Finance: Keeping the glass half full

Farming has always been an unpredictable business, but recent times will have tested even the most confident of fortune tellers. Climate change, Brexit, labour shortages, a loss of traditional subsidies, new rewards for environmental land management – and then the worst pandemic for a century, followed by the first major European war for 80 years. No-one was ever going to predict all this.

As a dedicated lender of funds directly to farmers in Great Britain, it’s part of our responsibility to our customers and ourselves to constantly review the probability of a ‘perfect storm’. But how on Earth do you forecast or stress-test business volatility like this?

At Rural Asset Finance we do things differently. It would be easy to treat all this unpredictability as an automatic obstacle to lending – but we are always on the side of the farmer, who in these uncertain times has proved more than ever their essential value to our nation’s health and economy. And as an alternative, non-bank lender we are realistic optimists – our pint glass is always half full!

Because we are not a bank, this gives us and our farmer customers many advantages. Firstly, we are not bound by regulation to apply extensive stress tests to borrowers’ affordability plans. This helps the borrower move forward more easily – with higher running costs, the last thing needed is a 3-5% increase in borrowing costs added to stress test the repayments of a loan application – and it gives us much more leeway to work with our customers to arrange a loan agreement that works properly for them, while highlighting the risks of a perfect storm.

It gives us much more flexibility than traditional lenders in helping farmers access funds for a wide variety of projects. In the perfect storm of uncertainty facing UK farmers right now, the flexibility and support we give them has never been more vital.

What options are available?

There is a clear dichotomy for our farmers, which could end up being a choice of two very distinct and separate paths for them to follow:

1. Food and fuel prices are soaring across the globe; a trend that will only continue as the war in Ukraine continues. To try to mitigate this the Bank of England will inevitably keep raising the base interest rate, which will adversely impact variable lending rates for farmers. But surely the ultimate solution is to secure a larger proportion of the UK’s food and fuel supplies from within our own shores, rather than relying on other unpredictable nations?

We firmly believe that the farmer looking to produce food and green energy needs to be hailed a hero and treated as such. That’s why we fund so many innovative on-farm energy systems, large or small, such as solar, wind and biogas production from farm feedstock, and are looking to fund electric battery storage on farms.

We offer only fixed rate, fixed term funding that gives our customers budgeting certainty in an uncertain world, rather than trying to stress test bank base rate rises. As a direct lender we at RAF are absolutely determined to support these businesses – with or without subsidy. Helping them to maximise their production opportunities doesn’t just support individual farmers, it’s for the ‘national good’.

2. But at RAF we’re equally committed to farmers and farm businesses looking to diversify. The implementation of environmental land management (ELM) schemes, and with it the divergence of the landowner and the land user effectively separate the balance sheet from the annual profit and loss account. ELMs will take farmers away from subsidised food production, which is a new and intriguing direction for the way farms are owned and run, their purpose and their practice.

As a lender we find most diversifications are ultimately driven from this divergence of capital growth of the assets and the annual return of the asset. A likely effect of ELMs replacing CAP subsidy is that many – most – farm owners could struggle to make food production pay. Therefore, we believe they will likely join forces with other owners and consolidate their land areas to create larger, more viable ‘contracted farms’. This will give them economies of scale needed to sustain the business of food production.

We are starting to see that maximising the opportunities of ELMs also means capital investment – and again RAF can help here too.

A foot in both camps

At Rural Asset Finance we are determined to help all farmers either way, which is why we have a foot in both camps. It’s why we lend both to farmers who continue to produce British food and energy, AND those who wish to follow the ELMs/environmental protection route. We are funding diversification to more efficient food and energy production on UK farms without subsidy, and are also funding a whole range of new farm-based businesses to complement this. We fund only equipment and land and buildings, all on a fixed rate, often in parallel, providing the solution to many diversification projects.

Not only that, but we are one of a rare handful of lenders who can offer both loans secured on land and buildings, as well as for equipment on hire purchase or lease, often in parallel. All under the same roof.

RAF is a different kind of lender. Our specialised agriculture-based background means we clearly understand the challenges farmers face – and as a non-bank lender, we can react flexibly and empathetically to their needs. We completely understand that all the seismic upheaval in the sector has skewed recent revenue figures, which might make it difficult for farmers to access the finance they need from traditional banks. At RAF we evaluate and lend based on business forecasts as well as historic performance. We look to the future, not to the past.

We have faith in UK farmers. All of them. And that is why we keep our glass half full.