Join the forum debate about the banking crisis
British farmers are facing a short-term rise in the cost of borrowing as a direct result of the latest turmoil in the global financial markets.
With the banking sector still reeling from this week’s events in Washington, the cost and availability of credit has tightened further.
According to NFU chief economist Carmen Suarez, UK agriculture is particularly vulnerable to the rising cost of credit, with borrowings standing at a record £12bn.
“Of course there are variations between the sectors, but pig, poultry and dairy farms have the greatest liabilities.”
There are two elements to interest rates, she explains – the Bank of England base lending rate and the London Interbank Offered Rate (Libor). Even though the base rate is fairly stable at 5%, the Libor, which is the rate at which banks lend to themselves, soared to a seven-year high of 6.88% earlier this week.
According to Ms Suarez, even if this meant an extra 0.5% on the cost of borrowing, poultry farmers could be facing another £1000 a year in bank charges.
The need for short-term credit is also highlighted by Graham Redman of farm business consultants Andersons. While farmers have faced rising input costs in recent months, the difficult harvest has led to much lower sales than normal, while payments are often arriving later.
“Faced with this situation, many businesses will need additional working capital and will be looking to their banks to provide it, often in the form of higher overdrafts,” he said. “But the shortage of liquidity in the banking sector is such that additional sums cannot be found at short notice – except at very high rates.”
Mr Redman said he was getting frequent reports of banks raising their rates to farmers, “without discussion in many cases”. “Rates of borrowing are unlikely to reflect base rates so closely as in the past,” he predicted.
But Euryn Jones, agriculture specialist at Barclays, insisted that getting hold of credit should not be a problem. “I can only talk for our book, but we are very much open for business,” he said. “But it is fair to say that the cost of credit to us is more expensive, which puts pressure on our margins.”
Barclays expects base rates to fall by 0.5% by the end of this year, and to drop to 4% in the first half of 2009.
Commodities feel the effects too
The financial crisis has also impacted on commodity markets, with more price volatility in response to the flow of investor money in and out of the futures markets, according to Dutch-based financier Rabobank.
The collapse of Lehmans Brothers and the bail out of insurance group AIG in the middle of September prompted many investors and hedge funds to cash in their holdings, moving prices sharply down.
“Prices rebounded in the second half of September, but this proved to be only a temporary correction, with the rejection of the bail out plan in the US sparking a significant sell off in both financial and commodity markets towards the end of the month.”
As Farmers Weekly went to press on Wednesday (1 October), November wheat futures were £5 down on the week at £101/t. Ex-farm prices were also much lower, with feed wheat quoted at about £90/t spot.
Oilseed rape had also dropped, by £12 to £265/t ex-farm, largely in response to the fall in world oil prices, which itself was due to fears that slower economic growth around the world will stifle demand.
“Financial chaos and the bail out of commodities have continued to give the markets a good kicking,” said Simon Ingle of Grainfarmers.