According to the Bank of England, debt levels in the farming sector rose to £18.5bn at the end of April, up just 1.2% or £235m compared with the same point in the previous year.
Although we, in the banking sector, have seen a slowdown in the demand for debt in the past 12 to 18 months, this may reflect better markets across the sector and businesses retaining more of the income they generate.
A number of factors drive farming debt. The lack of strength in farmgate markets is often held up as the prime driver in debt demand, but in usual trading periods it is actually strong prices for farm produce that drive farms’ confidence for expansion, infrastructure spending and other investment.
Even if the same steady levels of debt growth continue between now and peak of demand later in the year, namely November before the Basic Payments Scheme comes in, debt levels across the UK industry could just peak at £19bn for the first time ever.
So with strong farmgate prices for most sectors, why are the levels of demand for debt down, as the confidence in the market should be there as human nature would naturally see times of buoyant trading as a good time to invest in the business?
Brexit being only a few months away could clearly be a factor – we are still very light on detail as to what the policy decisions will entail for the sector, so potentially some businesses will look to hold off making investment decisions until there is a clearer view of future trading conditions. There is also the possibility that after some very low farmgate prices in the past couple of years, some farms are still just getting cashflow back to more usual levels of control.
Credit balances were sat at a good level of £7.78bn at the end of April 2018, still showing a very healthy 9.1% increase on the same month in 2017 – a rise in cash terms of £714m. Credit balances tend to slowly erode from highs in December and BPS payments coming in, combined with autumn stock sales and plenty of grain cheques to boot – so the month on month dips in balances is not out of the ordinary. The increased credit balances would also add weight to the theory of better trading being the main reason for reduced debt demand, as clearly there is income being accumulated by some.
So overall, in the measured period of April 2017 to April 2018, debt rose by £235m, while credit balances also rose by £714 million meaning a net increase of £479 million. It is phenomenal for a sector to increase its net position by nearly £0.5 billion in a 12-month period and something that can only be attributed to better margins across the industry as a whole, giving fewer cash negative businesses and less demand to draw down on savings or pull on overdraft facilities. This should give farming and the rural economy confidence in its ability to generate profits and potentially use those to invest in the business.