Debt slowdown masks underlying uncertainty

While official figures released yesterday showed that there had been a slowdown in the total lending from banks to Scottish agriculture over the past year, doubts hung over what this meant for the industry.

Total outstanding lending to the agricultural sector by banks and other financial institutions amounted to £2.34 billion, which although around 1 per cent up on last year’s figure, marked a slowdown in the rate of increase.

However while the sharp rises in borrowings in recent years has often been flagged up as a sign of poor returns, the slow-down also came with a warning. Some commentators said lending levels could be viewed as a sign of a lack of confidence in the industry, the slow-down being a sign of hesitation amongst businesses in making investment decisions. They pointed to the overall weak growth in the economy, concerns that interest rates could rise in the future and Brexit uncertainties as possible confidence sappers.

NFU Scotland policy director, Jonnie Hall added another take on the underlying reasons: “The increased levels of debt and borrowing taken on by Scottish agriculture in recent years are less likely to be about much-needed investment and more about farms and crofts having to take on greater levels of borrowing to keep businesses ticking over during increasingly uncertain and challenging times. That is unsustainable in the long run.”

He said that delayed CAP payments in 2015, 2016 and 2017 would have exacerbated the industry’s level of borrowings but this year’s early loan scheme would have helped the cash flow pressures on businesses, although delays in delivering on the full CAP payments would have compounded the vulnerability of many farm businesses.

He added that lower market returns across nearly every sector, along with rising input costs, had resulted in squeezed margins which had increased farm business reliance on support payments. “These borrowing figures simply underline the value and importance of on-going support to active producers and that determining the right package of post-brexit policies and funding of future support for Scottish agriculture will be critical,” he said.

In addition to bank lending, the statistics revealed that farms also had an estimated £1.2bn of debt related to hire purchase, leasing and other sources.

The figures from National statistics showed an estimated 51 percent of total lending was in the form of long-term debts, a percentage that had been slowly increasing over time.

“Total bank held debt is roughly the equivalent of 10 per cent of assets, a relatively low debt ratio, due to high value assets,” said the National Statistics Office.

The findings reflected the picture in the rest of the UK, with figures from the Bank of England showing that, by May 2018, the UK “agricultural, hunting and forestry” sector had an outstanding debt of £18.75bn.