Farm finance - outlook for 2025
Continuing our annual look ahead for farming and finance, we asked the team on their views on what 2025 may have in store for farms and the rural lending market.
What will happen to interest rates in 2025?
The Bank of England kept interest rates unchanged at 4.75% in December, despite three members of the Monetary Policy Committee (MPC) voting for a cut. While markets expect a rate cut in February, the number of cuts anticipated for 2025 has been revised downwards.
The actual path of interest rates will be heavily dependent on economic data and evolving policy responses from both domestic and international policy makers. UK inflation remains stubbornly above the target, driven by persistent inflation in the service sector. Economic growth, however, is showing signs of weakness. This conflicting data creates a dilemma for the MPC.
The US Federal Reserve and the European Central Bank have both cut interest rates aggressively in recent months. However, the Fed may be nearing a pause in cuts, while the ECB is signalling further easing. This divergence in monetary policy is impacting the pound.
With the factors considered, overall, the team's views on the interest rate trajectory in 2025 appear to be similar, with falling interest rates anticipated in only two or three 0.25% basis point reductions, with the year ending with base rate at around 4.00%.
A lowering of interest rates is good news for those farms and rural businesses looking to borrow to reinvest in their businesses to improve their financial resilience.
Where do you see average farm incomes moving in 2025?
Overall, the team anticipates a challenging year for farm incomes due to a combination of economic, environmental, and geopolitical factors.
The team consistently highlights the impact of increased costs on farm profitability. Paul Simon, Consultant in the Midlands says “With high input costs and increased wages and taxes, farms will struggle to maintain the same margin in 2025. While output maybe higher, the gains will be offset by higher input costs.”
The economic slowdown, inflation, and the potential for slower-than-expected interest rate reductions as mentioned above will add to the challenges, as will the impact of geopolitical issues on global commodity markets and the impact of volatile weather patterns on agricultural production.
Jim Richards, Director, says there are conflicting influences. “Supply and demand disparity is clearly driving prices up although costs continue to remain high. The reduction of the Basic Payment Scheme (BPS) may put some under pressure, but the new de-linked payments regime may go some way to balancing this. The effects of Natural Capital schemes may begin to seep into the equation as the landscape becomes clearer and any agreements implemented in previous years begin to bear fruit.”
Farmers need to be increasingly innovative in generating alternative income to bolster the loss of BPS and improve profitability through diversification, technological advancements, and adaptation to changing market conditions.
Where do you see farmland prices moving in 2025?
Savills report that in 2024, farmland for sale across GB increased by 19% compared to 2023. Values softened in certain regions, with an average increase of less than 1% across GB. They cite this trend being driven by market uncertainty with the Budget review and policy reform plans, but is also a response to the increase in supply. Our team’s opinion was that farmland prices would remain stable in 2025, again driven by the balance in supply and demand.
John Bailey, Consultant, says, “While there is much uncertainty following the inheritance tax (IHT) decision in the Budget, which potentially removes some of the tax incentive for purchasing land, overall, land ownership remains an attractive option as there are still advantages. It will take a material change in supply and demand to impact land values and this is difficult to predict at present. My expectations are that prices will remain stable as businesses plan and adapt to changes.”
Rob Lister, Director, also sees land sales and values over the short term being dependent on the implications of the Budget and the professional advice given to farmers. “Farmers have until April 2026 to make changes to their structure regarding IHT, but the National Insurance changes, minimum wage increases and loss of subsidies will have an immediate impact on farm profitability and viability, and hence investment decisions.”
These factors may fuel more land coming on to the market. Yet, continued demand from various sources, including farmers looking to buy neighbouring land to improve efficiencies, institutional investors, and those seeking to capitalize on the value of natural capital, is expected to support prices.
What will have the biggest impact on farming fortunes in 2025?
The team identified a number of factors impacting farming fortunes in 2025. The most dominant being input costs. There are concerns about rising costs across the board, from labour (with minimum wage and National Insurance contributions increases) to essential inputs like feed, fertilizer, and fuel. Rising costs will directly erode profitability.
Government policies will always heavily influence UK farming, and 2025 will be no exception. The further transition away from traditional subsidies and the implementation of new environmental incentive schemes will impact incomes and management practices. Changes to IHT and other tax policies will have a major impact on farm succession planning and investment decisions. The correct advice for the successful transfer of farms to the next generation will be crucial for the long-term viability of many farm businesses.
Graham Sanders, Consultant in the South, says, “I see the changes in the IHT regime as a wake-up call for succession planning. Businesses must evolve and must have a long-term plan. Innovation, openness to change and a can-do philosophy are essential.” He would also suggest businesses aim to be exemplary in their chosen field and look for partnerships and greater cooperation to ensure economies of scale.
Proactively exploring new technologies, diversifying income streams and embracing innovative farming practices were other suggestions from the team to help farms adapt to the changing environment and achieve long-term success.
Where do you see bank appetites to lend to farmers going in 2025?
Given the multitude of current factors at play in UK agriculture, while most of the team believe bank and lender appetite will remain relatively constant, there are some concerns about potential tightening of lending criteria. While the agricultural sector has generally experienced lower default rates, making it a "safe haven" for lenders, the pressure of increased costs could begin to impact debt serviceability and influence lending decisions.
David West, Consultant in East Anglia, emphasizes the potential for lenders to introduce much stricter credit assessments, including more cautious stress testing and a focus on robust succession planning to mitigate risks associated with IHT changes.
The key to successful lending applications in 2025 will be to present robust proposals with strong support from professional advisors and a good mortgage consultant!
