View from the boardroom: Farming can beat the credit crunch

UK Agriculture plc is well-placed to ride out the current economic crisis, according to the man heading up the agriculture division of one of the most talked-about UK banks of recent weeks. Paul Spackman reports.

The government-facilitated merger of Lloyds TSB and HBOS is undoubtedly a landmark event for the UK economy and one that would have been unimaginable in normal economic times. Only time will tell whether the move will, as hoped, help improve confidence in a faltering economy. But whatever happens, farmers can take comfort in the fact they should be sheltered from the worst of the economic downturn, Paul Spencer, the recently-appointed agriculture director for Lloyds TSB and the Agricultural Mortgage Corporation (AMC) reckons.

“Recession is more likely than not, but the question is, whether it’ll be shallow or deep? Our view at the moment is that it’ll be fairly shallow, with two to three quarters of flat, or negative, GDP growth, then some recovery in mid-2009 – when we should see inflation and interest rates starting to fall.”

Paul Spencer

View from the boardroom: Paul Spencer, Lloyds TSB & AMC

In true banker-style, he’s quick to point out the various economic and political caveats which go with such crystal ball gazing, although reassuringly for farmers, his optimistic prediction for agriculture is more certain – or as certain as anyone can be in the current economic climate.

Farming can weather the storm

Mr Spencer believes agriculture is relatively well-insulated from the economic turmoil, despite facing its own set of challenges not least from the weather and rising costs, which have increased demand for overdraft facilities in recent months.

“We’ve seen agriculture acting in almost a countercyclical fashion,” he says. “Residential and commercial values have fallen, but at the same time, agriculture’s net worth has increased as land prices rose 25% last year and into this.

“The feeling we get from land agents is that prices have reached something of a plateau now and in some cases coming back a bit. But, nevertheless, they’re still at levels we wouldn’t have forecast a couple of years ago.”

For that reason, the capacity for borrowing in UK agriculture remains strong, he says. “Total borrowing is around £11.5bn, but the total value of assets is nearer £150bn – that’s a gearing ratio of less than 10%, which is incredibly low.”

Comforting words from a man with over 20 years experience in the bank and great if you own the land, but what if you are a tenant farmer? “The debt still has to be serviced and that’s no different whether you’re an owner-occupier or a tenant farmer,” he says. “For some, there’s no question it has been a tough year, but there are plenty of profitable tenant farmers and owner-occupiers out there.”

Much to the relief of banks lending to agriculture, the ability of farmers to service their debt certainly received a boost this year, thanks to stronger prices across most arable, dairy and livestock sectors. To demonstrate the point, Mr Spencer points out that Total Income From Farming (TIFF) for 2008 is expected to rise well above last year’s £2.54bn. “Our core projection for TIFF in 2008 is £3.7bn (+46%) and in 2009 we predict TIFF in the region of £2.9bn – 21% lower than 2008, but above the level seen in 2007.”

Managing volatility

But, this prediction too, comes with its own caveats principally that of market volatility. “We see the long-term fundamentals as being strong,” Mr Spencer says. “The challenge is managing short-term volatility over the next 12-18 months.”

As farmers know all too well, volatile input and commodity prices – not to mention fluctuations in interest rates, inflation and foreign currency – make budgeting very difficult, so some degree of sensitivity analysis must be included in budgets, he explains. “You have to know what your breakeven price is and think about how much risk you are prepared to take. For example, ask yourself questions like, what will the business look like with wheat at £100/t compared with £150/t?

“There is a definite correlation between those that produce budgets and do sensitivity analysis and those that make money. But you’ve got to use the budget and keep it active, not file it away in the bottom drawer.”

Paul Spencer

Selling a proportion of produce, or buying inputs forward are useful ways of managing risk, so too is fixing some, or all, of your borrowing, he notes.

This may be familiar advice to many, but Mr Spencer acknowledges there are probably still a lot of farmers that are not following it.

Succession planning

Another key part of the planning and budgeting process that warrants greater attention by farmers is succession planning. Indeed, it is something that Mr Spencer has had to tackle within his role at Lloyds TSB Agriculture and he is quick to draw comparisons between the two. “Of the 140 staff in the agriculture team, about 63 are over 50, which is not too dissimilar to the age profile within agriculture. It’s great to have that experience in the team, but it does present a challenge for succession planning within the business and attracting younger people. It’s why we’ve got the ‘Head start’ programme, which aims to recruit agricultural graduates.”

At the farm level, succession planning firstly means having a plan of where you want to see the business in the future, he says. From there, you can look at the impact of all the “what if” scenarios and make appropriate arrangements. Key considerations should be: Who will take on the business after you? What are the tax implications of any changes to the business? Do you have a will in place? What about critical illness cover or life assurance?

“You have to get succession planning right if you want continuity throughout the business,” Mr Spencer remarks.

What will the HBOS merger mean?

Mr Spencer is understandably excited about the opportunities that the merger with HBOS could bring. “I say ‘could’ because it’s still very early days. But it will bring together two strongly customer-focussed businesses. It’s also a good geographical fit, as we’re probably not as strong in Scotland, so it should strengthen our position there.”

But, with Lloyds TSB and AMC’s combined agricultural lending already totalling £2.8-2.9bn, or 25% of the market, only time will tell whether the extra market share they gain from HBOS will be good for farming as well as non-farming customers.

Paul Spencer

Interest and exchange rate outlook

Mr Spencer is reasonably confident that interest rates will fall by the end of 2008, into 2009 and expects rates to be 0.25-0.5% lower than the current 5%. “But there are so many variables, particularly what happens with inflation, which is currently running at 4.7%,” he says.

The sterling versus euro exchange rate should remain fairly stable into next year, he adds. But, while the weaker pound will boost subsidy payments and potentially help exports, inputs priced in dollars or euros – such as fuel – are likely to be slightly more expensive, he says.

Lloyds TSB/AMC

LTSB Agriculture

  • Relationship banking via a dedicated agriculture team – 125 specialist managers in 37 offices
  • Largely current account banking, plus range of other products/ services


  • Member of the Lloyds TSB Bank Group since 1993
  • Run as a separate legal business
  • Long-term, secured finance on a ‘lend and leave’ basis (no annual reviews, etc)
  • Two-thirds of AMC lending is non-franchise (i.e. no LTSB account)

* LTSB & AMC combined lending to UK Agriculture is currently £2.9bn, equivalent to a 25% market share (based on total Bank of England lending to the sector of £11.7bn

The CV

Age: 44

Grew up and went to school in Bristol, left school after A-levels and joined Lloyds TSB management training programme in September 1982

Has worked in all major divisions of Lloyds TSB since then

2004 – Joined LTSB agriculture as senior manager agriculture network with a brief to grow the agricultural business

2006 – Took on role as head of AMC

July 2008 – became Agriculture director for Lloyds TSB and AMC


Lives: House in Bristol, with wife Sally and 14-month old son

Enjoys: Playing league tennis for local Bristol club, enjoys running (ran the Bath half marathon this year). Also learning to play the saxophone – played one piece at his wedding earlier this year

Dislikes: People who don’t try. “It doesn’t matter if you’re not very good at something, so long as you at least try your best.

“My wife would also say I’m really bad in traffic jams, and my colleagues probably say I’m a bit of a control freak.”

Not a lot of people know: “When I was 10, I was evacuated from a war zone during the Turkish invasion of Cyprus. My father was posted there and we were flown out on an RAF Hercules after shells started landing in the back garden.”

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