How far should farm businesses be prepared to gear up?

While the general UK industry is in the process of climbing out of a recession, UK agriculture has seen some sustained growth over a similar period, which is in part down to the low cost of money and also good capital growth seen in the previous five to 10 years. There is a strong argument that farm businesses should be taking this opportunity to invest more in their business before interest rates start to climb in the next few months and years. We have seen the Bank of England base rate at a historically low figure of 0.5% since March 2009, and all economic commentators are predicting rate rises coming soon.

Coupled with this, our banks are offering incentives for qualifying projects, such as discounts from the European Investment Bank and cash-back deals. Good levels of grant funding have been available through the Rural Development Programme for England (RDPE), Catchment Sensitive Farming (CSF) and other schemes which, with very good capital allowances for corporate structures, have promoted an excellent environment in which to invest.

The question we are often asked is how far should we be prepared to gear up our businesses? Of course this will be different for everyone depending on the value and type of assets held, but more importantly, what level of risk one is prepared to take? It may be a broad generalisation to say that those who are more entrepreneurial seem to be willing to push the boundaries on gearing further, perhaps with the understanding that personal drawings and income would be first to suffer if trading conditions were tougher.

Whether you embrace the risk, or are risk averse, it is vital to run a calculation on debt servicing ability when considering any new projects, taking into account the new income stream, cost savings, level of anticipated drawings, and of course a sensitivity analysis looking at increased levels of interest rates for all finance – unless of course everything borrowed is on a fixed basis! Whichever camp you sit in, now is the time to prepare a strategic plan of your business and consider what needs investment to push it forward for the next five to 10 years.

Richard Means is a partner at Strutt & Parker in the farming department of the Cambridge office, tel 01223 459473 or email richard. at the Andersons Centre in Melton Mowbray.

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