Green Shoots of Cautious Optimism

by Richard Miller

The devastating effect on morale and confidence within the local agricultural community in the wake of the Foot and mouth crisis, has been replaced in recent times by a sense of cautious optimism.

There is no clearer example of this than the sustained increase in agricultural land values. There were a number of commentators who predicted that values had peaked at the end of 2005 and would fall in 2006. In actual fact, the market has remained buoyant and prices have continued to rise with the national average up by approximately 40% since 2004.

One of the main reasons behind the increase is the basic economic principle of supply and demand. A number of factors, including foot and mouth and uncertainty regarding the introduction of the Single Payment Scheme, mean that supply has remained tight resulting in an upsurge in the number of potential purchasers. Indeed, the old saying, “they’ve stopped making land”, probably best represents the current state of affairs, which means there is no shortage of people out there who are willing to purchase farms.

Another key element, which has become even more apparent in the Cumbrian market, is the migration of farmers from elsewhere. In particular, agricultural land prices in Ireland being up to five times higher than the UK national average, has produced substantial “rollover money”, which in turn has fuelled a hunger for English land. A recent example was the sale of Lees Hill Farm, near Brampton, which made £1,260,000 via public auction in April , £310,000 over the guide price. Whilst many locals are unable to see how it is viable for such buyers to purchase farms at their current prices, the principle is relatively straight forward from the Irish point of view. Reputedly, unbelievable though it sounds, land in Ireland can make upwards of £20,000 per acre. Therefore, Irish farmers are in a position to sell up, move to England, purchase a farm twice the size of the one that they have just sold, pay off the bank and fend off the looming threat of inheritance tax being applied to their windfalls in the future. It simply makes good business sense in their present circumstances.

Indeed, migration of farmers isn’t confined to the Irish. The Danes have been buying commercial farms in East Anglia and Lincolnshire over the last two years or so. With supply continuing to fall short of demand, the Danes have begun casting their nets further afield and therefore, could Cumbria be their next target region?

It is no wonder that increasing numbers of Cumbrian farmers are consulting with their land agents and solicitors with a view to placing their businesses on the market. However, whilst the current climate provides continuing optimism for sellers seeking to maximise their return, the downside is the frustration of regional purchasers wishing to expand their existing operations but increasingly disillusioned by being priced out of the market.

Increasing costs and limited scope for increased turnover, has driven farmers to adopt as many cost-saving measures as possible with a view to improving profit margins. This mode of thought, combined with an extremely competitive local banking market has resulted in a number of farmers, many whose family has been with their bank for generations, instructing their solicitors in the transition from their old bank to a new lender. Tiring of high interest charges on term loan and overdraft facility deals, increasing numbers are taking the bold decision to switch banks netting substantial annual savings.

The majority of banks offer special facilities which have been tailor-made to suit agricultural businesses. The most obvious example in recent times is the “Euro loan”, which some banks have actively promoted. The end result for those who believe this form of lending arrangement best suits their circumstances is that they are looking forward to the potential for long term savings with lower and more stable EU interest rates.

A change of lender has also provided farmers with the opportunity to take advantage of higher equity to debt parameters thus enabling funds to be released and substantial re-investment in their businesses. For example, with a certain degree of optimism in the milk division, more farmers are looking to update their milking parlours in an attempt to increase production and reduce costs thus improving constrained profit margins. Local farmers have also capitalised on more favourable banking terms by borrowing money to fund various diversification projects. A popular example has been the conversion of disused/surplus outbuildings for residential and commercial lettings.

Local banks have demonstrated continuing support for Cumbria agriculture, but it will be up to individual farming businesses to prove that they will make the most of that backing by being prepared to evolve and adapt to the demands of the economy. However, an optimistic outlook must incorporate a degree of caution as there is no guarantee that the buoyancy will continue and that lenders will sustain their current level of support or that new opportunities will provide sufficient profit margins to replace declining subsidies in the future.

That said, the shoots of recovery are becoming increasingly evident in Cumbria agriculture. The recent recuperation is pivotal in the sense that some farmers are faced with this question: retire with both dignity and cash in the bank, or hold their nerve and attempt to take advantage of the opportunities and new challenges that the modern farming economy holds?

Richard Miller works in Burnetts’ Agricultural department. For further information or advice, contact Richard on 01228 552222. July 2007

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