The traditional August-October borrowing peak is likely to be higher than usual next year because of tax payments on profits earned from the 2007 harvested crop and higher input and energy costs for the 2009 crop.
While base rates are forecast to fall to 2% or less in the coming months the marginal cost of borrowing is likely to be higher to offset these reductions, warns Keith Leddington-Hill, managing director of Laurence Gould Partnership.
More expensive inputs not only need more cash but also more careful cashflow planning. Funding 2010 fertiliser before selling the 2009 crop will not be uncommon, he says.
“Money is in extremely tight supply and banks are looking for higher margins, so growers will need to be well organised and think further ahead than usual about funding. Many of the banks’ structures mean that it is likely to take longer than in the past for requests to be approved.”
Budgets for March year-ends need revising if they have not already been reworked and a serious budget to March 2010 needs to be in place now, says Mr Leddington-Hill. This should take account of the fact that there will be more volatility in the wheat market in the next three to five years, he says.
“We could see wheat prices back up to £120/t by next September. Growers need to be prepared to take profit when it is there and to retain profits within the business. You can only do that if you know your costs of production.
“With changes in peak borrowing demand and in the timing of input purchases, think very carefully about how you plan HP and other investments. For example, don’t organise HP for payment in August/September forcing the business to sell wheat at harvest if you have storage. Timing the sale of crops to match crop input bills also needs to be considered.
The agricultural sector is still relatively well placed as a potential borrower, but conditions have changed, says Mr Leddington-Hill. “Growers will probably still be able to get funds at a finer rate than many other sectors, but anyone thinking they can still get an overdraft at 1% over base is being unrealistic. The cost of borrowing to banks has risen compared with 12 months ago.”
While bank base rate is falling, banks are sourcing funds from a number of areas and at different and often higher rates than bank base rate, he explains.
“Each bank’s source of funds to lend to customers will be different and this may affect the rates charged. Where farmers are being charged a rate over base it will be increasing to reflect the higher cost of funds to the banks.
“Banks have to lodge security with the Bank of England to cover the whole of a facility even though the amount being borrowed may be lower, so farmers may find that if they do not use the whole of a facility, they may be charged a higher rate to cover the bank’s costs.
It will be worth some growers shifting core, long-term overdraft borrowing to a loan, says Mr Leddington-Hill. That will not only impose a repayment discipline, it will also reduce the annual overdraft arrangement or renewal fee, which is based on a percentage of the facility. However, there are initial loan set-up fees.
“Do not discount moving to a loan despite the forecasts for reduction in base rates,” says Mr Leddington-Hill. “Fixed-rate loans may be more cost-effective in the long term.” The fixed rate is about 6-6.5%, including a two-point margin for loans. This may fall marginally in the next few months with further falls in base rates.
“Fixed-rate loans can also be booked in advance. For example, a loan can be booked to start in 12 months’ time, giving the business the ability to benefit from forecast reductions in base rate over the next six months. However, should market rates not be in your favour once the loan period starts, there could be penalties if the loan is not taken up,1 since the bank will have secured that debt.”