Higher interest rates call for stress tests of agricultural budgets
The fallout from Chancellor Kwasi Kwarteng’s Sept. 23 announcement means stress tests of budgets and investment plans are needed at much higher interest rates, advisers say.
Banks continue to support agriculture, but some sectors are being watched more closely than others, said Greg Ricketts, farming consultant and rural manager at GSC Grays.
Referring to high input costs and rising base rates, he said:
“Pigs and poultry are the most exposed sectors – many pig producers are 20p/kg on the break-even point. Beef and mutton are also potentially vulnerable, although we don’t see many people at their overdraft right now. »
Although there appears to be no trend to tighten lending criteria, further rate hikes are expected and banks have slowly increased their use of covenants, requiring a certain level of financial performance to maintain borrowing.
See also: Splitting up a farm business – tax, legal and practical issues
A £1m construction project six weeks ago would have looked at a lending rate in the range of 4-5% and stress testing at 6%, Mr Ricketts said. “Now we are looking at 8-8.5% stress tests.”
Overdraft rates for typical farm businesses have risen from 2.5% a few weeks ago to 4.75% now, said Iain McVicar, partner and farms and estates team leader at accountant Albert Goodman .
Requests for longer-term borrowing to buy land might have been stress-tested at 7% last year, but now a higher rate might be prudent, he suggested.
While England’s 50 per cent basic payment scheme advance has helped farm cash flow, that extra working capital is needed to deal with farm inflation, Mr McVicar said.
Some of the recently announced measures, such as keeping the annual investment allowance at £1million, will help farms, as will measures on tax rates and national insurance, a he said, and also pointed to an opportunity for some who might be looking to get out of fixed rate borrowing sooner.
This usually incurs a penalty, but in today’s climate, banks can pay borrowers to get out sooner because they can then loan those funds out at a higher rate to someone else.
Mr. Ricketts stressed the importance of communicating with lenders and being armed with up-to-date information on where the business is located.
“If you’re looking for an increase in your overdraft limit, don’t expect a decision in two to three days.
“Banks are under pressure in terms of staff and resources; it can take 10 days and only if the bank has all the information they need from the customer.
“Every business should have a budget and cash flow forecast so that they can communicate with the bank in an informed way three, six or nine months before any overdraft limit is exceeded.
“If there are issues, as long as you can demonstrate that you recognize them and are working on them and come up with costed solutions to fix the issues, banks will usually support you.
“The problems arise when companies rely on values of security rather than the ease of borrowing.”
In recent years, banks have encouraged a move from base borrowing (the part of an overdraft that never diminishes) to a more structured lending base, although this is not the right thing for all businesses, Mr. Ricketts said.
Fixed or variable rates
“The decision whether or not to fix rates is more difficult at the moment and depends on whether rates begin to stabilize – it’s a matter of judgment and a matter of individual attitude to risk.
“Unless you want that certainty and can really afford a fixed rate of 7-8%, I wouldn’t fix 100%. There might be a case to fix some, but not all,” Mr Ricketts said.
Loans and budgets – advice
Greg Ricketts of GSC Grays advises farmers to be realistic, not optimistic, in budgeting and establish a good buffer on key variables.
For construction projects, this could now be a 20% contingency, rather than the 5% people might have used in the past – construction costs have already increased by 20-30%.
If you’re considering restructuring debt, do it once and do it right. It also requires a realistic approach so as not to go back two years to ask for more, he said.