The Race to the Bottom

[Walterp]

Your debt, like your TB status, was once a private matter - no one else would know about it.

Over the time that I have been farming, I have noticed a complete turnaround: farmers now openly discuss their TB breakdowns and also, to an extent, their indebtedness to their bank.

When it comes to openness about debt, I think that I'm talking about dairy farmers at the forefront of the dairy consolidation in the UK - they treat borrowed capital as just another factor of production: it has a function, a cost, and a place in their business plans. Their bank manager is, judged in this light, just another supplier. It explains why, to these farmers, "banks are just money shops..."

Like concentrate or fertiliser, borrowed capital is on this view neither 'good' not 'bad', it just is.

But is it? Nocton was going to cost £50 million, mainly being financed by Clydesdale bank; more modest producers, with just a thousand or two cows, may routinely carry a debt burden of 6 or 7 million Pounds. Which might sound like a lot, to a Methodist like me, but I'd be wrong - relative to cash-flow, the debt is easily justifiable.

So easily justifiable, in fact, that the UK dairy sector is probably the favourite agricultural sector that UK banks are enthusiastic about. So you get this loop going on: the big banks think big dairy is great, and big dairy thinks that the big banks are great, too. Which is nice.

Me? Call me old-fashioned, but I'd worry when my farm was worth less than my debt. If I'm concerned about my net worth, rather than my annual profit, wouldn't I be travelling to the bottom of the pile, rather than to the top?

So, this new attitude to borrowed capital is a good idea, right?

 

[grumpy]

my pal threw a party when his overdraft dropped below 1 mill,

 

[The_Swede]

A very interesting point this... makes me think about the interest only mortgages etc that caused the financial crisis in the first place.... ie:- money owed that could 'never' actually be paid back.

I suppose the big difference re these farms is that there is no reason for demand for their produce to slow or indeed for prices to fall given rising world population etc. The other markets bubble 'burst' and caused the meltdown due to the commodities either not really existing as it were or merely not being as desirable once the money supply dried up, clearly food should not suffer this fate.

Despite this owing such vast sums of money would concern me as well though!

 

[Walterp]

my pal threw a party when his overdraft dropped below 1 mill,

Which neatly shows the differences in attitude - one local farmer near here threw a party when his overdraft went OVER a million Pounds.

At the Ivy Bush Hotel, in Carmarthen (a very posh hotel, mucho expensive).

Mind you, his operation later went spectacularly bust...

 

[Andy26]

If you can comfortably deliver percentage returns greater than the percentage interest rates then it must seem an easy decision to keep borrowing?

I guess a lot of these highly geared farms have the 'borrowing' part separate from the land 'owning' part? Using the cows and fixtures and fittings as the security for the loan?

 

[dinderleat]

Go to Europe and have a look at their bank balances!

 

[Getnthair]

Debt levels - and one's comfort - are personal.

Like Walter, I'm uncomfortable when my debt exceeds my worth - and have made changes to address that.

However I know this caution may have held back my business. If I was to start another business - separate to the core business - I'd happily borrow more. In farming, if you can arrange finance for the initial start-up, be it stock or land, you can usually see those assets appreciate. Therefore if only on, say, an interest only loan (or long-term ) then at the end of the day (or business) you can sell up, pay the loan and keep the appreciation.

Isn't that how Philip Green made his fortune - borrowed heavily to buy a retail chain, cashed in for a £Billion plus, paid back the loan and kept the Billion.

The trick is to keep your head, and your head above water, whilst carrying all the debt.

 

[RDL]

I think the debt problem associated with the dairy industry is part of their poor returns. Interest payments must be adding 1-2 pence to each litre of milk. I have a dairy farmer friend who openly (pub talk) tells me of borrowings near to £3000 per cow (200+cows) which as a beef, sheep arable farmer seems like one hell of a headache. Father always told me never to borrow more than value of livestock (in theory debt could be paid back if need be without taking the farm with it) . A lot of farmers think their big farmers by having big debt but really it's putting their cost of production through the roof. Only my opinion.

 

[Y Fan Wen]

Debt levels - and one's comfort - are personal.

When we paid the last instalment on a mortgage, Dad and I went out and bought a new pair of wellies each!

 

[Blue.]

I know a dairy farmer with 200 cows and no borrowings,I know another with a 220 cow herd who's going to borrow £750k for 4 robots and a new shed,he thinks it will save him money on labour,I think he is absolutely nuts! I would have no qualms borrowing for land though.

 

[MickMoor]

I find large debt frightening; I'm desperately trying to reduce my borrowings. If you have very high debts, in effect you have no reserve. Even a small crisis sends you borrowing more. If your business is in debt, much tighter management control is needed, which, you may argue is a good thing, but as we are now we aren't chasing every penny and sleep easily at night! I've struggle din the past, and know which I prefer.

 

[Muck Spreader]

Go to Europe and have a look at their bank balances!

How do you mean, higher, lower or the same? Personal debt in France and probably much of Europe is a lot lower than the UK. This is principally because house prices are lower and the rented market is a lot larger on the continent.

 

[Aspiring Peasant]

The basis of a capitalist system is the transfer of surplus capital from those who have it to those who need it who create wealth. As such cost of capital is just another input cost and should be treated as such. That's the theory but like many things it's a bit more tricky in practise.

For the last 4 years interest rates have been at record lows and people are starting to think this is the norm. It probably will be for the next 2-3 years but they will rise. If base rates went up 3% they would still be in a historically low range but the cost of borrowings would have increased by 40-50%. If I was borrowing large sums now I would cost it based on higher rates than current and use the current difference to make higher repayments.

The one thing that may save the situation for the over borrowed is that I believe the Government will over the next decade allow inflation to be much higher and this reduces the value of debt. To big a risk for me though

I think keeping overheads low is the key to a resilient business and there are a lot of vanity projects about which in the long term don't do agriculture any good

 

[farmer901]

I always thought that a farm should only borrow an amount that if the stock was sold whether it be cows sheep or whatever,it would clear the debt,and the land is your own.As someone else said not taking on big debt has probably held my farm back from expanding.Seeing as i have absolutley no control over the price of milk i think i will stay cautious.

 

[le bon paysan]

How do you mean, higher, lower or the same? Personal debt in France and probably much of Europe is a lot lower than the UK. This is principally because house prices are lower and the rented market is a lot larger on the continent.

Spot on. Also the banks will only let your total annual repayments amount to 30% of your annual turnover. As for interest only mortgages

 

[MickMoor]

Spot on. Also the banks will only let your total annual repayments amount to 30% of your annual turnover. As for interest only mortgages

Don't think my bank would lend me enough to make repayments 30% of turnover, and nor would I want it to. As they say, turnover is vanity!

 

[bobk]

Spot on. Also the banks will only let your total annual repayments amount to 30% of your annual turnover. As for interest only mortgages

Wasn't long ago 100% mortgages for farms were the norm en france, well until the credit crunch and loads of british , irish and french going bust made the banks have a rethink.
As for interest only mortgages , I've got one and they're bloody brilliant ,what was alot of money 10 years ago is not quite so overbearing now.
Ask David Cameron , it's his plan for future prosperity .inflation will sort the deficit

 

[Elmsted]

My dear Pembrokeshire cousin as a previous manager of Nocton farm. I maybe have the possibility to add something. The previous institutional owners of Nocton sold the farm in it's entirety to astute businessman. Namely Mr Clarke he subsequently developed the farm in an admiral way. Such that he divested around 50% for the sum he paid for 100% of the surface area.

To then propose to sell on a paultry few hectares for a dairy next door to a limestone quarry . Good move in my view.

The leverage gearing involved is but a fact of modern day economics. Leveraged buy outs or projects are merely the sum of spreadsheet economics. But they do point the way in regard to why things are going t**ts up.

Around the Nocton big dairy was/is numerous others regarding feeding the cows and getting rid of the slurry produced. Frankly care not who wins or looses. But am sure that owner of land looses no sleep. Quite right to.

Stephen Price.

 

[snowhite]

I find large debt frightening; I'm desperately trying to reduce my borrowings. If you have very high debts, in effect you have no reserve. Even a small crisis sends you borrowing more. If your business is in debt, much tighter management control is needed, which, you may argue is a good thing, but as we are now we aren't chasing every penny and sleep easily at night! I've struggle din the past, and know which I prefer.

i can't wait till 2015 gets here and i pay the last payment , the last 10 years have being long and hard

 

[snowhite]

Spot on. Also the banks will only let your total annual repayments amount to 30% of your annual turnover. As for interest only mortgages

not all ways the case , i could tell you a long story of cheating in which the farmer used every
way he could to swindle and the CA know the real values