THE decision by the Bank of England to slash base interest rates by one and a half per cent will reduce annual repayments on agricultural borrowings by more than £10 million, Ulster Bank's Cormac McKervey has told Farming Life.
"The level of agri bank borrowings in Northern Ireland now stands at just over £800 million. Variable rate loans and overdrafts contribute to this total will benefit in full from the base interest rate cuts announced this week. The question is how th
is week's developments will impact on new borrowings.
"The interest charged by the financial institutions on new credit agreements with the business community and the general public is linked to the LIBOR Rate. This is the interest levied between the banks when they borrow money from each other.
"If LIBOR Rates fall following the Bank of England's announcement then the greater will be the impact on the interest rates charged by all the banks on new borrowings."
The Ulster Bank representative went on to confirm his acute awareness of the problems facing local dairy farmers at the present time.
"Another bad auction will put milk prices well below cost of production levels. Many farmers are also committed to repaying loans on new slurry tanks as a result of the Farm Nutrient Management Scheme," he further explained.
"I can envisage cases where this year's Single Farm Payment will be fully subsumed into the cash flow of the business. And in some instances overdrafts will have to be re-negotiated to take account of the expected reduction in farm receipts.
"The banks, however, are anxious to take a very flexible approach when these issues arise, we view farming and on- farm investments over the long term and will aim to support farmers were possible."
He concluded: "If cash flow issues arise contact your local bank manager to plan a way forward."
Northern Bank's head of agriculture John Henning also confirmed to Farming Life that the base interest rate cut will help farmers and farm supply businesses.
"It will also lighten the load on those within a farm business with mortgages to pay," he added.
"But it will not address the key issues of falling milk returns and the continuing disparity between beef prices in Northern Ireland and Scotland."
The Northern Bank representative then referred to speculation within the banking world that base rates could fall to 2% in the not too distant future.
"There is significant financial pressure on many of our agricultural sectors at the present time," he further explained.
"However, farmers must take a long term perspective on this issue and this will be reflected in the service on-offer from the Northern. Borrowing levels within agriculture have been rising at between 10% and 14% annually over the past couple of years.
"So it is quite probable that total bank borrowings for the industry could reach the £900 million level during 2009. Capital expenditure courtesy of the Farm Nutrient Management Scheme has accounted for a high proportion of the recent increase. Other issues coming into play are increases in feed, fuel, fertiliser and livestock prices."
o The Sterling Interbank Lending Rate fell yesterday from 5.56% to 4.49%.
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