Agricultural inflation is shaping farm business planning as the ramifications of Brexit, the energy crisis and Government policies take effect.
Levels of agricultural inflation in the UK were already reportedly high before the impact of the Ukrainian conflict was felt and the economic landscape has also been shaped by Chancellor Kwasi Kwarteng’s recent “mini-budget” announcement.
While banks are largely supportive of agriculture, industry experts have noted overdraft rates for typical farm businesses have increased to nearly 5%.
The collapse of the pound against the dollar may boost exports of agri-products from the UK, however, it will also mean potentially bigger bills for oil, fertilizer and grain.
GSC Grays has been appointed to offer customised free farm business advice across the North of England as part of Defra’s £32m Future Farming Resilience Fund (FFRF) Scale Up Project – the Farm Business Advice Service (FBAS) scheme.
Greg Ricketts, farm business consultant and rural director at GSC Grays, says it is imperative farmers take a realistic approach when it comes to budgeting and overdraft management.
Being prepared with specialist advice is vital to negotiate the demanding and changing financial challenges and to work with the banks to ensure financial support is available. Mr Ricketts is urging farm businesses to have a budget and cashflow forecast “three, six or nine months in advance of any breach of the overdraft limit”.
In certain sectors, the pressure is on, he said: “Many pig producers are 20p/kg off break-even. Beef and sheep are also potentially vulnerable, although we’re not seeing many people at their overdraft limit just now.”
He expects further interest rate rises while banks have also been slowly increasing their use of covenants, requiring a certain level of financial performance to maintain the borrowing. That raises the question of farmers utilising fixed rates with Mr Ricketts believing it is a judgement call dependent on risk appetite and there is a case for “some rate fixing, but not all.”
The agricultural community also needs to recognise that banks could take up to 10 days to make key decisions on the receipt of good financial projections and the business plan “If you’re looking for an increase in your overdraft limit, don’t expect a decision in two to three days.”
Mr Ricketts warns a much larger contingency for building and other capital work is now required with costs rising rapidly. He said: “A £1m building project six weeks ago would have been looking at a loan rate in the region of 4-5% and stress testing at 6%. Now we’re looking at stress testing at 8-8.5%.
“That is why we are urging farmers to take advantage of the free and independent farm business advice we are offering under the GSC Grays Farm Business Advice Service (FBAS). Our bespoke service will offer business planning, budget forecasts and cash flows amongst others.”
Farmers can register their interest for this free service by emailing FBAS@gscgrays.co.uk