Last Thursday, the Bank of England (BoE) raised interest rates by 0.5% to 1.75%, the highest level since the start of 2009. Interest rates were raised in the aim of combating the surge in inflation that we have seen at the national level in recent months. . Inflation rates started to climb in 2021 due to higher post-pandemic spending. Fast forward to this year and the invasion of Ukraine led to soaring energy prices as well as rising food prices.
So what does all of this mean for our arable farmers? First, and one of the most immediate impacts is that a rise in base interest rates means an increase in the cost of borrowing. Although interest rates remain historically low, businesses with loans and other borrowings at non-fixed rates will see an increase in repayments. Moreover, since a large part of agricultural enterprises depend on borrowing to finance their investments, it will cost them more. This comes at a time when farm business revenues are being squeezed by rising input prices and changes in agricultural policy.
In addition to rising borrowing costs, increases in interest rates and inflation could also impact demand going forward. Inflation is likely to continue to rise due to the impact of rising energy prices caused by the ongoing war in Ukraine. With the UK already in a ‘cost of living crisis’, households are feeling the pressure and it is believed we have yet to feel the full impact of rising inflation. This will likely impact consumer demand for meat, poultry and dairy products. This, in turn, would affect demand for animal feed going forward, as mentioned last week in an analyst overview. Besides the demand for animal feed, we could also see an impact on the demand for malting.
Interest rates are likely to rise (next update in September) if inflation continues to rise. However, it will be a careful balancing act to avoid tipping the UK into recession. If we were to enter a recession, we would probably see more changes in consumer demand and therefore grain utilization.
Once the harvest is over, understanding the quality you hold in store, the volumes under contract and those that are open to the market will enable more informed marketing decisions to be made as we head into a period of uncertain demand.