The European agricultural leasing sector has enjoyed a relatively successful time in recent years. Peter Johnstone talked to three industry experts about their predictions for the future

Agriculture is an industry upon which the entire globe is dependent, and as such should remain resistant to complete decline.
While the industry as a whole will always exist, existing farms are increasingly consolidating and mechanising, while factors such as the Common Agricultural Policy (CAP)and climate change can have a profound effect on farmers’ livelihoods.

Leasing Life spoke to several agricultural equipment finance companies and all reported having a good year in 2012.

Pascal Layan, director of the international business line for equipment and logistic solutions at BNP Paribas Leasing Solutions, says it was a growth year in Western Europe (including Poland), with the number of new units sold almost reaching the same level as its 2008 peak.

Meanwhile, Martin Nixon, head of asset finance at United Trust Bank (UTB), says business "certainly increased" last year, although "not in the same manner as the rest of [UTB’s] business", while Jonathan Rawlings, AGCO Finance’s regional managing director for Ireland, Italy, Spain, and the UK, says the company had "some really excellent results".

Agricultural leasing is performing well in Western markets with a strong asset finance background. Rawlings says business is good in the areas he is responsible for, but "in addition, in Europe we have seen strong sales performance in both the French and German markets" with France, Germany and the UK being the largest European tractor markets.

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Conversely, Layan says that while Germany remained stable for BNP Paribas, and France and Poland saw increased business, "the situation was worsening" in Southern Europe, as well as Benelux and the UK "to a lesser extent."

Big potential

Rawlings says the "big potential" in continental Europe "has lain in Central and Eastern Europe" for quite some time, but "while these markets still have an appetite for domestic equipment acquisition and there are general credit constraints, the activity [compared to immediate potential] remains relatively modest."

This is in part because Western European markets, while they are recovering from the recession, with Germany coming close
to pre-recession highs, are quite mature markets.

At the same time, agriculture in these countries is becoming more mechanised, which is a mixed blessing for finance providers.
Nixon says it will be an opportunity, with "more mechanised equipment and less manual work", which would hopefully involve "major asset purchases".

Rawlings expands on this: "Our own experience in the UK is that as farms increase their levels of mechanisation they tend to turn to products such as the higher horsepower, high-productivity machines produced by AGCO.

"Although for many years there has been a trend toward farm consolidation and smaller tractors being replaced by bigger tractors, increases in machine size translate into increases in the amount of funding required per unit."

Layan also believes the "increase in average horse power per tractor, and in general the improvements in technology", should see the sector continue to grow. BNP Paribas thinks "that innovation on financing solutions and increased specialisation" should also contribute to the generation of more business.

Rawlings says the agricultural sector should be faring well, as everybody has to eat. Demographic growth, combined with a drop in the amount of land available for farming, should lead to higher commodity prices, and European farmers "should therefore be better off".

However, such a wide-ranging industry, with its "myriad" pressures, can be affected in many ways. For example: "input price inflation, [including] the agricultural feedstuffs for animals, fuel and fertiliser, along with foreign exchange fluctuation, uncertainties over support systems, cheap imports and of course the biggest factor of all, the weather."

But, says Rawlings: "We are in a global economy and global demand for food continues to increase with supply, [and] farming has a long-term focus and professional farmers are adaptable.

"Where there are challenges there will always be someone ready to spot the opportunity and this is as true in agriculture as anywhere else."

Layan also says that price volatility is an issue to be aware of, especially due to "erratic climate conditions". However, he thinks the "fundamentals" of the sector are "very sound".

He says: "Output prices should continue to increase along with the increase in the world population, and the arable lands are not likely to increase at the same pace. Hence a strong incentive for mechanisation and for innovation."

With business currently strong, no one expects there to be much change in the level of renegotiations or repossessions, with Nixon saying the sector has "a historically low default rate", with "no sign of that changing. Certainly, we haven’t seen any change in default in the sector".

Layan says agriculture is a "globally less risky sector than average", as farmers "know how to adapt".

Rawlings says that may change, as "any market deterioration will impact repossessions and renegotiations", but farmers "are in business for the long haul and our relationships tend to be long-standing."

He adds that "good levels of down payments on good equipment collateral" can help the company to work with lessees "in times of genuine difficulty".

Looking forward, the future seems, if not bright, then not too overcast either. Nixon expects to grow business in the sector, but expects "steady growth rather than anything dramatic", while Layan predicts a "more delicate year" for 2013.

He says this will be due to the "double effect of the difficult weather conditions at the beginning of the year and the persistent unfavourable business climate in Southern Europe."

Indeed, according to BNP Paribas’s observations, the French market is continuing to grow, albeit slowly, whereas Germany’s market, while still close to historic high levels, is "slightly decreasing" and the Latin countries are "down to very low levels and should not contract" any further. Poland is also down, suffering from a halt in European subsidies.

Rawlings thinks the Western European market, while steady, is mature, and sees Eastern Europe as an area with great potential. "One only has to look at the size and potential of the Russian or Ukrainian farming territories to realise that it is significant," he says.

Another factor influencing agricultural equipment leasing is the renegotiation of the CAP, with an agreement reached in June 2013, due to come into effect on 1 January 2014 and last until 2020.

Rawlings says: "Every farming sector is different so it’s hard to generalise except to say that other issues such as uncertainty over the CAP reforms and over commodity pricing would be high on the agenda of the sector, as well as opportunities provided in the area of renewable energy."

Layan says it’s too early to assess, but BNP Paribas thinks it should be a "smooth transition" as the CAP budget is "down by 7.3% for the six years to come, compared to the period 2007-2013".

The great unknown is the weather, with climate change possibly having as yet unknown effects on the sector.

Layan states that "more and more unpredictable climate conditions" may be the most significant issue affecting the sector, and links it to "the volatility of output prices".

Rawlings calls the weather "the most significant" factor, with weather patterns becoming "even more uncertain and unreliable than before".

He highlights the case of severe drought in Russia and Ukraine leading to a drop in exports and impacting wheat futures, or of wet weather last year creating planting and harvesting difficulties for UK farmers.

Ultimately, there is a possibility that this could impact yields and cash flow, reducing investment appetite, and possibly affecting the ability to pay.

Layan says a positive trend for business will be the "ongoing concentration of the sector", coupled with "the introduction of new emissions standards" which should see provision of farm equipment continue to grow.

Soft landing

Aside from monitoring the effects of the new CAP and the competitiveness of European agriculture, Layan says the industry expects a soft landing in 2013 and 2014, following two to three years of sustained growth.

He expects the market "should be flat to down next year", but that is "a rather normal situation" after a growth period.

Rawlings agrees, saying: "Expectations are for a relatively flat market in the next 18 months, but again so much is dependent on factors such as weather patterns and the price of commodities."

He believes the farm business is constantly evolving "and this, along with changes in farm infrastructure and diversification will continue to provide opportunities to lenders".

Ultimately, many "opportunities are there as farmers cast their eyes to the future and to protecting their longevity".

The indispensable nature of farming means it has weathered the recent financial storm better than many industries, while facing its own climatic challenges.

Now continued technological changes, driven by emissions requirements and production pressures, mean the future will be sunny for lessors serving the sector.