August 2022 Update:
As the economy and interest rates are changing at a pace many of us haven't seen for many years (if at all) we thought we'd add the team's more recent thoughts. We've left all our earlier predictions untouched below.
With the Bank of England predicting inflation will rise to 13% in the Autumn, market analysts are predicting further rate hikes to above 2% by the end of 2022 and above 2.5% by the end of 2023. For those looking for new borrowing, longer term fixed rate options are looking the best deal, with good, traditional farm businesses being offered by the high street lenders around 4.45% for 10-year fixed - compared to 4.84% or 4.53% for two and five year fixed respectively. In comparison, private banks are cheaper at around 4.07% for 5-year fixed and 4.42% for 10-years, however the business must meet the banks' asset base and security cover criteria
And, is now the time to refinance? We say, do your research well, and look at a selection of lenders and their offerings. You can get in touch with us to talk through your current arrangements and to see if you could be better off switching.
February 2022 article:
We asked the team what they see happening in farming and banking in 2022, and how that could affect the agricultural lending market.
What will happen to interest rates in 2022?
The team were unanimous - interest rates will rise this year. But they had mixed views on how many times. Twice, three times or even more – and with some industry commentators saying rates could reach 1.25% or even 1.5% by the end of the year.
Jim Richards, Director, says: “The rises in December 2021 from 0.1% to 0.25%, and in February to 0.5% were in response to the recent rise in inflation. The Bank of England inflation target is 2%, but it had reached 5.4% at the end of December, due to increasing energy prices, global supply chain issues and other co-influencing factors.”
“The interest rate rise might curb this inflationary rise, but it will take time to see the results. The Bank of England expect inflation to exceed 7% in the spring. It won’t be clear until later into this year if the interest rate increase has worked, but inflation is forecast to fall back to target during 2023 as upward pressure influencing factors work through the system."
"We shouldn’t be overly concerned though that interest rates are going to rise significantly. As the Covid situation eases it is a desire of the Bank of England to return to normalisation and the recent increase in bank base rate is also that process in action. The Bank still have Quantitative Easing in their arsenal and that is a far more powerful tool than interest rates to control inflation."
What does a rise in interest rates mean for farm borrowing?
For people looking for new borrowing, we're seeing fixed rate markets rising for the three-to-five-year period, but maintaining relatively level, or even slightly lower for longer fixed periods i.e. for ten years compared to five years.
However, it’s important to point out that as Bank base rate rises, banks will adjust their sensitivity rates for new lending. They were ‘stress testing’ borrowing at typically around 5.5% to 6.0% last year, but we’ve already seen this pushed up to 6.5% for agricultural deals. And for those farm businesses also with strong commercial (non-agricultural) incomes this stress testing will be even higher.
For existing borrowing, those on fixed rates won’t see any change until the end of their fixed period. If it’s on a variable rate, the cost of repayments will go up as the rate rises. We aren’t likely to reach the heights of interest rates in the 1980s, and any increase this year will be small and won’t be limiting to most farm businesses. You can use our mortgage calculator to see how rate rises could affect your repayments.
An option for those with a large long-term debt could be to look at moving to a fixed rate.
Where do you see average farm profits moving in 2022?
There were mixed views from the team on this question! 20% said farm profits in 2022 would stay around the same mark as 2021. 40% said a moderate increase, and 40% a moderate decrease – a sentiment shared by Andersons in their 2022 Outlook.
David West, Consultant in East Anglia sees a moderate profit decrease on the cards. “Cereal productivity is plateauing with yields are at a maximum for the top quartile farmers. Unless there are new varieties that yield consistently higher than those currently available, there is little in the short term that arable farmers can do to mitigate against rising production costs. Energy, fuel, fertiliser, labour and machinery are all on an upward trajectory. Diversified and off-farm incomes will be important, but there will be pressures on rental incomes as the economy struggles.”
“While many farmers have adapted already with other incomes, until 2024 and the agri-environmental schemes become clearer and the payments arrive, profits will become static or even see a small drop.”
On a more positive note, those forecasting an increase in farm incomes base that on the quality of British produce. Buying British will be attractive for the home consumers, compared to imported goods, and the quality of our produce will attract increasing interest from Europe and other world markets.
What can farmers do to improve their incomes?
The change in the farming support regime will focus the mind, and farmers should seek options to reduce their reliance on farming support.
Graham Sanders, Consultant in the South and South East, says, “Traditional and existing livestock and crop production enterprises must continue to focus on delivering quality produce to market both home and abroad. The farming industry has a long way to go before it reaches its productive and operational efficiency capacity. We need to see proactive innovation and investment to cut production costs and boost production. The regenerative agriculture initiative focussing on soil management resulting in natural carbon capture will be interesting to watch as Government support steps up and the carbon management markets mature.”
Farms should also consider incorporating different, diverse and innovative enterprises alongside their existing enterprises. For example, the’ UK staycation’ will continue to feature for a few years to come, offering potential for more income in glamping, camping and holiday lets.
Where do you see farmland prices moving in 2022?
The team agreed that farmland prices will remain strong, and as supply remains short, could even see a small rise.
Peter Reynolds, Consultant in the South West, says “The land market has been quiet for a few years, with few farms or parcels of land coming on to the market, despite the uncertainty over farm support payments, Brexit and COVID. There are many buyers waiting in the wings – whether it’s farmers, investors or lifestyle buyers. And there’s an interesting trend emerging in carbon offsetting, with house builders looking to buy land to offset their developments. This supply and demand balance will keep land prices strong this year.”
How does this land ‘shortage’ effect potential purchasers?
Farmers should stay close with their local land agents, so they are at the top of the list when any land comes on the market – openly or otherwise.
When banks want to assess new applications, they immediately look at the buyer’s existing commercial farming income and the experience of the applicant. Blue-chip farm business will generally not have a problem borrowing to buy land, if/when it becomes available. But they must be prepared in advance with offers in principle, so that they can grasp, often once-in-a-lifetime, opportunities quickly.
Rob Lister, Director, says “It will be harder for those buying land for a lifestyle purchase. With little farming track record and most of the income coming from outside of agriculture, banks will have a varying appetite. In some cases, applicants will be turned away. This is where a good mortgage consultant, like R&BS, is key to making the purchase happen. Knowledge of the lenders who will consider lifestyle buyers and presenting applications in the right way will achieve the greatest chance of success.”
Where do you see bank appetites to lend to farmers going in 2022?
The team agrees - banks are likely to remain cautious in 2022.
Banks are still focused on Covid, and will be having to deal with issues surrounding their Coronavirus Business Interruption (CBILS) and Bounce Back Loan Scheme (BBLS) loans. As a result, they'll continue to look after their own clients first, and not be as open to new customers. Banks will feel safer taking on new customers with established business and strong historical performance, making it hard for new businesses or enterprises to find bank lending.