Continued low interest rates and strengthening pound encourage prompt action
With the Bank of England base rate held at 0.5% for another month, farmers should be considering ways in which relatively low cost finance can be used to benefit their farm businesses. Meanwhile, a strengthening of the pound means there is an argument for hedging exchange rates on future Single Farm Payments sooner rather than later.
So said Gareth Oakley, Agriculture Director for Lloyds TSB Agriculture and Bank of Scotland, in response to the Bank of England’s 4 February announcement that base rate is to remain unchanged for an eleventh consecutive month.
"While interest rates remain historically low, now is a good time for farmers to look at funding investments that will improve efficiency and productivity including expansion or upgrading buildings. Many will be considering how best to finance "regulation driven" projects such as those that ensure adherence to NVZ regulations due to come into force by 2012."
The UK Gross Domestic Product (GDP) grew by 0.1% in the period October to December 2009. While this economic recovery is only modest, it is likely that any sustained period of growth will increase the pressure for a rise in base rates. Economists within Lloyds TSB are currently predicting a base rate of 1.5% by the end of 2011. Although predicting future rates is difficult, it is reasonable to expect them to increase over the medium to long term.
"Fixing interest rates for loans should therefore be a consideration especially for those projects with a longer pay back period," said Mr Oakley.
Lower interest rates contributed to the weakening of the pound in 2009 making UK farm exports more competitive and increasing the value of the Single Farm Payment (SFP). However, the pound has already strengthened through the first weeks of this year. By the close of business on Wednesday 3 February 2010 the euro was worth 87.6 pence compared to 90.9 pence at the end of December last year. Lloyds TSB Corporate Markets are forecasting that the pound could continue to strengthen over the coming year with a prediction that a euro could be worth 83 pence by the end of 2010.
"A stronger pound would impact on the rate at which the Single Farm Payment is set in September 2010," said Mr Oakley.
"Given the impact SFP has on farm profit, farmers should consider hedging or protecting their exchange rate risk."
"Last year Lloyds TSB Agriculture were able to help many of their customers either lock into a forward rate or buy a foreign currency option. Payments can be hedged up to 2012, which creates a guaranteed minimum value for the subsidy payment and reduces some of the income risks associated with currency volatility."
Latest lending figures from the Bank of England announced on 1 February show sterling lending to agriculture at the end of December 2009 to be £10.673 billion, a 5.28% rise on the same time last year.
"In 2009 Lloyds TSB Agriculture lent more money to British farmers than it has ever done before," said Mr Oakley. "We increased our lending balances over the year by 17%, underlining our commitment to UK Farming plc."
