Roddy McLean of the Royal Bank of Scotland’s Agricultural Services division has welcomed last week’s announcement that the new Basic Payment Scheme will be phased in over a five-year transition period.
At a press conference ahead of this week’s Royal Highland Show, Mr McLean pointed to the wide range of impacts which the CAP implementation package would have.
“Having the package earlier would have helped, too. Now we await the fine detail,” he added.
Mr McLean noted Scottish agriculture’s level of dependence on support, with Total Income From Farming last year recorded as £829 million, with Single Farm Payment and Less Favoured Area Support Schemes accounting for a very significant £446m of the total.
“Reduction to these payments will have a significant impact on profitability. It has been a sensible approach to have a five-year transition period to the new flat-rate system providing businesses, with time to make alterations in an orderly manner,” he added.
Volatility was the new reality, not only in Scotland but around the globe.
As each successive CAP reform had kicked in, support had been reduced and exposure to global prices had become more marked.
The pressure on inputs had helpfully eased in the first half of this year, with red diesel down 6%, animal feed down 10% to 20% and fertiliser down 10%.
“The impact on profitability is difficult to call,” Mr McLean said.
On the output side, New Zealand dairy production had increased by 7% and in the US by 2.5%. UK dairy farmers had also pushed up production by 11% to the highest level for 10 years, putting pressure on the domestic markets.
Cereal prices were on a downward trajectory but this could change quickly. “The vital stocks-to-use figure for wheat is 27% for wheat and 18.9% for maize. These are not large buffers for the market if adverse weather conditions are experienced around the globe, “ Mr McLean added.
He was well aware of the problems faced by potato producers this year, with a large proportion of the 2013 crop unable to find a market.
“We realised early on that production was up, and there is no doubt the current situation will dent a number of cash flows.
“It does happen from time to time in the potato industry, and growers may have adjusted their acreages for the current campaign,” he said.
The fall in beef prices had been well publicised and analysed.
“The warmer weather was not helping demand for roasts, making processors cautious purchasers but looking at global production trends the markets did not look out of balance for the rest of 2014 and supply was expected to remain tight. Prices should remain firm in historical terms but back on the highs of last year.
Lower sheep numbers in New Zealand and Australia and a focus by these countries on the Chinese market should provide market opportunities for Scottish producers.
Lending to the agricultural sector in Scotland had reached £1.72 billion, estimated Mr McLean. This represented a 3.2% increase on the year.
“As a bank we are continuing to lend more to the sector, and estimate that borrowing may increase by a further 4% to 5%. Businesses are investing for the future and making use of the still historically low base rates.
“For some, unfortunately, increased borrowing is still being driven by the legacy of 2012 and the awful spring in 2013.”
Royal Bank economist Marcus Wright noted that Bank of England governor Mark Carney had put “the cat among the pigeons” by suggesting that bank base rates might increase by as soon as the end of this year. The Royal Bank view was that any increase would come later, possibly even towards the middle of 2015 and that rates would rise at a “gentle pace” settling at a base rate of around 2% to 3%. “ General inflation is low and although a lot of jobs are being created wage growth is very low at no more than 1%. It has only been as low twice before , in the 1860s and again in the 1920s.”
As regards the all-important exchange rate with the euro , Mr Wright expected the current exchange rate of 1.25 to the pound to stay relatively steady in the run up to September 30 when the SFP exchange rate is settled. “The euro is not a weak currency although there is obviously a bit of push and pull from the European Central Bank,” Mr Wright said.
The Royal Bank of Scotland has been the main sponsor of the Royal Highland Show since 1991 and plays a central role in the four day event which begins on Thursday. Last year the cash machine at its branch within the Ingliston showground dispensed £1m and over £500,000 worth of business was transacted over the counter. This year at the show RBS agricultural managers will be focussing on participation in rural charity RSABI’s Great Glen Challenge fund raiser at the end of August. RBS managers have also been involved in RSABI workshops exchanging knowledge and explaining how they come to lending decisions. RSABI have in turn outlined how they help and support those in need in the rural sector.