The Scottish Government figures on Scottish Farm debt which were published in the autumn were disappointing. Loans to Scottish farms rose by £73 million, a 4% increase in the last year and the sixth consecutive annual increase in debt bringing the total amount due to £2.03 billon the highest since the late 1980’s. The vast majority of that debt is owed not surprisingly by owner occupiers.
The Banks have plenty of security given the currently high values of most land and are still willing to lend but not necessarily to every customer. The affordability of the business to make the repayments is often more of a priority for the lender than asset value. Some of our clients have received an unwelcome surprise when applications for very modest loans compared to the value of the farm have been refused because they are seen to be unaffordable given the current low commodity prices.
The continuing increase in debt is of concern, especially when combined with low prices across the board for agricultural commodities and farmers would certainly welcome a good year and probably need several good years in a row to rebuild their income and balance sheets.
While borrowing to make up for reduced income can be justified for a while, it is not something that is sensible in the medium or long term. Investment returns from capital projects also have to be looked at very carefully, particularly when commodity prices are low. Some commentators are speculating that agricultural products are likely to decrease in price over the next 10 years which is not an appealing prospect especially if combined with a rise in interest rates.
The response to static or declining demand and lower prices is to look for ways to increase efficiency, increase yields and reduce input costs. This may be achieved by economies of scale and the historic trend for fewer larger farms is likely to accelerate in the future.
Many in the industry argue that one way of increasing efficiency are GM crops. A lot of controversy was caused by the Scottish Government’s refusal to allow GM crops to be grown in Scotland.
The danger is that our farmers are competing in a global market against other farmers who can produce food more cheaply by growing GM crops but ours find themselves in a position where they don’t get a premium for their non GM crops.
It is of course essential that farmers produce a product that the public are willing to buy. However, most people don’t fully understand the pros and cons of GM crops. It is incumbent on the industry and politicians to encourage sensible mature debate without the use of emotive words such as “Frankenstein Foods” to ensure that a rational decision on GM crops can be reached.
If there is not a level playing field the downward pressure on Scottish farming income is likely to continue. This will have a negative impact not just on farmers but on suppliers and ancillary trades which is not good for Scotland’s economy.
We’ve seen the drastic impact falling oil prices have had in that sector and it is in no one’s interests if we have a similar and sustained downturn in the farming sector.