Direct Driller Issue 21 – Introduction

Written by Mike Donovan

Downside pressures increase

Every farming year has its ups and downs and in many ways 2022 didn’t perform too badly. The cost of inputs was certainly a real hit, but were to an extent balanced by the increase in crop values. Interest rates rose rapidly following inflation, but from an historic low figure and they were expected to decline as the new prices of gas, fuel and food became historical. What happens if inflation stays constant? Will we be punished by higher borrowing? And how much can some farmers take? Despite the seemingly poor performance of UK plc when compared with other economies recovering from the pandemic (we also had the Brexit negatives to ride) we still have an economy that enjoys high employment and reasonable levels of trade.

The 2023 New Year opened with the traditional fireworks and a sense that events were under control. The vaccines had protected the population; Ukraine and global finances would settle down, and many of us anticipated a period of calm. We had survived. And then another balloon goes up.

There’s a run on Silicon Valley Bank, a specialist bank used by the high risk tech sector with clients who are fleet of foot when it comes to money. SVB depositors withdrew their funds as if there was no tomorrow. The news spread like wildfire and the bank was all but bust in a couple of days, and was sold for $1. Less than a month later a second bank, Credit Swisse reports something similar. Business competition rules are swiftly changed so their Swiss competitor, UBS, could pick up the pieces.

What has this got to do with farming? Commodity prices are moved by every kind of event. Farmers who follow the markets are saying that downside risks – prices moving lower – are far easier to spot than upside. Agriculture is increasing dependent on finance and selling crops forward reduces farm debt, but adds to downside pressure.  Farmers want or need to borrow and banks and finance companies are willing to lend, with loans backed by farm assets. Interest rates of 1% have been transformed to 4, 5, or 6%. Quadruple interest at the same time as farm inputs such as fuel and fertiliser are doubled, and you have a tough situation. In past decades we could expect government to step in, but minister Therese Coffey has been definite, turning down any request from the sector. Worst case scenario? Farmers will need to farm the downside, shed assets and do what they can to cut costs in order to create a new balance sheet.

The post Pandemic flush has been short lived. We’re back where we were in 2008 and 2001 when world finances went topsy-turvy.