Farming is big business. In 2022, the income generated from crops and livestock production in the UK totalled £8 billion. This marks a fourfold increase since 2000, according to the latest available annual statistics from the UK’s Department for Environment, Food and Rural Affairs (DEFRA) and will likely increase in full-year 2024.
Farmers are notably reaping higher production values from their wheat – worth £4.1 billion in total, a record high in 2022 – as well as oats, oil rapeseed and fresh vegetables. They are also investing more in new machinery to improve crop yields and adapt to the demands of environmental change, supported by a range of government grants.
Go deeper with GlobalData
Equipment leasing in farming is also big business. According to Research and Markets, the global farm equipment rental market size reached $54.5 billion in 2023, and it is projected to rise to $85.9 billion by 2032, measuring a compound annual growth rate of 5%. For the UK alone, Statista forecasts the revenue of the rental and leasing of agricultural machinery and equipment will be worth $246.8 million in 2025.
Compared with 2010, the sales value of agricultural and forestry equipment in the UK has almost doubled to hit record levels of £2.2 billion in both 2021 and 2022, highlighting the very investment-intensive nature of farming production.
More challenges
However, UK farmers have been facing many challenges in recent years, with producers having to absorb the rising costs of fertilisers, machinery, spare parts and farm labour, not to mention the vagaries of the British weather aggravated by climate change producing record levels of rainfall through the autumn, winter and early spring months damaging crops.
On top of that, borrower’s interest rates have increased as the Bank of England (central bank) has tightened monetary policy to tame unusually high inflation. All these factors, of course, are beyond farmers’ direct control but must be tackled head-on.
How well do you really know your competitors?
Access the most comprehensive Company Profiles on the market, powered by GlobalData. Save hours of research. Gain competitive edge.
Thank you!
Your download email will arrive shortly
Not ready to buy yet? Download a free sample
We are confident about the unique quality of our Company Profiles. However, we want you to make the most beneficial decision for your business, so we offer a free sample that you can download by submitting the below form
By GlobalDataBrexit meanwhile has meant transitioning from the EU’s Common Agricultural Policy to a new national system rewarding farmers for sustainable practices and environmental performance. Farmers are not all convinced of its merits. Some 51% of agricultural businesses do not believe that Brexit has been good for them, outweighing 47% believing it has, according to the “first wave of data for 2024” compiled by Close Brothers Asset Finance on its SME Data Hub.
The UK’s rural community must continue producing to feed the nation, and with agricultural and input supply chain problems sprouting from the war in Ukraine, plus myriad other geopolitical risks to factor, an even greater emphasis is now being placed on supporting domestic production to lessen the country’s reliance on imports.
That is making farmers adaptable, and plan more, and equivalently it is brightening the mood among agricultural finance specialists, who remain generally positive about the levels of demand for purchasing and leasing the latest high-performance farm vehicles and equipment, which include tractors, balers and harvesters that have a measurable impact on agricultural productivity and profitability.
These can be extremely pricey products. The operational costs of farming – that which involves labour and machinery – are typically up to 45% of the total cost of production for cereals, according to Farmers Weekly, and these costs have risen sharply in recent years as inflation has become a bigger problem causing the prices of key inputs such as fertiliser to also skyrocket.
Given these higher purchase prices, farmers are facing a depreciation problem, forcing many to extend their rolling five-year replacement plans to an eight-year schedule for key equipment, such as tractors, combine harvesters and sprayers.
The shift to more environmentally friendly and technologically advanced products, however, presents substantial opportunities for lenders offering a broad range of financing options targeted to the specific requirements of each borrower.
Positive mood
Gareth Evans, head of agriculture at Close Brothers Asset Finance is one of those lenders in an ebullient mood about the outlook for the agricultural sector. “Farmers are very resilient,” he says, “and we have a history of working with the agricultural sector through all cycles – environmental, economic and political.”
According to his own company’s data, 45% of agricultural businesses fear their economic outlook will worsen over the next 12 months, but equally the same percentage anticipate growth. A separate YouGov survey undertaken earlier this year meanwhile found that a higher percentage of agricultural small businesses were anticipating significant or organic growth than the UK small business average.
The Close Brothers Asset Finance data indicate that 41% of agricultural businesses expect to perform at the same level over the next 12 months, while 47% are envisaging expansion; in contrast, only 9% are anticipating contraction, with just 3% fearing closure.
Importantly, against this backdrop, some 76% of agricultural businesses UK-wide plan to seek funding for their investments over the next 12 months, with 63% expressing confidence in being able to access the funds. The prospect of a General Election is not having any negative bearing either, with 56% not planning to postpone their decisions. There is also a greater share believing that a change of government will have a positive impact, than not, on their business.
In addition, 62% of agricultural businesses would consider taking on additional funding to make their business more sustainable, with 52% tracking their business’ carbon footprint.
This general level of positivity among lenders is shared by Andrew Laird, head of agriculture and food at Anglo Scottish Finance, who says his company’s level of funding has held up and is broadly similar to last year, while adding that his business is well-positioned within the agricultural market by taking a share from traditional lending sources. Anglo Scottish Finance can offer nought-percent deposit deals, he notes, as well as stage the payments of renewable projects and offer bespoke subsidised finance that is tailored to the customer’s specific requirements.
Market lenders do appear to have become increasingly savvy in terms of recognising the risk-reward trade-offs of supplying the volume of finance farmers require, and occupying the agricultural business space.
In January of this year, for example, Aldermore established a dedicated division to agricultural financing, comprising a team that has specialist knowledge of the sector. Chris Smith, who is head of specialist equipment, states that this has served the company well by attracting and serving more small and medium-sized enterprises in the sector.
“Our relationships with brokers and introducers have been vital in getting in front of agricultural businesses who are looking for flexible funding solutions that are simple and quick,” he says, before mentioning that Aldermore also plans to dedicate more time and resources to enhancing these relationships with brokers and other direct partners to grow its agricultural sector business.
Smith goes on to explain that the increased demand that is being witnessed in the sector is mainly down to diversification among farmers away from standard business practices to focus more on environmental practices.
Inevitably, as sustainable farming becomes a greater priority for the industry, it will be the availability of equipment and the associated funding that will enable this shift more effectively, he says. As with other lenders in this space, Aldermore is well-positioned to assess risk appetite and determine if farms can be supported with the appropriate financing they require.
Given the tight margins involved in the agricultural industry, it is no surprise that farmers require the most highly efficient equipment that produces minimal waste.
US farm machinery manufacturer John Deere notes how electrification is not simply about using batteries in vehicles, but also electrical drives to replace traditional engines and hydraulics with more efficient and wear-free alternatives.
For instance, in cooperation with Joskin, John Deere has developed a slurry tanker with two electric drive axles. The eight-wheel drive system provides a more efficient transmission of tractive power that it estimates can reduce slurry costs by up to 25%. The use of autonomous and semi-autonomous electric tractors, not to mention drones for crop spraying, is becoming more commonplace.
Artificial Intelligence also has an important role to play in agriculture and is being incorporated into vehicles and other machinery, thus underlining the huge changes taking place in the sector that are also highlighting the huge investment costs involved and the need for the right financing products.
Regulatory risks and opportunities
Laird believes that Anglo Scottish Finance has the right experience to structure deals to satisfy this demand, although he cautions that credit decisioning has tightened across the board, with lenders taking on less risk.
“The sector is seeing an increase in payments perhaps not being met on the initial request,” he says. However, he adds comfortingly that the sector usually has a very low default rate. It is an industry that is built on tradition, family lifestyle, and a general willingness to meet financial commitments that is plainly met as far as possible.
Regulation is a bugbear, however. Laird mentions the fact that farms and agricultural businesses tend to operate as sole traders or partnerships with business-critical assets that are less than £25,000. The regulated finance market has significantly reduced the number of lenders available to offer facilities, resulting in very limited lending options available.
On top of that the reduction in single farm payments will have an impact on cash flow for many agricultural businesses that are already experiencing a tough trading environment. The Basic Payment Scheme available from the Rural Payments Agency for farmers carrying out eligible agricultural activities was phased out last year and replaced with a new delinked payments scheme. These are payable from 2024 to 2027, but decrease each year with progressive reductions applied.
There are several schemes currently available to farmers from the Rural Payments Agency that lenders hope the next government will continue. They include the Farming Equipment and Technology Fund 2024, providing grants of up to £50,000 to purchase items that improve productivity, manage slurry and improve animal health and welfare. There are separate grants available up to a maximum of £500,000 for robotic and automated equipment and systems, and water management, and up to £250,000 for slurry storage capacity.
Aldermore’s Smith notes that there are also calls on the government to agree on a basic income for farmers to compensate for the fact the post-Brexit agriculture subsidy scheme has left many of them worse off. Delays to the sustainable farming schemes put in place after the UK left the EU, to replace the Common Agricultural Policy, have meant that in England many farmers have been left out of pocket.
“The new regime suffered from low subscription rates, and the government has underspent hundreds of millions from the £2.4 billion farming budget each year due to the lack of sign-up,” he says. Scotland and Wales have different farming schemes and Northern Ireland has yet to set up its new scheme due to the Stormont Assembly not sitting for two years.
Tailored products
Smith is positive about the prospects for the growth of leasing business, not least in the light of government support for the agricultural sector offered in the form of grants. The terms of these state that lenders are not permitted to offer products such as hire purchase (HP) to help acquire assets alongside them.
This opens the door to renting an asset without the option to buy, which has the advantage of freeing up capital, as the Value-Added Tax (VAT) is spread across the contract, thereby keeping the upfront costs to a minimum. It is tax efficient too, as the repayments are counted as a business expense, and there is also the option of bundling up the servicing costs into the repayment plan.
Evans meanwhile states that in addition to their existing suite of products, Close Brothers Asset Finance offers seasonal repayments to support farmers. These are loans structured to match a farmer’s income and cashflow, which greatly benefit both arable and livestock farmers. The agreements are customised and tailored to meet their specific demands. This means the borrower makes larger repayments when their income is strong and consequently smaller repayments during quieter times.
Despite the challenges, such as rising costs and regulatory changes, UK farming continues to thrive, with crop and livestock production reaching £8 billion in 2022. Investments in machinery and grants drive growth, but farmers face uncertainties from Brexit and climate change. Nonetheless, the sector remains resilient, supported by tailored financing solutions and a positive outlook for future expansion.
John Deere unveils Sustainability Report 2022
UK agricultural small business growth outlook surges to 3-year high
