The industry has reacted angrily to suggestions it is run on too tight margins for banks to consider backing them.
Market analyst Plimsoll Publishing has argued that banks are right not to lend to businesses operating on small margins as they are too risky.
It claims high profile failures in other sectors - namely travel and construction - show the danger of operating on “micro profit margins” and the same thing could be heading to the fresh produce industry in 2011.
Its report claims 566 companies exist on low profit margins of less than 1.5 per cent, with 237 of these making a loss and that “any bump in the road will be enough to see them fail because they cannot rely on cheap credit to see them through any more”.
But the produce industry has hit back. Fresh Produce Consortium ceo Nigel Jenney said firms work on an average margin of two to three per cent and the fact the majority of the trade is in profit is “constructive and encouraging”.
Jenney urged companies to foster “strong relationships” with banks as well as the rest of their supply chain and ensure financial backers were aware of the intricacies of their business so there are “no surprises when the weather or issues like the situation with producer organisations (POs) [in which payments are currently on hold to a number of POs]” affects a business.
John Smith, chairman of Northern Mushrooms, said: “Margins have always been tight and that’s the nature of the business, but you have to make sure you work out your costs. If you are looking to put in a new line, work out exactly how much that will make you and how many staff you need before you meet with the bank. The reality is that it is very hard to justify investing large amounts of capital in the fresh produce sector when profits are at one to two per cent - if interest rates rise it could really hit profitability.”
In the mushroom sector, a study of the top 23 businesses with a combined turnover of £785 million revealed the average margin is 2.1 per cent.
Steve Ellwood, head of food and agriculture at accountant Smith & Williamson, told FPJ: “There are some very valid sustainable trading models that operate on low margins with high volumes of sales. If you ensure the sale first and then source the product, then tight margins are fine. Where the risk comes is when you are both growing and selling the product and have low margins as you are vulnerable. Planting without knowing where the sale is going is a risky business.”
“I object to Plimsoll’s idea that there are ‘perfectly good’ companies being rejected by banks but I think that there are ‘sound’ companies who are finding it a much slower process getting finance. It is much more on the banks’ terms now, with conditions and fees much more weighted in banks’ favour. In general, the banks look upon the food sector favourably,” Ellwood added.
Plimsoll said in the report: “Nobody should blame them for refusing credit to companies that might not be able to pay it back... The financial sector was correctly vilified for reckless lending that led to the economic crisis but in at least 566 cases in the fresh produce industry, they are right. If banks are to meet government and electorate demands to lend responsibly then many companies with consistently low margins pose too big a risk.”
Ian Hardcastle, head of sectors at NatWest and RBS, told FPJ: “We are absolutely committed to supporting this sector. We currently approve around 85 per cent of all loan applications.”
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