Advice for dairy farms on accessing finance for growth

Resilience is the capacity to withstand and recover quickly from difficulty.

Greg Ricketts, farm business consultant at GSC Grays, believes such toughness will be a prerequisite for farmers, because he predicts milk price volatility will continue for the next 15 years.

To be resilient, he says businesses will need to ensure their average cost of production is below the average milk price.

See also: How to transform dairy farming passion into financial success

Yet the gap between the best- and worst-performing farms is significant.

He points to AHDB figures from 2024 that show dairy farm profits ranged from £42,800 to £169,300 – a difference of £126,500.

Greg says the best-performing businesses are in the position to access finance to grow and develop.

“Farm business resilience and lending capacity go hand in hand. And the relationship between profit and cash is critical for a business.”

Profit versus cash

He explains profit and cash are “very different”. For example, if a family dairy business producing 2m litres of milk makes a profit of £180,000, he says this equates to a 9p/litre profit.

He says “£180,000 sounds great”, but this “quickly disappears” after tax, drawings and capital repayments to leave a cash surplus of 0.2p/litre (see “Profit versus cash: where does the profit go?”).

“A successful business must generate a cashflow surplus,” he stresses.

Equity

Greg says a good debt-to-asset ratio is 60%, and businesses with just 50% equity are less resilient because their liabilities are higher.

“Businesses that are more resilient, because they are more profitable and have a strong equity, will find accessing finance for growth, development and new opportunities much easier,” he advises.

Accessing finance – what are banks looking for?

Adam White, head of agriculture at Barclays, says finances are still a key assessment requirement for banks when lending.

However, he explains that banks now think more strategically.

“Traditionally, the three things a bank will look at are financials, collateral and forecasts,” he explains.

1. Finances How is the business performing? What is the profit and cost of production? And, most importantly, what is the profit after repaying borrowing?
2. Assets What assets are available to secure that lending against? Is it farmland, buildings or stock?
3. Forecasts Businesses change over time, so what is the financial forecast?

Banks are also giving increasing consideration to new areas. These include:

• The core farming business
• Diversification
• Sustainable Farming Incentive (SFI) (when available)
• Sustainability
• New and emerging markets.

“We see a huge amount of diversification into other sectors,” Adam explains.

“That could be bringing in arable land to offset feed costs.

“Over the past five years, a number of farms have gone into leisure, retail and residential. What’s the right thing for your region and you?”

He says it is important for farmers who want to diversify to show the costs and risks associated with that change.

He also encourages them to speak to professionals, engage with other farmers and attend events to generate new ideas and determine if current practices are effective.

He says banks are also examining how engaged farmers are with SFI to make up for the BPS shortfall.

“Have you got a forward look in terms of how it might be replaced, the sort of costs SFI may cover?” he asks.

Adam also encourages farmers to “get ahead” on sustainability by talking to dairy processors to understand future requirements.

“Good practice is generally sustainable, and I see large units that engage closely with their supply chain early on and turn that into profit.”

He adds that biodiversity net gain is a new and emerging market but urges farmers to seek professional advice.

“That market is growing, adapting and maturing.

“Get involved with a professional who understands some of the complexities of engaging with biodiversity net gain markets [house developers] and understand if that’s something that fits your farm.”

But he stresses farmers must baseline carbon emissions first to capitalise on these new markets.

“If you’re not measuring, you’re not going to be able to capture those benefits in future years,” he says.

Greg Ricketts and Adam White were speaking at the recent Dairy-Tech event