Rate increase will compound difficult trading conditions for farmers

Commenting on a week that has seen the Bank of England raise interest rates by 0.25% to 4.75%, as well as issue new figures which show that the UK agricultural industry’s total borrowing has climbed by £503 million in the past 12 months, Tim Porter, Agriculture Director, Lloyds TSB Business Banking, said:

“Pressure for the Bank of England Monetary Policy Committee (MPC) to raise interest rates has been building for some time, principally driven by concerns over underlying inflationary pressure. Nevertheless the increase was unexpected coming after last month’s unanimous decision to keep rates steady.

“This rate increase will compound difficult trading conditions for farmers who are already faced with increased fuel and fertiliser costs coupled with low commodity prices. Dairy farmers will have been particularly disappointed with the downward pressure on milk price,” he said.

This interest rate rise is coupled with the latest Bank of England lending to agriculture figures, released today (4 August 2006). At the end of June 2006 farming debt stood at £9.159 billion, compared with £8.656 billion at the same time in 2005, an increase of just under 6%. This figure does however represent a decrease of £162 million from the all time high of £9.321 billion recorded in March 2006.

Mr Porter continued: “Net lending to agriculture has reduced following the delayed payment of the SFP and this reflects in part, seasonality, particularly with livestock and arable farmers, and the general settling of overdue creditors as a result of the SFP delay. Year on year, however, lending has increased and taking these figures in isolation disguises the underlying changes taking place in UK agriculture.

“Farmers have been investing in the future of their farms and managing a long-term investment strategy now that the effect of the SFP is clearer. More land and farms have been coming on the market and they have been attracting strong interest from farm and non-farm buyers alike, with the result that land is being freed up by sale or rent and creating more investment opportunities.

“Technically strong farmers are looking for and finding openings. Whilst long-term interest rates are still relatively low this increase in rates is unlikely to change how the industry is restructuring, but farmers are likely to review investment decisions in the light of interest rate movement. We anticipate further interest in fixed rate borrowing terms and the benefits of fully restructuring farm debt,” he said.

“Our advice remains the same. We recommend that farmers speak to their advisors, including their local Bank Manager, to consider the effect on their business and discuss ways of mitigating the effects of interest rate movement on their business.”