UK farm lending reaches new record levels

Bank of England data released today (August 4, 2008) shows that bank lending to agriculture at the end of June 2008 rose to an all-time high of £10.6 billion. This is an increase of £889 million compared to the same period in 2007 when total lending was £9.7 billion. This equates to a rise of 9.1 per cent. The latest data also represents an increase of 5.2 per cent since the end of March this year, when total lending was £10.1 billion.

Commenting on theses figures, Euryn Jones, National Agricultural Specialist at Barclays said:

“Barclays own figures show that the greatest increase in borrowing has been on arable farms. Higher returns from the 2007 crop encouraged many farmers to replace out-dated and ageing machinery and the cost of financing these assets has added significantly to the cash requirements on arable farms.

“Lending figures also reflect two other key inflationary trends that farming businesses have experienced during the first half of this year. Farming inputs and fertiliser prices in particular have increased dramatically in recent months. Not only have prices risen sharply but altered terms of trade mean that inputs have to be ordered and paid for earlier than usual.”

Data from Barclays indicates that farm lending has further increased significantly during the month of July, particularly in the arable sector, as farmers have had to buy costly inputs to establish next year’s crops, before the combines start on the 2008 crop.

Farmland prices have also increased significantly during the first half of the year, with the latest RICS survey indicating that prices jumped by 24 per cent. Although not all farmers who buy land will need a loan to cover the whole purchase price, many do. More activity and higher values in this market has also contributed to pushing up farm borrowing.

Although dairy farmers have also experienced sharp rises in input costs, borrowing in this sector has declined as higher milk prices have enabled dairy farming businesses to operate more profitably.

One of the few input costs to have reduced over the last twelve months is finance charges. This time last year Bank of England base rate was 5.75 per cent, compared to the current base rate of five per cent. For every £100,000 borrowed, this equates to a saving of £750 per annum – a reduction of 13 per cent. Whilst Barclays does not expect further cuts in base rates during 2008, it does expect rates to fall further during 2009, possibly to four per cent by the end of next year.

Euryn Jones said: “The Sterling exchange rate against the Euro has had a positive impact on farming, as our exports have become more competitive and imported commodities have become more expensive. Barclays is optimistic that current exchange rates will continue for some time, which should also provide a significant boost to payments under this year’s Single Payment Scheme. The payment rate for 2008 will be determined by the exchange rate on September 30.

“Whilst the latest farm borrowing statistics are significant, the UK farming balance sheet remains exceptionally robust and most farms are well able to service their debts. Despite concerns that some have about the potential impact of current financial market conditions, the figures also clearly demonstrate that lenders are still providing finance for the sector. Barclays remains very much open for business and we are providing strong support for our customers, whether they are looking to finance additional working capital or to expand their farms by buying more land.”