Industry Eye: Risk management strategy remains important as UK economy starts to improve

Despite recent reports of economic improvements, there are still significant areas of volatility which continue to have financial implications on all farm businesses.

Risk management strategies are important for any business in current times and despite the continuing strength of the beef and sheep sectors over the past 12 months, overall farm profitability has been masked by continued weakness in arable and dairy incomes.

The recent strengthening of Sterling against the Euro and more subtle but fundamental changes in purchasing patterns of the consumer now pose more significant risk to future livestock revenues.

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Further strengthening of the pound could also pose ongoing risks to the Single Farm Payment this year following the record payments seen in 2009 which arose from the weakness of the pound last year.

As the RPA exchange rate is not set until September 30 there has been renewed interest in so called 'fixing' as a mechanism to hedge risks and mitigate the loss in Single Farm Payment.

Whilst fixing the Single Farm Payment may offer benefits to protect the increased levels of income seen over the past two years, it should be weighed carefully against the set up cost of these financial products and realistically we are unlikely to see exchange rates returning to those seen two years ago.

Recent announcements by the Bank of England have confirmed that national farm borrowing levels have fallen, although this needs to be interpreted carefully against and in contrast to the record high reported in 2008/2009 which was largely bolstered by short term facilities that were used to cope with rocketing input costs at that time.

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Whilst input prices, particularly for fertiliser, may have fallen back to more historic levels, there remains continued pressure on the banks to increase their margins and this has been seen widely in both set up and review costs, together with longer term borrowing arrangements. However, the London Inter-Bank Offertory Rate (LIBOR) has settled significantly over the past six months with longer term fixed rate deals still achievable at realistic costs when these are considered against historic bank borrowing over the past 10 or 20-year period.

Although the land market in Yorkshire has been slow so far this spring, we are unlikely to see any significant uplift in supply over the coming months. With a general election now looming there are many perceived threats, particularly to the current capital taxation regimes which could pose risk and influence the more traditional investment owner or those who have been scaling back in hand activities.

Land values may have settled although demand continues as a firm undercurrent and principally farmer-dominated. Changes in government could prompt a range of disposals in advance of any new budget proposals being introduced after the election and securing finance remains a key consideration for any prospective purchaser, with debt loading and financial gearing of any business a crucial factor against the backdrop of a volatile sector.

Tom Whitehead, associate, Carter Jonas, Harrogate office. Tel: 01423 707801. email: [email protected]

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