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How can farmers balance investment with the volatility of the UK food market?

POSTED: 30th November 2015
IN: Industry news
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For farmers looking to invest in new machinery, there are a number of financing options available, including asset or hire purchase. Find out more from Aldermore.

Farming plays a crucial role in the UK economy. According to the National Farmers' Union (NFU), the total gross output from farming increased from £19.6 billion in 2009 to £25.7 billion in 2013 and the industry provides more than 3.5 million jobs throughout the country. But, while farming significantly contributes both culturally and economically to the UK, agricultural companies are coming under increasing pressure to remain profitable.

A rising global and national population, coupled with competition from world markets and a controversial international policy has led to a diminishing return for farmers. During 2014, dairy farms across England closed at a rate of nine per week. However, against this backdrop there is also an increasing demand for home-grown product from UK consumers, with eight out of ten shoppers wanting to purchase more British food.

The impact of market volatility

Still, while the demand for British food has never been greater, market volatility has severely impacted the industry. In a 2014 NFU Confidence Survey, 56 per cent of farmers polled were concerned about negative farmgate prices; year-on-year the price of wheat and potatoes has dropped 30 per cent and 24 per cent respectively. Meanwhile, milk prices have experienced a 20 per cent decline across 2014-2015. There is predicted to be little respite from this volatility in the future, as Torsten Hemme, managing director at the International Farm Comparison Network predicts that farmers could see the price of milk move 50 per cent once or twice every decade.

'We are receiving much lower prices than we were 12 months ago,' agrees NFU president Meurig Raymond.'This increased volatility has clearly impacted on our members' confidence.'

A reluctance to invest

For Raymond, action needs to be taken to allow farmers to cope in light of market volatility. In a speech during the 2014 NFU annual conference, he called on politicians and supermarkets to commit to creating a fairer and more resilient supply chain in order to help farmers plan for long-term growth. 'The mechanisms we used to see to ensure stability have been dismantled,' he said, referring to the end of milk and sugar quotas in 2015 and 2017. 'Everyone knows that a boom and bust rollercoaster ride is the worst environment for the long-term planning,' he added.

For many farmers, the unpredictable marketplace is impacting on their ability to plan for the future. 'High volatility,' said Raymond in another speech during a conference in Peterborough, 'has a knock-on effect on confidence to invest on-farm.'  These challenging cash flows, he argues, are delaying investment.

Indeed, CNH Industrial, the owner of Case and New Holland brands, the world's largest makers of agricultural equipment, have highlighted a decline in the demand for farm equipment between 2012-2015; a result of global factors influencing trading conditions and the confidence to invest.

Making the decision to invest

Investing during this volatility, agued Torsten Hemme, at the Progressive Dairy Operators Conference, is the 'biggest challenge to the industry.' Speaking at the recent Agri-Tech East Conference, Meurig Raymond echoed this view. He discussed how all farmers “feel the pressures of rising costs, extreme weather, supply chain expectations, volatility, recession and regulation” and urged the government to increase its agricultural investment.

Financial options available for farmers

For those farmers looking to make a decision to invest in new machinery though, there are a number of different financing options available, including purchasing an asset outright or a hire purchase. But, while some farmers may prefer to pay the cost up front, Mike Butler, Partner at Old Mill Accountants and Financial Planners, warns against buying any new machinery outright, stating that, given the market volatility, unforeseen emergencies may 'produce an opportunity cost that may not be calculable at first glance.' Alternatively, he also highlights asset finance as an option to 'help maintain cash flow and potentially give opportunities to invest in other areas of the business.'

Aldermore Bank has provided UK farmers with a variety of financial services, ensuring that agriculture business can continue to compete with the right equipment for their needs. You can read more about our work with the farming industry here.

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