‘Worrying trend’ as farm debt payments climb

Farms are becoming more indebted, a survey shows.

Farms are becoming more indebted, a survey shows. - Credit: citizenside.com

Farmers used an average of 15% of their incomes last year to pay interest on debts, a new report reveals.

Rachel Lawrence of the Farm Business Survey.

Rachel Lawrence of the Farm Business Survey. - Credit: Archant

The Farm Business Survey, compiled by a group of researchers from the Universities of Cambridge, Newcastle-Upon-Tyne, Nottingham, Reading, Askham Bryan and Duchy College, found that total debts per farm averaged £188,500, with 14% of farms forced to either increase their borrowings or sell assets to cover the interest payments.

For a further 7% of businesses, net interest payments totalled more than 50% of farm income.

However, one third of farms made no interest payments at all, or received interest on their deposits, and overall, the average level of farm debt rose by just 1.2%, or an average of £2,300 on the previous year.

Pig and poultry farms had the highest levels of debt, averaging £350,000 per business, closely followed by the dairy sector, where the average debt was £325,000 per farm.

The average cereals farm has liabilities of £204,200, while grazing beef and sheep farms had lower levels of borrowings averaging just £63,300 in Less Favoured Areas and £92,100 elsewhere in the country.

Rachel Lawrence from the University of Cambridge, said the key issue was whether farmers were able to meet the interest payments as the size of debt grows.

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“It’s not necessarily the level of debt or size of the interest payments that’s important here, but the ability of a business to make the payments,” she said.

“This reflects a longer term trend, five years ago average net interest payments made up just 7% of farm income, increasing to take up 15% of the average farm income today.”

The increased debt was due to a combination of factors, she said. Farm incomes have declined, so interest payments are now taking up a larger chunk of income than before.

The impact has been greatest on mixed and lowland beef and sheep farms where payments averaged 20-21% of income. For dairy businesses this figure was 17% and for pig, poultry and cereals farms it was 14%.

“It’s a worrying trend as it can divert funds from other aspects of the business, making important business decisions and key changes more difficult”, said Ms Lawrence.

However, farms still have scope to borrow and invest. The average net worth of a farm is £1.75m, and the average gearing ratio is just 10%, reflecting the high value of assets that most farms own.

“The gearing ratio is a measure of the longer term financial viability of the farm and this low average figure suggests farm businesses are still able to meet their longer term investment needs,” said Ms Lawrence.

The survey measures liabilities as the total debt a farm holds including mortgages, long term loans, monies owed for hire purchases, leasing and overdrafts. Net interest payments as a proportion of farm business income is an indication of whether farms can afford to pay the interest on their debts.