Opportunities in a Changing Agriculture by Michael Bax

I attended the Andersons Spring Seminar on 25 March – excellent overview. Joined a focus group in the afternoon to consider the features of the agricultural industry that are not reflected in the general credit crunch scenario.

1. Finance is readily available, albeit at increased margins and with increased fee structures. Fixed rate borrowing is being looked at hard although a difficult decision for existing variable rate borrowers on the slender margins of two years ago.
2. The land market has boomed, once again showing the counter cyclical capability of the agricultural land market. There is still shortage of supply and excess demand, but low commodity prices must have an affect. Higher interest rates would also remove some of the heat. Nevertheless, one reported sale was to a Dutch farmer who had disposed of 500 acres in Holland for £20,000 per acre giving him £10M for a UK farm purchase. UK land prices are still well behind most of Northern Europe.
3. Everyone is noting increased attention from HMRC on capital taxation in the agricultural sector, particularly marginal APR cases.
4. Diversification – views vary from region to region and many consider diversification to be a diversion for farmers who should be focused on food production. Farmers are very “hands-on” in the management of business lettings and tourism has benefited from the weak pound. Development for diversification will continue to make use of redundant assets in the right location.
5. There are concerns over the tenanted sector where a significant disparity is arising as between tenants paying rent on every acre occupied, versus owner occupiers, who have significant collateral in property and lower servicing charges for their business. After rent, the tenant farmer is not generating sufficient cash for reinvestment, and reduced availability of unsecured credit in the industry could create significant problems. A representative from a major feed producer indicated that, whilst the industry is able to provide unsecured credit facilities, it has to be increasingly discerning as to who those facilities are available to. Any new business is now on direct debit terms only.
6. In the machinery sector, it is a fact that UK equipment is now the cheapest in Europe. In many European countries, particularly the Eastern Bloc, there is simply no finance available and whilst there is significant demand, there are virtually no sales in those countries.
7. On marketing, many farmers are seeking to spread risk by selling to a range of market outlets rather than sticking to old favourites. The industry is let down in many sectors by too great a number of selling desks. It was noted that the dairy sector probably only needs three and that effectively New Zealand now only has one, having been nearer 40.
8. In the pig sector, one major producer has a refined production system in place with highly effective input purchasing contracts. He has introduced franchising arrangements with other local producers, which are working well. Similarities with wine growing in France.
   
   

Negative Thoughts by Michael Bax

Sometimes I do just sit and wonder whether farmers have proper tabs on their business, and more importantly, whether land agents have a clue as to what is going on in the industry.

The review of Single Farm Payment is a very critical subject.

Why?

1. We are told that farming incomes are averaging approx. £20K per annum and that Single Payment averages approx. £20K per annum. On those farms therefore, there is no profit being earnt from production.
2. A noted columnist in Farmer's Weekly recently informed us that his latest costings indicated that his 09 wheat crop had cost £125/tonne to produce. He still has 200 tonnes in store worth £95/tonne. At a yield of 3 tonnes (and presumably quite a bit more), his shortfall is £90/acre. There goes his Single Farm Payment!
3. All the time the Single Farm Payment comes through on an annual basis at current levels, the status quo survives.
4. In the meantime the Eastern Bloc want a bigger share, the conservationists want more on Pillar 2, and the European Governments are generally bust and so want to pay out as little as possible.

One day it may not be alright next year!

Some Interesting Bullet Points from the Economic Briefing at AMC Agents’ Seminar 18 March 2010 by Michael Bax

• Current Bank policy is to hold more capital and more liquid assets in the form of gilts/bonds. These liquid assets could have been used for lending. Banks are also looking to extend lending terms and all of this increases costs.
• Equities are not likely to rise in value significantly.
• Oil currently at $70 per barrel will probably rise to +/- $100 per barrel.
• In the residential property market, house enquiries are down after sharp increases last year.
• General view is that house prices in the South East are overvalued by 10%/15%.
• 08 inflation ran at about 4%; 09 at 1% and 2010 forecast at 3% - mainly due to VAT increase, fuel increases and weak sterling putting the price of imports up.
• RPI is at 3.7% with the Consumer Price Index at 3.4% but the existence of massive spare capacity will bear down on inflationary pressure.
• Accordingly, the timing of possible interest rate movements will be very sensitive indeed.
• In the UK economy any growth has been mainly due to the car scrappage scheme and end of year consumer expenditure before the VAT change.
• In 09 consumer spending was actually down 3% with business investment down 15%.
• In the UK household debt is running at about 100% of GDP, corporate debt at 115% and Government debt at 50% - these are the highest figures ever.
• Accordingly, households and companies will try to save and there will be less income available to buy goods and services.
• The proportion of the working age population actually in employment fell to 70% which is the lowest since 1990.
• Nevertheless the public sector has generated 228,000 new jobs out of an overall loss of 799,000 since mid-2008.
• The general view is that fiscal policy is unlikely to change dramatically in 2010.
• The Government will cut spending – consumers cannot afford to spend and companies will be reluctant to spend – accordingly we have to increase exports.
• The forecast is for €1.20/£ and so the climate has never been better for exports.
• A hung parliament would be likely to create fiscal paralysis and foreign investors will stop buying UK debt.
• Accordingly, it is quite possible to see inflation dropping to 1% with the base rate staying at 0.5% through 2011.
• Nevertheless the long-term trend is likely to be increasing inflation but the worse case could be continuing decline and weakening sterling.
• In the exporting sector, we currently stand at 13% of GDP from a high of 30%, but our exports are good on high value items in skilled sectors, such as engineering, pharmaceuticals and professional/financial services.