Agriculture - Government-backed loans: research

Discussion

The agricultural sector is a key employer in rural Scotland which is facing challenges around depopulation^[70], ageing workforces and a potential generational renewal crisis. Therefore, there is a clear need to support young/new entrant farmers and crofters in Scotland and other countries. The banking sector understood that there were challenges to agricultural finance for new/young entrants and were interested in taking forward discussions about government-backed loans. Some noted that it had been discussed before and that regular meetings were needed to maintain momentum.

Embeddedness of generational renewal in agricultural policy/strategy

Through reviewing the government-backed loan schemes in EU countries it became clear that they were part of a wider strategy or suite of measures. This wider suite of measures was something that both the NFUS Next Generation Committee and most bankers interviewed agreed with. This included keeping grant schemes (as well as agricultural subsidies) available, as there is a fear that government-backed loans could displace grant schemes.

The suite of measures approach is being taken forward by the EU and could be considered as an approach that the Scottish Government could also take forward. The EU has set a target for 2040 that the proportion of young and new farmers should reach 24%, from a current base of 12% of farmers being classed as ‘young’ farmers. Additionally, the Commission has recommended that 6% of ring-fenced agricultural spending is dedicated to generational renewal, highlighting that this is key for Member States that are experiencing challenges with generational transition^[71]. Embedding these targets in agricultural policy and Member States setting objectives in individual CAP Strategic Plans will enable the EU to monitor action taken and progress towards the numbers of young farmers and new entrant farmers across the EU.

Awareness and education of current financial products

One theme that arose from the interviews with bankers was a perceived low awareness amongst farmers of the finance products that they could access, or the standard assessment criteria used to assess applicants for their products. The uptake of current government-backed loans for agricultural businesses is low (1.5% of businesses with loans under the Growth Guarantee Scheme are in the agriculture, forestry and fishing sector) and it was felt that in part, this could be down to a lack of awareness. The finance sector has changed a lot in the last 10 years with the closure of many high street banks, particularly in rural communities (Clark et al, 2023)^[72] and therefore, that face-to-face personal relationship which farmers had with a bank manager has changed. There is also a culture where farmers are more risk-averse than other business owners. It was suggested that some new/young entrants may be eligible for existing loan schemes, such as those offered by the British Business Bank however, they may not realise this. Whilst the banking sector are working with young/new entrants in a variety of ways it was suggested that further education could enable more to access current products. It was suggested that this education could start from school age.

Setting up a government-backed loan scheme

It was acknowledged that establishing new government-backed loans required extensive paperwork, therefore, it was suggested that a more pragmatic approach would be to consider existing UK products and either i) promote them more and support new/young farmers to apply for them, ii) consider whether the conditions could be modified - such as payback time extended and/or iii) use them as framework to create new products. In their CAP Strategic Plan 2023-27, the Irish Government highlighted using cross-Governmental loan schemes for the agricultural sector, citing the country’s small market and potential for administrative efficiencies^[73]. This approach could one of the most relevant for Scotland, whereby existing sector-wide government-backed guarantees are promoted more widely amongst young and new entrants.

i) Evidence points to low uptake from the agricultural sector for former and current government-backed schemes– ranging from 0.5% uptake for the Agriculture, Forestry and Fishing sector for the Enterprise Finance Guarantee scheme, to 1.1% for the Recovery Loan Guarantee Schemes to 1.5% for the Growth Guarantee Scheme^[74]. Therefore, there are opportunities to promote such schemes more and highlight the applicability of these loans for the agricultural sector.

ii) Another approach would be to further explore why the current loan offerings are not being taken up by young/new entrants and modify existing scheme conditions to address these. British Business Bank backed products usually have a six-year maximum payback period; increasing this could make them more suitable for agricultural businesses. It was suggested that extending this for agriculture only could affect the “integrity” of the product, therefore a more realistic option could be to assess whether there is demand from other sectors to increase the payback time.

iii) Using existing government-backed loans frameworks could form the basis of a new product. Using existing legislation and mechanisms could both speed up the process and keep costs down, however this would be a more costly option compared to making small amendments to current loan terms.

The main approach suggested by bankers was to explore options similar to the British Business Bank backed loans and to use them as the guarantor, this could be in part due to their awareness and understandings of these schemes. The bankers did not have the same awareness of similar government-backed loan schemes in other countries, so there is an opportunity to increase awareness of these frameworks within the banking sector. Some suggested that the Scottish Government should be speaking to agriculture teams in the devolved nations in the UK to increase the demand for schemes. It is currently unknown whether there is a desire for this, bankers were clear to say that demand is important for the success of these schemes.

The bankers knew less about the Scottish National Investment Bank (SNIB) as they had no direct experience working with them; however, some felt that discussions should be held with them. Some interviewees questioned whether this type of scheme would be in their remit or would be of the scale they are interested in. The SNIB’s website states “Typically the Bank will invest in businesses and projects seeking more than £1m in investment support (debt or equity)”^[75] this could be larger than many young/new entrants could service. There are, however, opportunities for agricultural investments to align with the wider strategy of the SNIB.

Another approach could be for the banks not to be involved, and the scheme instead is taken in-house by the Scottish Government, however, this was not the preferred approach for the bankers interviewed. The various EU schemes reviewed demonstrate that a range of partner organisations have been involved, and in some cases multiple partners are involved in a scheme. It should be noted that the group interviewed as a whole, were not well informed about these other EU schemes and therefore providing summaries of this information may be required to progress conversations in an informed way.

Demand

One of the biggest potential challenges that needs to be addressed is assessing the demand from new/young entrant farmers and crofters for the Scottish Government-backed loans and estimating how many more people could access finance if this option were taken forward. Currently, it is unknown how many new/young applicants applying for finance are unsuccessful and the reasons why. Most bankers were clear that further data on the demand would be required for future discussions on government-backed loans. The way that banks collated this data and sensitivities around the topic could make gaining this information challenging.

There were variations in the uptake of the schemes reviewed in other countries. Ireland’s Future Growth Loan Scheme and Growth and Sustainability Loan Schemes have experienced relatively high levels of uptake from agricultural businesses, although the scheme was not targeted solely towards agricultural businesses. Evidence of uptake by young farmers and new entrants is unclear, but the loan schemes appear to provide an example of government-backed loans that have been relatively successful in facilitating uptake amongst farmers. Fi-compass notes that the scheme has had a varied and comprehensive marketing strategy which has assisted with its visibility^[76]. The French scheme: Initiative Nationale pour l’Agriculture Francaise, originally introduced in 2019 has been described as a ‘major success’^[77] by the French Government, prompting a second phase. This prioritised projects that helped to meet consumer expectations, particularly through support for local food supply chains, diversification and investment in efficient technologies. Young and new entrants working on projects with agroecological or economic added value benefits were also targeted,^[78] with this focus contributing to wider social, economic and environmental objectives.

This contrasts with the Netherlands Vermogensversterkend Krediet (VVK) scheme, which, in the first 2 years, had only 6 applicants, where lack of confidence in the agricultural sector and government policy was cited as a factor. Although scheme design was cited as a factor amongst reasons affecting uptake, market conditions and structural barriers along with uncertainty about government policy can impact farmer confidence. This confidence can influence financing decisions and ultimately the decision of new entrants to enter the sector. This can include the reluctance of new entrants to purchase land and high land values being prohibitive (McKee et al, 2018)^[79], even with longer terms and preferential interest rates for loans. Given that external shocks can have a disproportionate impact on the business resilience of new entrants to agriculture (including factors such as the costs of production and volatility in farm-gate prices) and young and new entrants cite profitability as a challenge and improving profitability as a high priority,^[80] there could be an argument for schemes that permit financing for purposes beyond the purchase of land and capital investment as seen in Spain.

Whilst the external factors were not discussed much in the interviews, there were suggestions that some new/young entrants in the UK had realised that buying a farm would be out of reach, so they were now focusing on renting and joint ventures.

There were also suggestions that more than one scheme may be required to ensure that tenants and those requiring unsecured loans were able to access government-backed loans. This, however, could further dilute demand for each scheme. Once the demand for schemes gets very low, there is a possibility that the set-up and administration costs will become prohibitive and providing grants could be cheaper for the government.

Cost/value for money

Many variables could change the costs associated with establishing new government-backed loan schemes. In Scotland, these include who will administer it, how the guarantee will be provided, how much will be guaranteed, if entrants require external advisors to help them, how costly the finance will be, the default rates etc. Looking at other countries, there is little published evidence on the setup costs of the loans, which makes it challenging to assess the costs of establishing a government-backed loan scheme.

Currently, the default rates in UK agriculture are low (although more data is needed). However, new/young entrants could be more exposed to shocks and (as they are unlikely to be eligible for existing agricultural finance) they could be considered “riskier”, therefore, default rates in this group could potentially be higher. There are ways to support young/new entrant farmers; however, many of these options, including the use of external advisors, also cost money.

During interviews participants raised questions regarding the sources of funding and whether such financing would be reallocated from existing grant provisions. Additional queries concerned who the guarantor would be and the involvement of the Scottish Government, the British Business Bank and the Scottish Investment Bank were all discussed. It was also discussed as to whether collaboration with the devolved nations would enhance the attractiveness to the British Business Bank.