Funders are developing their
services and working closely with farmers to develop attractive
financing options. Claire Hack reports.
Go deeper with GlobalData
Agricultural equipment is a sunny
spot in a changeable and challenging market for funders. Described
by some as “recession-proof”, the segment has remained strong in
the UK, although markets vary throughout Europe.
After a period of consolidation,
the outlook among many in the sector is upbeat. Northridge, based
in Northern Ireland, expects a 40% uplift, largely in its
agriculture business, during the 12 months to September 2011. And
Hitachi Capital reports that, while orders were slightly down at
the end of 2009, the market is now buoyant.
Mark Danter, manager of
Northridge’s agricultural unit, says: “We’re looking to increase
quite substantially this year through quality intermediaries,
almost exclusively in agriculture. It’s about improving our
offering to get close to existing clients.”
The expansion will include taking
on new intermediaries, increasing business with current partners
and improving the company’s IT systems.
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By GlobalDataNorthridge is attracted by the
relative stability of the agricultural market, which always
continues to function even during tough economic times.
“It’s not as exciting as other
sectors but it’s very, very steady. The level of impairment is much
lower in that arena and bad debt is significantly lower,” Danter
says.
Hire purchase (HP) is a popular
form of finance among farmers, meaning that residual value risk in
the sector is low.
Marie Dunkley, head of sales at
Hitachi Capital, says: “Customers like HP because they get good
value. They will pay over three, four or five years but the
equipment typically lasts longer. There is still very much an
ownership mentality, but we are starting to see more customers
taking advantage of operating leases.”
There is the possibility of
structuring finance to accommodate seasonal changes, allowing
farmers’ payments to coincide with their income.
“We’re looking to strengthen our
position in that market in terms of how we operate so we’re trying
to improve service. It’s an important market to us because we think
we can still grow. It’s a good, safe business,” Dunkley says.
Lombard has also been performing
well in the segment within the UK. Based on FLA figures, Lombard
holds about 10% market share in terms of new business volumes. The
company’s agricultural equipment clients are 85% SMEs.
Andy Hart, managing director of
business and commercial at Lombard, says: “This is a
relationship-led proposition. Farmers know us and trust us and
that’s actually one of the most important aspects of dealing with
their financing needs. We can take our proposition forward to help
farmers finance equipment in the most efficient way.”
Many of Lombard’s customers use HP
facilities. And, like Hitachi Capital’s, some customers are
starting to look towards using operating leases.
“A lot of funding is HP or
traditional bank debt. However, it’s quite possible it would be
better for some to look at operating leases to add cash flow. Our
proposition is very much to look at how we can learn about
individual assets to make sure we understand their future value so
that we can give different financing options,” Hart says.
Sales of certain types of equipment
have softened as farmers remain cautious about spending money.
However, changes in spending habits are not necessarily bad
news.
Hart says: “Farmers are likely to
become much more interested in renewable energy sources: there are
opportunities for us to look at funding this for them. They might
start looking at wind turbines, which is something we wouldn’t have
seen two years ago.”
Continental
Europe
In continental Europe, the picture
is markedly different; European funders are less bullish about the
market than their UK counterparts.
French banking group Crédit
Agricole, originally founded to support farmers, retains strong
ties to the industry. However, leasing is not its main financing
product.
Olivier Daeschner, head of Crédit
Agricole Leasing and Factoring’s (CAL&F) agriculture division,
says: “In France, financing through leasing in the agriculture
market is rather small. The main financing product is loans: it’s
about 90% loans, 10% leasing.”
In Spain and Italy leasing is more
popular. CAL&F has been present in both markets for a
relatively short period.
Daeschner says: “We’re currently
looking into how we can use our expertise in Italy, which is very
different to the French market. We also have a strong subsidiary in
Poland, where we’ve had a good experience with leasing, and we’re
carefully studying the way to provide this in Ukraine. It will be
difficult to have 85% market share as in France, but we can be a
strong presence in Italy in the coming years.
“There are two main trends which
have led to the agriculture community using leasing more than they
did before. The first is the insecurity of production. Because of
changes in prices and changes in the European Community, people are
uncertain of what they will be producing in a couple of years’
time. Therefore they need leasing, which has more flexibility than
loans.”
Consolidation has also occurred
among farms, especially in the dairy industry, in order to enable
farmers to share the cost of equipment that may not be needed in a
few years’ time. Orders from manufacturers fell during 2009 and
2010, which has led to a drop in financing globally of 45% in the
last two years.
Daeschner says: “What we can see
today is that the overall economic trends in the agriculture market
are better and that we will probably have a brighter 2011. We think
it’s going to grow soon.”
Vendor
partnerships
For funders without a strong
agricultural background, Europe is a challenge.
SG Equipment Finance (SGEF) focuses
solely on vendor finance in agriculture; there is little room for
much else thanks to the dominance of banks like Crédit Agricole and
captive funders like Fiat.
Benoît Chenu, head of sales and
marketing at SGEF, says: “There are local banks in each country
which have traditionally dominated the market. If you don’t have
support from the manufacturer, you have no chance of developing
this activity.” SGEF has a presence in agriculture in the Nordic
countries, Germany and UK.
“In the UK, there’s a niche market
for smaller equipment which goes through brokers and we’ve been
able to develop small ticket facilities,” Chenu says.
There is also the possibility of a
“redistribution of the cards”, claims Chenu. Captive funders fared
badly during the economic crisis, and SGEF was able to buy the
captive activities of CNH in Denmark at the beginning of 2010.
The crisis has also led to fewer
exclusive vendor finance partnerships with third parties. This
clears the path for funders like SGEF to gain new business in the
mid to long term.
“It’s a stable market at the moment
and we don’t expect any major changes in the next six months. But,
all manufacturers could either downsize or stop some of their
captive activities in some countries, so there are likely be new
opportunities,” Chenu says.
SGEF sees opportunities in Eastern
Europe where it already has a strong foothold, unlike some of its
competitors.
Chenu adds: “We are trying to re-enter this market and
re-entering depends on whether manufacturers are available or not.
You cannot work without strong involvement from manufacturers.”
