No return to 1980s interest rates – Virgin Money’s agri-banker

Farmers should prepare for a rise in interest rates – but they won’t reach the “historic” levels seen in the 1970s and 1980s, according to Brian Richardson, head of agricultural loans at Virgin Money (formerly Clydesdale Bank).

The Bank of England raised interest rates to 0.75% last month and many expect rates to hit 2% by the end of the year. However, Mr. Richardson did not expect rates to return to the more than 20% rates of 40 years ago. “We don’t think about what I would call historic rates,” he said. “Over the next five to ten years, rates will be higher but manageable.”

As input prices rise for all sectors of agriculture, it has never been more important to the business plan, Mr Richardson said. He told The Scottish Farmer: “If there was ever a time to take a look at your farming business, it’s now. Gather your trusted advisors around the table and watch what you do for the next few years.

The cost crisis is putting pressure on working capital, with arable farmers particularly hit by dramatically increased costs before any increased yields are paid for after harvest this autumn. Mr Richardson urged anyone in this position to quickly contact their bank and explain the situation, so plans can be made to address it.

However, he believed the worst was yet to come, with the real challenge for companies not to hit until the next growing season, from this back end. “There is a bit of uncertainty for this year, but greater uncertainty will be the 2022/23 season, when higher fertilizer, feed and spraying costs come into play. That’s where that the real challenge is coming.”

Overall, Richardson felt the strong asset base and long-term view of farming left room for any additional borrowing needed in the years to come. Emphasizing that all companies would be taken on their individual merits, compared to other sectors, he said agriculture was not as heavily biased.

“While some farms will be heavily borrowed, there are many that borrow little or nothing,” Mr. Richardson pointed out. Solid business plans would still be the keystone of access to borrowing, but banks also want to see new documents such as carbon audits.

Although not essential, when working with Virgin Money, farmers are encouraged to share any available carbon analysis. He said: “Carbon audits are not required for banks, but will become more important in the wider industry – retailers and milk processors are already looking to require them from some suppliers. Coming out of Covid, the pace will start picking up again.

This week Virgin Money released a recent survey of 300 farming businesses which showed that 51% of farmers said the pandemic had little impact on their business, an increase of 4% from the last survey in 2020. However, 35% told the bank that the pandemic continued to have a negative impact, although down from 43% in 2020.

Crucially, nearly a third of businesses were still struggling with labor issues, as well as delays in their supply chains.

Of the 300 respondents, 78% had a turnover between £100,000 and £2.5 million, with 25% having a turnover between £1 and £2.5 million. Interestingly, the vast majority (91%) did not export any of their products.