Against a backdrop of weak commodity markets 2016 is shaping up to be one of the most challenging years for farm incomes in many years.

It is in this context that perhaps our biggest competitive advantage may not be our low-cost, grass-based production system, but in fact our relatively low level of borrowing per farmer compared with our global competitors. The latest Irish Central Bank figures show that at the end of September 2015, outstanding debt on Irish farms had reduced by an average of 9% over the four previous quarters. At €3.3bn, farmers have in effect paid down €340m of debt over the 12-month period. Interestingly, since the financial crisis, farm debt has been reduced by almost €2bn, while over the same period the value of Irish food exports increased by almost 40% to €10.8bn in 2015.

Of course, the reduction in farm debt does not mean investment has ground to a halt. During the 12-month period to the end of September 2015, €643m was forwarded to farmers in new and restructured loans – a €43m increase on 2014 levels and almost €100m more than in 2011.

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What has been happening over the past number of years is that Irish farmers have been paying down debt at a faster rate than drawing it down. What makes this even more impressive is that they have managed to do so at the same time as we have seen huge growth in the dairy sector. Last year, dairy output increased 13%, with most of the increase due to extra cows.

Funding expansion through cashflow while at the same time paying down debt is possible when market prices are high. However, the sustainability of the funding model has to be questioned in an environment where market swings can lead to severe volatility in farm incomes. Instead of building cash reserves, farmers have pumped surplus cash, generated after three relatively good years, into growing output. Such a funding strategy clearly has the potential to put severe pressure on farm finances as we head into a difficult year.

Unfortunately, the banking sector helped drive farmers towards this high-risk model of funding due to the extent of interest rate spread between deposit accounts and the cost of credit. As Eoin Lowry reports in our special Focus supplement, the interest rate spread in Ireland is twice that of other EU member states. It is little wonder that our pillar banks have spectacularly returned to profitability. Last year, Bank of Ireland made a profit of €4m every day for the first six months, reflecting trading margins of 2.2%.

Lower incomes

As we head into a period of lower farm incomes, banks must recognise the extent to which the farm business has generated free cash over the past five years. It must not merely rely on cash deposits as an indicator of repayment capacity. Given the role that banks have played in encouraging farmers to deplete cash reserves, there should also be a commitment to finance buildings and development work that has been done from cashflow over the past few years.

Long term, there is clearly a need to address the lack of sustainable finance options available to farmers. With co-ops in a position to secure funds for as low as 2%, the opportunity to establish a competitive farm finance model exists along with innovative repayment models.

These agribusinesses and indeed the banks financing their operations should not lose sight of the fact that their business model is based on a profitable farming base. We welcome reports that Glanbia is at an advanced stage of developing a farm finance model.