Farm borrowings reach record £17bn

UK farm businesses borrowed a record £17.1bn in the year to the end of July.

This was an 8.4% increase on a year earlier and marks the fourth year in succession that borrowing has risen by more than 7%.

Although estimates vary, up to 40% of new borrowing is thought to be for coping with the cashflow squeeze, which has been exacerbated by further falls in arable and livestock prices in recent weeks.

In contrast, demand is high for loans to invest in farm infrastructure, to expand and diversify in areas such as broiler production and renewable energy, while higher land prices have also fuelled some of the increase.

Rob Hitch, a partner in Cumbria-based accountants Dodd & Co, who mainly advises west coast dairy and livestock farmers, described the figures as quite alarming.

“Since the turn of the year the increase in dairy borrowing has on the whole come from farmers funding cashflow losses, although I have had clients buying farms with borrowed money, as farms are available and long-term borrowing is cheap.

“We have also seen a number of clients move some larger loans to interest only, taking advantage of capital repayment holidays. While this isn’t increasing bank lending, it will lead to a rise as money which should have been repaid isn’t.

“I think we will see the same in the sheep sector if lamb prices remain subdued.”

Banks had been very supportive, particularly to the dairy sector, but some businesses were now struggling to get any additional debt funding, he said.

One option was to bring forward the year end and set results against last year’s profits, reducing the cashflow impact of some large tax bills due in January from dairy farmers.

Partnerships could change their year-end once every five years for no reason, or at any other time with a commercial justification, such as retirement of a partner, he said.

Peter Griffiths, tax director at Gloucestershire-based accountant Hazlewoods, said that the borrowing figures also reflected arable land purchases and machinery and equipment investment, which may have been accelerated in anticipation of a lower annual investment allowance.

While there was a lot of investment in poultry enterprises, the potato sector had been hit hard and some difficult decisions would have to be made.

He urged farm business managers to keep things under rolling review and to allow enough time for any big decisions to be made in the most tax efficient way.

The increase of just over 8% was in line with recent year-on-year comparisons, said Oliver McEntyre, national agriculture specialist at Barclays.

“The increased trend is likely to continue to the end of the year, when traditionally there is a reduction in overall bank debt – I expect that trend to remain, albeit the reduction in debt may not be a significant as in recent years.”

Further pressure would be added by the delay in agri-environment payments and questions over the timeliness of BPS payments, said NFU economist Anand Dossa.