Farm finance - outlook for 2024

As we did for 2022, we asked the team what they see happening in farming and finance in 2024, and how that could affect the agricultural lending market.

What will happen to interest rates in 2024?

The team believe interest rates will stay the same for the first half of the year, and then may decrease in the second half, although continuing war in Ukraine and conflict on the Red Sea could change this.

Jim Richards, Director, says: “The Bank of England raised interest rates 14 times in a row from December 2021. Our 2022 predictions were for a rise in interest rates. But who could have predicted such a steep curve? Emerging from the Covid pandemic and the invasion of Ukraine and its effect on oil and food prices had the biggest affects on inflation. The government had to act to curb inflation and increased interest rates to end the year at 5.25%”

“Now, in January 2024, inflation pressures remain stubborn at 4.0% as at the latest figures from the end of December; rising from November's more-than-two-year low of 3.9%. Economic growth is low, and there is a potential threat of recession because the base rate increase has been too high. The recent inflation figures have stalled expectations for an early Base Rate cut. The Bank of England are wary of reducing rates whilst inflation remains above their target 2% and as a result will most likely keep a tight rein on rates. But, market commentators still predict interest rates will come down slightly later in the year.”

Where do you see average farm profits moving in 2024?

John Bailey, Consultant in North Wiltshire, Gloucestershire and West Oxfordshire, says “2023 has seen a fall in profits but to more normal levels compared to record levels seen in 2022. This was because of inputs being purchased at peak values with outputs being sold into falling markets. With cost of inputs easing (fertilisers, feed and energy/fuel) overall cost levels seem set to remain high, which leads to the view that profitability will be little changed from 2023. Continuing conflicts in the Middle East could easily impact adversely on energy costs and, for many in UK farming, conditions could be challenging.”

It was a 50-50 split among the team for farm profits to stay the same or decrease in 2024. As ever, different sectors will have different fortunes – just look at the awful wet conditions for arable farmers who haven’t sown their usual cropping volumes - but the overall industry figures will probably be similar to 2023.

Rob Lister, Director, says, “There will continue to be challenges from the volatility of input prices and commodities. Subsidy payments will reduce in England, but closely managed and established diversified farms will cope with diminishing Basic Payment Scheme. That said, farms should focus how to maintain incomes via alternative sources. Diversification, farm development opportunities and outside income will play a greater part in farming family incomes this year. In addition, more will be looking at the benefits from biodiversity and environmental net gains.”

For an in-depth look on farming fortunes sector-by-sector, we’d always recommend the Andersons Outlook.

Where do you see farmland prices moving in 2024?

Despite increased inflation and cost of borrowing, farmland values hit another record high in 2023 (Source: Knight Frank). The team agreed that farmland prices will remain strong, and could even see a small rise, but as ever, there will be regional differences.

David West, Consultant in East Anglia says “Farm inputs are high, and there continues to be volatility in commodity prices within most sectors. Coupled with the rise in interest rates, it is harder to justify adequate returns from buying more land, which is making the market quieter. However, land remains an attractive capital investment, and I can see cash buyers dictating land prices.”

The demand precedent for land use for carbon offsetting, the environment and fuel against land use for food will keep demand for farmland high for corporate and institutional investors.

What will have the biggest impact on farming fortunes in 2024?

Richard Townsend, Consultant in the South West summarised the team’s view well, “The government needs to fully recognise the vital role farmers play in terms of both food production and as custodians of the landscape. As has been said many times in the industry, ‘it's hard to go green if you are in the red’. There must be greater clarity and simplification of the new environmental schemes which are replacing the Basic Payment Scheme and the impact this is having on farm incomes.”

That said, farmers and landowners will need to continue to focus on efficiency, and seriously consider opportunities to develop additional income streams. Farms and rural businesses will continue to need finance for growth, investment in the business, diversification or restructuring debt, and Rural & Business Specialists remain uniquely placed to help clients secure the funding they need.

Where do you see bank appetites to lend to farmers going in 2024?

The team agrees, as they did in 2022, banks are likely to remain cautious in 2024.

While farming and farmland has always been considered a haven for lenders, their policies and pressure from credit underwriters are dictating a more cautious approach and limiting appetites.

Paul Simon, Consultant in the Midlands says, “We are seeing less of the ‘lend and leave’ approach of traditional lenders, and more scrutiny towards new borrowing from new and existing customers alike. There remains a strong appetite for pure agricultural cases, but an increased lender focus on affordability will see limited appetite for diversification projects – which many farmers are looking to do to offset the loss of subsidies.”

Graham Sanders, Consultant in the South East continues, “While the farming sector will rely on investment in property and diversification to reduce the commodity price volatility, lenders are continuing to put too much weight on historic accounts and too little consideration given to forecasts and expansion plans. Lenders who take a holistic view of businesses will make inroads in market.

“Confidence in lending is hindered by a lack of experienced agricultural lending managers among the established high street lenders too. It is important that farmers looking to borrow have expert, impartial guidance on their options. Opportunities are there if the proposals are prepared well and put to the right people.”

What does this mean for farm borrowing?

Jim Richards says, “For those with current borrowing on variable rates, there's no doubt that the rise in base rate has transferred directly to an increase in borrowing cost which has been painful. With a potential fall in base rate, some relief could be on its way, but the question is when and by how much. The reality is, though, that we're unlikely to return to the very low base rate unless the economy experiences another major shock - and the timing is about right for that too! So, the expectation should be that we're going to have to live and adjust to a sustained, 'normalised' higher base rate.”

Fixed rate cost of funds are currently lower than the present Bank of England Base Rate (5.25%). The reason being that fixed rate cost of funds anticipate the potential movement in base rate and in this case, a fall. For example, 3-year cost of funds are currently around 4.05%, and 10-year cost of funds at around 3.6%. So, including the margin, obtaining a fixed rate within the realms of below 6% is conceivable, reasonable and potentially attractive from a comparable historic perspective. 

Jim continues “For those approaching the end of their fixed rate period, they could be pleasantly surprised. Given that fixed rate cost of funds are, currently, unusually lower than base rate, maybe the difference between the fixed rate that is ending and the prevailing available fixed rates will not be that significantly different.”

Rob Lister concludes, “For those looking for new borrowing, farmers should consider other lending options including private banks, alternative lenders, buy-to-let options and residential mortgages to ensure they do not have all their eggs in one basket. They may offer better margins, terms and relationships too. It is important to have professional advice to access the best finance for the circumstances.”