The eventual arrival of the single farm payment has cut farmers’ overdrafts slightly, but borrowing is still up on 2005 and last week’s hike in interest rates could add further pressure.
According to newly released figures from the Bank of England, total agricultural lending, which had been at a record high, fell in the second quarter of the year by about 1.5% to £9.4bn.
This, however, was 7% higher than the same period last year when borrowing stood at £8.8bn.
John Barker, senior agricultural manager at HSBC, said the payment of the SFP had reversed the normal seasonal cash flow trend, which usually saw farmers borrowing more to fund harvest.
“Despite this, lending is £615m higher than the same quarter last year.
DEFRA figures indicate that around 77m of this represents outstanding support payments.
Even allowing for this there is an underlying upward trend of 6% per annum, which is a reflection of the continuing pressure on both profits and cash flow,” he said.
Ian Kenny, head of agricultural policy at NatWest, said the payment of the SFP did not seem to have cut debt by as much as normal.
“Over the past four years, we have seen that the payment of EU support has reduced agricultural borrowing by 4-6% in that quarter.
“It is clear that farmers are going to have to examine their businesses closely to ensure continued profitability.”
However, Mr Kenny said it was good news that farmers’ bank deposits had risen by about 8% over the same period to almost £3.9bn.
“This clearly demonstrates that many farmers are continuing to trade profitably and can even put money aside to potentially reinvest in their business.”
Bankers appear to have been taken by surprise following the Bank of England’s Monetary Policy Committee’s decision to raise interest rates by 0.25% to 4.75%, which will cost farmers an estimated extra £20m a year.
Tim Porter, agricultural director at Lloyds TSB, said:
“Pressure has been building for some time.
Nevertheless the increase was unexpected coming after last month’s decision to keep rates steady.
This increase will compound difficult trading conditions for farmers who are already faced with increased fuel and fertiliser costs.”
Euryn Jones, Barclay’s agricultural policy director, said it was difficult to predict what the Bank of England would do next but reckoned another 0.25% rise later this year and a similar move sometime in 2007 seemed likely.
Even then, interest rates would still be a historically low levels, he said.
“In relation to other things affecting the industry like energy costs, I don’t think it will have that much impact overall.”