Farmers in Northern Ireland are facing four major cost-related challenges; “feed, fertiliser fuel and finance”, that is according to the head of agriculture with Ulster Bank.

These four key challenges combined with the rise in interest rates is likely to have a direct impact on farm cash flows, Cormac McKervey has warned.

The head of agriculture with Ulster Bank believes that finance is most likely to be the factor that will have the smallest impact on “farm cash flows”.

But McKervey is also warning that indicators suggest that base interest rates could reach 4.0% before Christmas, rising to 5.0% in the New Year.

Base interest rates

McKervey, who has his own small suckling farm, said base interest rates have averaged 0.5% for the past 14 years but in recent weeks that figure has climbed steadily to rest at around 2.25%.

He said this will create different scenarios for some farmers with borrowings.

“These increases will have a direct impact on the amount of money required by farming businesses to manage their bank debt.

“The fact is that most loans within the agri-sector over recent years have been taken out on the back of variable interest rate agreements.”

As the recent upheaval in the UK’s financial sector and on stock markets continues to settle McKervey remains upbeat about farmers’ ability to meet loan repayments.

Loan repayments

He said Ulster Bank’s approach is to stress-tested loans to farming customers up to an interest rate fluctuation of plus 2% beyond the agreed figure.

McKervey added:

“We have a very good idea of clients’ ability to re-pay outstanding monies. Moreover, despite the recent interest rate hikes, the financial standing of most farming businesses in Northern Ireland remains strong.”

The head of agriculture with Ulster Bank has stressed that if farming businesses do experience difficulties in relation to monthly debt repayments it is “far from the end of the world”.

He said businesses should look at the options such as going interest-only or extending the total loan repayment period.

McKervey said farmers should be especially mindful of how to manage their overdrafts.

“An overdraft should reflect the ebb and flow of the monies coming in and out of a farm business”.

He has warned that if farmers are in a position where their overdraft levels remain close to their limits, they should explore other options such as a restructuring on to a loan.

McKervey said an overdraft should not be used to cover one-off, large payments such as bill for buying fertiliser.

“The best way to mange this financial outlay is to agree a bespoke loan with the bank.

“This can be paid back over an agreed period of time. One option might be to go interest only for an agreed number of months and to repay the capital using single farm payment monies or revenues generated from cattle sales.”

Although he is confident that most farm account balances are relatively strong currently, the head of agriculture with Ulster Bank also acknowledges that this could change over the coming months.

He said all the economic indicators point to a costly winter ahead for farming families with expensive feed, fertiliser, energy and tax bills to be paid.

McKervey said the key starting point for farmers now should be to plan ahead and to ensure that they work through a cash flow budget that will cover their business for the next six months.