In April 2011 the NFU launched a Banking Survey with a number of aims.
a. To provide an accurate insight into the cost and availability of credit from banks and building societies.
b. To provide information for use by the Payments Council and the Treasury Select Committee on the usage of cheques and take up of alternatives.
c. To provide bank officials information on what farmers and growers want from their bank.
The results will be reported in three parts, this part is farm borrowing. In 2009-10 farmers in England spent three times as much on bank charges and interest (£397m) as they did on veterinary and medicines for livestock (£158m). In February 2010, the average farm business in England had debts of £132,582 up from £105,177 in 2006 it is likely the figure will be higher still in 2011. Finance has always been important in farming however structuring debt effectively and sourcing new funds will become even more important in the future.
Why is focusing on credit important?
As investments become larger and more costly, the ability for farmers and growers to make business improvements without external finance will reduce. More and more farmers are using bank capital to form part of a finance package for investment. Channelling finance from different sources often leads to smaller overall costs and less risks to the business or personal assets if the investment goes wrong.
What’s happening to borrowing in farming and the wider economy?
Fuelled by the cereals sector and lending to pig and poultry farms, borrowing has been on a significant upward trend however, the rapid expansion in bank credit has slowed this year.
26.2% of farmers have attempted to increase borrowing facilities in the past two years. The majority are very specific in their behaviour, approaching a single bank about one product typically a new loan or overdraft extension. Only 0.8% of respondents to the NFU survey had all their applications for new and existing credit facilities refused by every bank they approached. This indicates that farmers and growers have been using credit for investment or cash-flow. The fact that 19.2% of farmers and growers are looking to increase their overdrafts demonstrates that many farming sectors are going through harder times however the fact that few are looking or being advised to restructure debt indicates that this is a short term issue.
Despite the high probability of being approved, few farmers and growers approach different lenders when looking for more credit. More farmers shopped around loans than other products however only 33.6% approached two or more potential providers 53.7% approached just one provider. Very few farmers approached more than one provider for a new overdraft. This indicates farmers are more reluctant to change their current account facilities. Even for new mortgages farmers approach a maximum of three providers. This is indicative of the lack of providers in the market.
Typical long term borrowing rates in 2009-10 were 3.1%, borrowing rates for the economy as a whole for comparable businesses outside of farming were typically between 3.2% and 4%. Although base rate has remained at 0.5% for some time, lending rates have crept up by 0.5% since the start of 2011. The data points to debt serviceability being the key determinant of interest rates. Farms were interest payments account for fewer than 10% of farm profits pay typically between 1% and 2% over base rate, farms over 10% pay between 2% and 6% over base rate.
What can farmers and growers do differently to get a better deal from the banks?
It is clear that from the results from the survey that banks value farm business. The high approval rates show both how well banks know farm businesses and how good farmers are as customers.
Times are changing
Banks in the UK are being subjected to changes. The regulatory structure they operate in is likely to change and many banks will need to change internally and this is likely to affect you. In these circumstances it is important that you are aware of your current finance deals. If you have fixed rate loans and mortgages due for renewal what rates will you revert to if you don’t renew? If you opt to drop onto variable rates what will happen if base rate rises to 4% in two years?
Predicting base rates
Many experts are saying base rate will rise in November however there is a fair chance they will not rise until 2012. The same experts were saying they would rise in June 2011.
FACT – Over the past twenty years base rates have fallen faster than they have increased. The fastest increase in base rate over one year has been 1.5%, over two years 1.8% however, we are in unchartered waters.
Shopping around
When seeking new borrowing many farmers and growers speak to one bank. Although this says farmers are in general happy with their main bank is this going to get the best deal?
The behaviour of different banks is likely to vary considerably in this environment some may be looking to grow market share in the agricultural sector others may be looking to renegotiate terms to fit the new regulations. It is important that when the time comes to speak to the bank these changes do not come as a surprise.
What is the NFU doing about borrowing?
The NFU has been actively monitoring farm borrowing terms, approval rates and debt structure since the 2007-08 financial crisis and subsequent credit crunch using surveys, industry contacts and publicly available data. Information and ideas are regularly channelled through the NFU to the leaders of individual banks and building societies regularly used by farmers and growers.
Part of the borrowing terms for farmers and growers are generated through lenders credit and risk functions. The people involved set guidelines and policy for borrowing terms and these play an increasingly important role in the rates the customer will need to pay for finance. Uncertainty and doubt over the viability of a farming sector or diversification project will play an important role in the setting of rates.
The NFU has, and will continue to feed into the process by providing detailed information for internal use within the banks to help farmers receive fair rates. In conjunction with the British Bankers Association, the NFU has organised a six monthly meeting to provide sector updates and to relay you’re feedback to the heads of the banks. You can help by providing your feedback to banking@nfu.org.uk.
Members can read the full report by clicking on the attachment to the right.
No comments have been made.