Interest payments on debt averaged 15% of farm income in 2016, according to Farm Business Survey (FBS) figures released this week.

The size of interest payments varied hugely between farms. Last year 15% of farm businesses had to increase borrowings or sell off assets to cover the interest payments on their debts. For a further 7% of businesses, net interest payments totalled over 50% of farm income. Yet one third of farms made no interest payments at all, or received interest on their deposits.

The average level of farm debt was £188,500 per farm in 2016, an increase of just 1.2% (£2,300) on the previous year. Pig and poultry farms had the highest levels of debt, averaging £350,000 per business. This is closely followed by the dairy sector, where the average debt was £325,000 per farm. The average cereals farm has liabilities of £204,200. Grazing beef and sheep farms had lower levels of borrowings averaging just £63,300 in Less Favoured Areas and £92,100 elsewhere in the country.

Rachel Lawrence from the University of Cambridge, one of the institutions involved in the FBS explains the figures. “It’s not necessarily the level of debt or size of the interest payments that’s important here, but the ability of a business to make the payments. This reflects a longer term trend, five years ago average net interest payments made up just 7% of farm income, increasing to take up 15% of the average farm income today.”

“This is the result of a combination of factors, as average net interest payments have increased; farm incomes have declined, so interest payments are now taking up a larger chunk of income than before. The impact has been greatest on mixed and lowland beef and sheep farms where payments averaged 20-21% of income. For dairy businesses this figure was 17% and for pig, poultry and cereals farms it was 14%. It’s a worrying trend as it can divert funds from other aspects of the business, making important business decisions and key changes more difficult” adds Ms Lawrence.

However, farms still have scope to borrow and invest; the average farm net worth is £1.75 million, and the average gearing ratio is just 10%, reflecting the high value of assets that most farms own. “The gearing ratio is a measure of the longer term financial viability of the farm and this low average figure suggests farm businesses are still able to meet their longer term investment needs” explains Ms Lawrence.

The survey measures liabilities as the total debt a farm holds including mortgages, long term loans, monies owed for hire purchases, leasing and overdrafts. Net interest payments as a proportion of farm business income is an indication of whether farms can afford to pay the interest on their debts.