Banks warn farm borrowings likely to continue increasing

1 May 1998

Banks warn farm borrowings likely to continue increasing

By Boyd Champness

FARM borrowings increased by about 12% over the past two years and are tipped to rise by as much again this year, the major banks have warned.

Borrowings have been rising steadily since the government announced in Mar 1996 that there was a possible link between mad cow disease and nvCJD – the human equivalent. Since then, the £ has also appreciated against the German mark and the French franc by about 30% – forcing many farmers to take out large overdrafts.

But according to David Neal-Smith, Barclays deputy head of agriculture, the largest jump at Barclays has come from the arable and dairy sectors – which have increased borrowings by 21% and 18% respectively from Mar 1997 to 1998 – compared with 3% rise from the livestock sector during the same period.

Mr Neal-Smith has several theories as to why this has happened. The Conservatives adequately compensated farmers during the early stage of the BSE crisis, livestock producers prepared themselves for the turmoil currently unfolding by cutting costs and reducing the size of their businesses, and sheep prices were high in 1996 and for the first half of 1997.

But beef and sheep producers are expected to feature significantly in the banks borrowings next year which are forecast to rise by 10% across all farm businesses.

Barclays overall farm borrowings rose by 9% in 1996-97, followed by a further rise of 12% in 1997-98, while farm credit fell by 15% in 1997-98.

David Hughston, NatWest agriculture marketing manager, said the banks overall farm borrowings rose by 7% in 1997-98, while credit balances fell by 9% during the same period.

Mr Hughston said the major banks were not concerned about the rise in farm borrowings at this stage because they had risen from low levels. However, the drop in credit and the rise in borrowings at NatWest equates to a 10% movement in liquidity levels – liquidity being free cash necessary to run a farm business.

"Liquidity is the danger signal, and for that to move by 10% within a year is quite a substantial amount," he said.

Auction marketsalso feel the brunt of the livestock crises.

"Livestock prices have declined by 20-30% over the past two years making things very tough," said John Martin, executive secretary of the Livestock Auctioneers Association.

"There is no doubt that there will be some rationalisation over the coming year, but Im not aware of any plans to shut down specific markets," he added.

In 1993, there were 280 marts throughout England, Scotland and Wales compared with 247 in 1997 – a fall of 12%.