Counting the cost of rising interest rates

The cost of finance is rising. Cedric Porter finds out what that means on-farm.

For more than a decade, interest rates were more of an academic interest than a business one. The financial crash of 2008 saw the Bank of

England’s base rate plunge from 5.0% to 0.5% in just six months.

The rate jogged along at that level until the next UK financial shock in 2016 when the UK voted to leave the EU when it dropped to just 0.25%. By early 2020 it had gradually risen to 0.75% but

Covid-19 sent it plunging to an all-time low of just 0.1%.

Since then it has crept upwards again and as the world started to recover from the pandemic and

Russia invaded Ukraine the rate jumped again, increasing to 2.25% in September.

Market analysts say the base rate could be at 3.0% by the end of the year and up to 4.25% in a year’s time. That means that a variable rate £100,000 loan is already costing £183 a month more than it did a year ago and could rise by another £57 a month by the end of the year and another £105 next year – a possible increase of £345 in 18 months.

Debt

Farming is not so heavily borrowed as other sectors. The average debt across all English farms in 2020/21 was £246,100, with cereal farms matching that average, according to latest Defra figures.

Debts for arable farms with roots were at nearly £400,000, which was £200,000 less than those of pig and poultry farms. The average net worth across all farms was £1.94 million, giving an all-time high liquidity ratio of

Average loans and liabilities for English farms

120,000

Data for 2020/2021. SOURCE: Defra

100,000 Level of debt (£)

80,000

60,000

40,000

20,000

0 Bank loans Institutional loans Creditors Overdraft Hire purchase Family loans Other loans

Some farms will be seeing a significant increase in their repayments if they are on variable rates

GRAHAM REDMAN

262%. Net interest payments were 10% of farm business income, with loans accounting for 70% of debt, mainly owed to banks and institutions.

The recent increase in interest rates may have been dramatic, but it has to be put in context, according to Graham Redman, editor of the John Nix Pocketbook and partner at the Andersons Centre.

He says: “It has to be remembered when the Bank of England base rate dropped in 2008 it fell below 2% for the first time ever, so today’s rates are still historically low. That being said, there will be some farms that have much higher borrowings than others who will be seeing a significant increase in their repayments if they are on variable rates.”

Those on variable rates should consider a discussion with their lenders about fixing rates, he says.

“That might be sensible if borrowers think rates will continue to increase. Fixing rates

The rise in interest rates should not rule out strategic investments, says Graham Redman of the Andersons Centre.

does also give you more certainty when you are budgeting.”

The rise in interest rates should also not rule out strategic investments that will strengthen the business, adds Mr Redman.

“It is more important than ever to carefully assess and plan an investment that could make farming operations more efficient, add value to crops or develop a new source of income by diversifying. The rise in fertiliser, fuel and energy costs may mean there is a need to invest in

production or storage systems, while others will be looking at renewable energy investments.”

Well-planned and justified investments may be a way of helping to manage tax burdens too, says Mr Redman. The Annual Investment Allowance on eligible investments has been retained at £1m a year until at least March 31, 2023.

Investments to make a business more financially and environmentally sustainable are on the agenda of many farm businesses, according to a survey by Paragon Bank. It found that 73% of agricultural small and medium sized enterprises (SMEs) had made progress in becoming more sustainable, compared with an average for all types of businesses of 46%.

Of those questioned, 59% said investment in sustainability improved the reputation of the business, 47% said it gave a competitive advantage, 41% said it ensured compliance with legislation and 26% said it saved money. While 80% said they were willing to invest in more sustainability projects, there were fears about the cost of borrowing.

Ashley Butterfield, regional director of SME lending at Paragon, says: “With the recent Bank of England base interest rate

7

SOURCE: Bank of England

Interest rate (%)

6

5

4

3

2

1

0

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

impact to global supply chains affecting the sourcing of new, greener equipment and ongoing concerns about inflation, it is understandable that many firms in the sector are cautious about financing and the costs of taking further steps towards sustainability.

“There is a range of financial products and support, including refinancing, available to SMEs in the sector that can help provide them with the practical solutions they need,” he says.

Many firms are cautious about financing and the costs of taking further steps towards sustainability

ASHLEY BUTTERFIELD

Frustration

Another survey, this time by NatWest, highlights the frustration rising costs are holding back investments in climate change mitigation measures. It found 82% of farmers surveyed reported a feeling of frustration or guilt that they were not able to take planned action on climate change.

To help address the increase in input costs and interest rates, the bank has said it is freezing all charges and tariffs on its business current accounts for at least 12 months and reducing interest rates on small business loans up to £40,000 by 0.51.35% depending on the terms and length of the loan.

Ian Burrow head of agriculture at NatWest says: “We want to provide the financial means and accessibility for farmers to pursue their climate ambitions.

“Addressing climate change and reducing environmental impact is a key issue for farmers, so we’re working to remove the barriers and help the sector make changes now, which will save money and safeguard businesses in the long term.”

Interest rates can be expected to be elevated for the next year at least, but they may not be higher for a prolonged period. The Bank of England has been increasing rates to help curb inflation which is near 10%.

The Bank had forecast the Consumer Price Index inflation rate to rise above 13% by the end of the year, with some commercial banks predicting a rise to nearly 20%.

However, the Government’s commitment to capping domestic energy bills and supporting businesses is likely to mean a lower inflation rate. A weaker global economy and reduced energy usage could also reduce inflation, with many banks expecting the base rate to be at or below 2% by the end of 2023.