Field of dreams

Like it or not, few farms could survive without being in debt, says Fen Tiger

Debt it is not something I’ve ever been comfortable with – and I suspect most farmers feel the same.

That hasn’t stopped me borrowing money, of course. I have taken out numerous loans over the years and I am more often in the red than in the black. But I still feel uneasy about it and I have never got used to it.

Income sources

Much of that money has been borrowed for land deals to secure that elusive field of dreams to produce more food. Diversification projects were never important back in the day because a decent standard of living could be had from food production.

Sadly, that is not the case now. The return on investment from food production is so poor these days that additional sources of income are vital. In years gone by, I tried to repay my debt as soon as possible. How things have changed.

Forthcoming inheritance tax changes mean some people are taking on more debt in the hope that any borrowings can be offset against the tax liability when passing on the farm. The urge to save seems to have gone. The buzz-phrase is asset retention.

Large farmers appear more comfortable with the idea of borrowing money so they can expand their ever-growing businesses. Some take the alternative view and find outside investors to purchase land while the farming company does the manual work.

Big and bold

Seemingly worry-free about debt, they seem big and bold – although perhaps below the surface all is not what it seems. As one large farmer said to me: “Why use your own money when you can use somebody else’s?”

Of course, the well-known banks still lend to farmers. But the days of the specialist agricultural manager seem numbered. Instead, it’s a freephone number, a long wait and then usually a conversation with someone who can’t tell a cow from a sheep.

Thankfully, a specialist bank has now emerged to fill this gap. But funding still poses a problem for many farming families – especially at a time of so much uncertainty and cost for the industry.

Low returns and the phase-out of direct support mean understandable concern about land valves. Lending is usually based on asset values and with current worries over tax issues, who knows whether land values will rise or fall?

Better position

Farms with larger borrowings may be in a better position. Lenders are often reluctant to foreclose on a business – so a bigger debt may be as much their problem as it us yours, if not more so.

Today it is more about debt restructuring. It seems to be encouraged to increase your debt in the hope that the asset value will eventually outweigh the liability – provided that financial conditions allow.

But there are few guarantees when it comes to capital growth. And having seen the way changes to the tax regime have prompted investors to flee the buy-to-let rental market, who is to say that the same will not happen to farmland?

To my mind, farms will always need to borrow. But it’s important to have a clear strategy. After all, lenders like certainty and will offer better rates if they know they will get their money back – with interest, of course.