2016-02-26 |
   |
Volatility Means New Strategies Needed to Manage Cashflow
Increasing swings in commodity prices mean highly seasonal farming businesses, and those with longer term profit cycles, should seriously consider restructuring their debt to make sure their cashflow can cope.
This is the message from Simon Eales of the Agricultural Mortgage Corporation (AMC), who says recent warnings of growing commodity market volatility from Anderson’s and AHDB have highlighted that UK farmers are having to operate in very different conditions than they were 10 years ago.
Agricultural commodity price trends
Source: AHDB at the Institute of Agricultural Management
“Volatility is the ‘new normal’, says Mr Eales. “And this means that farm businesses whose profits are realised on a seasonal, annual or even longer term basis may have to wait through two or three business cycles to see those returns come through.”
The impact of this, explains Mr Eales, is more pressure on cashflow. “We’re seeing the results of the volatility – affected clients funding increasing amounts of their working capital through 12-month annual overdrafts, which, for most, simply can’t provide the longer term certainty and financial ‘buffer’ needed.”
Instead, shorter term cashflow needs would be better covered via a flexible loan spanning several years rather than an annual overdraft, which could find markets largely unrecovered in a 12-month period.
“Another measure to ease cashflow pressure could be to take out longer term or interest-only loans. We find our clients can be inclined to pay off term loan borrowing as quickly as possible. But at current interest rates, taking a longer term loan with lower monthly charges could be a very practical route to take. Equally, a number of lenders offer interest-only loans where you pay back the capital when funds allow.
“So borrowing £250,000 over 30 years rather than 20, or even borrowing on an interest-only basis, would keep monthly repayments low – especially with the rates you can fix now. In difficult times, like now, this means you are putting your business cashflow – and yourself – under less stress. In good times, it means you are freeing up cash to invest elsewhere or pay off more of the capital.”
The example of £250,000 borrowed at a notional 5% interest rate on a 20-year annuity would mean a representative monthly repayment of £1,650. As a 30-year annuity it would represent a repayment of £1,342 per month; and on an interest-only basis, £1,042 per month.
“As ever, it’s important to talk through these options with an independent financial adviser before making any decisions,” adds Mr Eales.
