable.

“The combined impact of very high growing costs for next year’s crops, earlier payment for those inputs and expensive bills for drying this season’s crops are now been clearly seen in the amounts borrowed by arable farmers.”

In particular, pressure on credit availability generally meant many suppliers had asked for earlier payment than in previous years, he said. “It’s put more pressure on cash-flow and many farmers have had to pay for more 2009 inputs already.”

HSBC’s Pat Tomlinson said that while the industry’s debt had reached record levels, the balance sheet remained strong and higher debt should not be a barrier to success. “Net worth is in the order of £100bn, so with debt of £10bn, that’s still a gearing ratio of 10%, which is pretty low compared with other industry sectors.”

But he warned that next year would see greater requirement for cash and the probability of lower profit. “Prices appear to have peaked in most sectors, but working capital requirements are higher. Our forward planning figures reckon the average arable farm will see a 48% increase in working capital, average dairy farm a 23% increase and the average red meat farm a 17% increase.”

Given the tighter economic situation, it was important any extra borrowing was secured sooner rather than later, he said.

The NFU’s Tom Hind said there was more need than ever for the Rural Payments Agency to ensure single payments were paid as quickly as possible after the 1 December payment date to help ease cash-flows and allow farmers to pay off some borrowing. “We have seen payouts come earlier since the single payment was introduced, but there’s still a way to go and in the current economic climate, there’s even more pressure to ensure swift payment.”

Mr Jones said lending could fall in Q4, but the amount and timing depended on when farmers received single payment cheques. “On the dairy side, I think we can expect a continuation of the trend for farmers paying off borrowing,” he said. “But for arable farmers, I don’t think this will happen – yields were good, but prices are disappointing and costs still high.”

Deposits from agriculture during Q3 totalled £4,893m, which was £115m down on the end of June, but £539m (12.4%) higher than Q3 2007. “This largely reflects the profits made by non-borrowers during that period,” Mr Jones noted.

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