Fortunes in UK agriculture have been varied in recent years. In an industry traditionally based around ownership of assets, could leasing give farmers some much-needed financial breathing space? Lorenzo Migliorato speaks to industry figures to find out more
Companies operating in agriculture in the UK have seen a 30% drop in profitability in the last two years, according to Anand Dossa, economist at the National Farmers Union (NFU), due to a drastic drop in commodity prices.
Cuts in government subsidies – such as the Feed-in Tariff, which incentivises renewable energy production, and the Regional Growth Fund – certainly did not help in terms of available capital.
“The last three years for [some] sectors became a question of survival rather than investment,” says Dossa.
“Fortunes have varied across sectors in recent years, with poultry and potato farming showing a comeback while dairy, lamb and pork production languished. However, in the last decade all farmers have had to rely on borrowing at some point, just to keep their businesses going.”
Leah Waterhouse, director for agriculture at Lombard, adds: “The potato sector [is now] more focused on using the profits from their bumper years [for investment], but two years ago they were just focused on ensuring that they could get their day-to-day activities done.”
Surviving in this volatile market required the industry to go beyond its traditional business, based on ownership of assets and upfront cash payments.
“Nowadays that has changed,” says Andreas Richling, international programme manager at Société Générale Equipment Finance (SGEF). “The farmers also need to protect themselves by doing finance, because that gives them the option to [spread payments and] buffer volatility.”
Borrowing has always been part of the farming business, but its role in maintaining basic cashflows has increased significantly due to recent commodity trends.
Dossa says the 12 months to July 2017 were a record year, with some £18.6bn (€20.9bn) borrowed from banks by farmers. He tentatively puts the cashflow-to-investment ratio at 40:60: “Forty percent of farmers tend to borrow cash to meet their day-to-day cashflow requirements, versus [60% for] investment.”
Whatever the purpose, borrowing in agriculture still happens mostly through high street banks, although this is more due to conservativeness than a genuine preference over other providers.
“Farmers are definitely as trustful of asset finance [as they are of] bank loans. It depends on the awareness they have of asset finance,” explains Waterhouse. “If they are aware of it, it is really helpful to them, because they do not need to give up any of their land or buildings’ security. But where they are not aware of it, they will obviously [go for] bank loans.”
Dossa admits: “The leasing side of things is relatively new to us; it needs a bit more promotion within our industry.” Asset finance in agriculture, he continues, “has not taken off and has not been promoted that much”.
Agriculture is a conservative industry, and older-generation farmers would rely on the same bank or broker for the length of their career, with little interest in exploring alternatives.
That attitude could soon change, however. Aside from a generational turnover that is putting younger farmers in charge with bigger appetites for finance, there is also the elephant in the room of Brexit.
“I think there is [now] a greater interest in asset finance, because of this uncertainty around what is going to happen to the agricultural support we have received under the EU agreements over the last four decades,” says Dossa. “UK agricultural policy has always relied on European subsidies, and although the Conservative government has said payments will go on until 2020, what happens after that is a big question mark.”
If and when that pipeline is closed, Dossa says: “Farmers will be looking at different sorts of finance than their traditional banks.”
It is telling that when Simon Goldie of the Financial Leasing Association (FLA) was invited to an NFU meeting to address the issue of Brexit, the conversation eventually shifted to asset finance opportunities.
However volatile it may be, agriculture is also the seasonal industry par excellence. Farming businesses are built on planning in advance and, most importantly, owning assets.
“It is the most intense seasonality you can imagine,” says Richling. “Combine harvesters are only used 20-25 days in Germany, and similarly in the rest of Europe. You have a very narrow window to use machines whose sales price starts at €100,000, €120,000, going up to €450,000 – just one machine, and it is used 20-25 days a year.”
In any other business, this would be the perfect gap for leasing solutions. In this sector, Richling says, that would be impossible, because of mainly two factors:
First, intensity of work. During harvest season, the machines run 12 or more hours a day, and checking for damages between the end of one leasing contract and the start of another would simply not be feasible in useful time. Machines like combine harvesters can really only be shared inside the same company.
The second factor is time sensitivity. “Every farmer wants to have the machine at the same point of time [in the year],” says Richling. “They do not want their harvest to lose in quality.”
That is why most small and medium-size farms rely on neighbours or contractors whose main asset is a piece of machinery and who will do the harvesting on all contiguous farms in a certain area.
Whatever the case, this is an industry built on ownership, which partly explains the heavy reliance on credit loans aimed at purchases. And although land remains the most prized asset, especially in terms of credit rating, equipment comes a close second. This is especially true for those farmers who ended up selling their property and now work as the aforementioned contractors.
The high value attributed to ownership also has to do with reputation. Richling says: “Farmers, being part of the community, do not want rumours going around that they are not liquid at the moment, so they [make sure to keep paying loans]. They do not want banks to enter the farm and take away machinery, especially the tractor, which is a kind of sanctum.”
It is not just about mentality though. There is also one major practical incentive to be an owner rather than a lessee, and that is subsidies.
The strong reliance on ownership, however, does not mean agricultural equipment does not move around – it just does so over a long time. “These are highly stable assets that we are talking about,” Richling says, in relation to the machines’ marketability.
Across a lifecycle of 12 or 15 years, a tractor or combine harvester might see their first usage in major markets like the UK, France or Germany, and then go on to be remarketed in central and eastern Europe, or the former Soviet Union.
But because of its durability, farmers are usually not in a hurry to part with such expensive equipment. “They literally use it to the end,” says Waterhouse. “[Only] then will they come to us and get new machinery that’s more up-to-date,” although she adds that there are some who prefer to keep tighter refreshment schedules, of three years for example.
Whatever the case, farmers are clients who know their equipment: “They have a great knowledge of what the residual value [of an asset] might be,” Waterhouse notes. “They [also] know who to trade it in to. They know they will get the best value.”
Conservative biases towards assets might have left agriculture somewhat lagging when it comes to diversification of finance models, but on the other hand it makes for highly reliable customers in the eyes of lessors.
“The client involved is a traditional, conservative customer in some respects, in that he is part of the landscape, he is not going to go and do anything else, he does not run away,” says David Walton, a colleague of Richling and UK head of agriculture at SGEF.
“Generally speaking, farmers are quite creditworthy,” says Richling, despite occasionally having distorted revenue prospects, created by an overreliance on subsidies. “The risk profile is quite good, because farmers are tied to the land and pay as regularly as they can, also because of reputational reasons.
“Yes, you have discontinuities, but if you are prepared and keep track of unpaid loans, [all parties] will make it through difficult times.”
That said, such inertia can exasperate some lessors who would like to see more space for experimentation. However, this is not the farmers’ fault, according to Dario Ghislandi, international managing director for equipment at BNP Paribas Leasing Solutions (BPLS).
“It is mainly because of the conservative mentality of financial institutions,” he says. “Everyone thinks that there is no reason to change or update a product which has been appreciated by farmers for 30 years because there is no market demand for anything else.”
That, he says, is “a really big mistake” that ignores the generational turnover that has been taking place. “At BPLS, we think that we have a – let us say – mission to support the new generation and the next generation of farmers, because we see they are disoriented.
“The market is demanding, but generally speaking the offer is always the same: a very basic, poor product, normally a simple loan. [Instead] we see that when we offer more modern financial products, a farmer [can better] calculate the profitability of their business.”
The first resistance to this change, Ghislandi says, comes from the sales sector itself. It already takes effort to convince the lessor’s own sales team, but then when the latter reach out to dealers, they are met with scepticism. They are told: “Farmers do not want this kind of product. They want to know how high [the loan’s] interest rate is. They prefer to discuss maintenance with a mechanic and the insurance with an insurance provider.”
But where BPLS managed to introduce new types of finance, the fallout was so far-reaching it forced competitors to adapt their strategies. Ghislandi makes the example of his home country, Italy: “We had a very important partner with a large share in tractors and combiners, and thanks to their support we started to promote new products.
“If you compare the present Italian market to that of, say, 10 years ago, you see that credit loans, from 100%, now represent no more than 30%. And that 30% only depends on the last player in this, the public institutions,” which, at least in Italy, remain “in the middle ages” when it comes to tailoring subsidies to modern asset finance facilities.
The road to modernising the market also comes through a more integrated supply chain, Ghislandi reckons: “This is our vision. We have to work closely with the manufacturers and their sales network.”
He says that where finance is provided through a joint venture between a manufacturer and a high street bank, most of the input will come from the former. But when the partnership is between a manufacturer and a specialist provider, like BPLS, then the lessor has the chance to be much more proactive, “sometimes even pushy”.
When the manufacturers understand that their role is not just to produce equipment, but also to provide supply to a market that is constantly changing, then the generic partnership with the high street bank “will still be relevant, but might fall back on its role as a mere financier, less and less a participant to the equipment market”.
Finally, Ghislandi touches on one final relationship model that needs improvement: that between lessors and technology innovators. When his team goes to a robotics exhibition, he says, they are the only big lessor there, which shows how slow financiers’ responsiveness is to change.
He adds: “Sometimes helping these startups in promoting their products involves a sense of patronage, even in financial institutions which, pleased as they might be in patronage, are fundamentally profit-oriented.
“Helping these makers to gain a foothold serves a double purpose that suits us perfectly: to be a specialist lessor and to support modernisation of agriculture in general. It is very engaging.”