Wednesday 23 December 2015

Farming debt has risen

It is sobering to learn that farming debt in the UK has risen annually by approximately £1bn for the past five years and in the 12 months to September 2015 it rose by a staggering £1.45bn - bringing total debt to £17.5bn.

This is not all doom and gloom because some of this debt has increased because many farmers have made good profits since 2007 and used some of these profits for much needed investment in fixed equipment and land. However, the tide has certainly turned and in the last 18 months or so additional debt has been taken on to finance losses.

In this context Andersons, the farm business consultants, predict that farm debt is likely to rise between £1 and 2bn by autumn 2016.  Securing these funds will be challenging because banks have become increasingly demanding in their requirements.

But with interest rates still at historically low levels, businesses are currently being cushioned from the worst effects of these rising levels of debt although now US interest rates are increasing, the prediction is that Bank of England rates will follow this upward trend in the next year or 18 months. Rates are not expected to rise dramatically, but now may be a good moment for businesses to consider fixing the interest rate on least some of their long term borrowing.

However, if additional debt is to be taken on, the importance of preparing good business plans, budgets and cashflows cannot be overestimated, particularly if it is predicted that losses will be made in the short term.  

Banks will need to be confident that any farmer wishing to borrow more will have the ability to service that debt. It is no longer sufficient to rely on capital value of land and property as the security.

Farmers who cannot convince the banks that they have a firm grasp of the finances of their own business will struggle to secure further debt. This is the moment when such individuals must be careful not to fall into the grips of unscrupulous lenders who may offer finance but at crippling rates which will often end in tears.  

But for those who can secure debt based on realistic short-term budgets and longer term optimism that commodity prices will rise once again to more sustainable levels, there is reason for hope in 2016 and beyond. 

James Stephen MRICS FAAV
Partner
Rural Practice Chartered Surveyor, Wells

T: 01749 683381
E: james.stephen@carterjonas.co.uk

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