Borrowing levels for the UK agriculture sector have broken the £10 billion mark for the first time, according to figures released by the Bank of England last week.

In the quarter to June 2008, UK agricultural borrowing grew £512 million, or 5.02 per cent, bringing the total national lending to the farming industry up to £10.192bn. This compares with £9.44bn at the same time in 2007, an increase of 7.37 per cent. Deposits are down £148m from the previous quarter, taking the value of deposits held by UK farmers to £4.873bn.

Paul Spencer, agriculture director for Lloyds TSB Bank plc and the Agricultural Mortgage Corporation (AMC), said: “The Bank of England figures bring the issues facing the industry into sharp focus. Despite significantly increased market prices for most agricultural products over the last 12 months, debt has risen. This clearly reflects the massive increase in input costs, which is impacting upon cash flow and profitability.

“In the bank, we have seen many cases of overdrafts being extended to cope with not only increased input prices but also much tighter credit terms from suppliers, particularly fertiliser. Coupled with this has been increased forward purchasing as a hedge against further cost inflation.

“The concern must be whether output prices remain high enough to enable satisfactory profits to be generated over the coming year. We have already seen grain prices falling back significantly,” he added.

“If businesses are locking into input costs they must also consider locking in to forward sales contracts where possible, to secure a profit margin.”

However, Spencer maintained that, despite the effect of input prices at AMC, Lloyds TSB has seen lending up significantly in the first quarter of 2008 compared to the same period last year. This illustrates that although costs are rising, farmers are showing an increased optimism on the back of improved commodity prices, and are taking the opportunity to invest, which will secure sustainable profits in the years ahead.

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