Farm borrowings on the increase

30 April 1998

Farm borrowings on the increase

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 March 1996 that their was a possible link between mad cow disease and nvCJD – the human equivalent. Since then, the pound 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 – who have increased borrowings by 21% and 18% respectively from March 1997-98 – 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 Tories adequately compensated farmers during the early stages 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 the first half of 1997.

But while the current downturn seems to have caught dairy and arable farmers off guard, 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.

Christine McCarthy, Midland agriculture manager, said borrowings at Midland had risen by 12% over the past two years and were now on par with 1992 levels. The UK left the Exchange Rate Mechanism in September 1992 resulting in a weakening of the Pound – giving farmers what has come to be known as the golden years.

Ms McCarthy said farmers who invested wisely during the so-called golden years are now using their savings instead of going into debt.

Auction markets are also feeling the brunt of the livestock crisis. John Martin, executive secretary of the Livestock Auctioneers Association, said marts are commissioned-based meaning their success depends on throughput and the value of stock sold.

“Livestock prices have declined by 20-30% over the past two years making things very tough,” he said.

Mr Martin said he was not privy to information on how much marts were owed by farmers and abattoirs because commercial arrangements between marts and their customers was a matter for individual negotiation.

“But some farm businesses are under a lot of pressure, and Im aware that theyve been asked for assessments on their businesses,” he added.

“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%.

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