Glanbia Co-op this week launched the Glanbia MilkFlex, a €100m fund to give loans to its milk suppliers. This is the first of its kind in Ireland.

The most innovative element of the loan is the volatility measures for repayments that triggers around milk price. All loans will have a standard term of eight years but can be extended up to 10 years if milk price is poor. This is designed to reduce repayments when farmers’ cashflow needs it most.

Talking to the Irish Farmers Journal, Jim Bergin, CEO of Glanbia Ingredients Ireland (GII), and Sean Molley, director of strategy with GII, said the aim was to tackle what farmers fear most: volatility. It leads on from the company’s fixed-milk price schemes to support suppliers.

“It was clear when we started this process there was no funding product targeted at tackling these issues. We were able to bring this case of market failure in banking to the Ireland Strategic Investment Fund,” said Bergin. While there is a lot of complexity behind the loans, the aim was to have one standard offering to farmers to keep administration costs down.

Volatility measures on repayments that trigger around milk price are designed to reduce repayments when farmers’ cashflow is poor (see Table 1).

The first trigger is when the GII manufacturing milk price falls below 28c/l (including VAT) for three consecutive months. Farmers automatically get a reduction of 50% of repayments and interest for six months. This trigger can occur up to four times during the loan period.

The second trigger is when the GII manufacturing milk price falls below 26c/l (including VAT) for three consecutive months, where it currently sits. If this happens, the farmer makes no loan repayments for six months. This trigger can occur up to twice during the loan period.

There is also a similar trigger for disease outbreaks. If a farmer has a notifiable disease such as TB or Brucellosis that reduces milk production by more than 30% (compared with the same month the previous year) then the farmer does not have to make loan or interest repayment for the following six months.

The final trigger is an upward one – when the GII manufacturing price goes above 34c/l (including VAT) for three consecutive months. In this case, the loan repayment increases by 25% for the six subsequent months.

The loans will have a standard term of eight years, but if all the low milk price triggers are used up the loan can be extended up to a maximum of 10 years.

How much money is available?

The total fund is €100m. Glanbia co-op put in €6m with the other partners – Finance Ireland, Rabobank and the Ireland Strategic Investment Fund – putting in debt or equity.

Finance Ireland will manage all aspects of the fund. It is expected that the fund will be made available in three tranches in 2016, with the first tranche of €50m coming on stream from May 2016.

There is a minimum loan per farmer is €25,000 and the maximum amount is €300,000. There is €2.5m ring-fenced for new entrants starting off in milk. They must have long-term leases in place to secure loans.

The margin is 3.75% over the one-month borrowing rate that is currently at zero. So the current rate is 3.75% but, like any variable rate, it will rise if the Euribor rate increases.

Are there any other costs?

Yes. There is a 1.25% administration feed that is taken directly off the loan. So if a farmer borrows €100,000, the administration charge is €1,250 (1.25%) and they will get €98,750. There is also a fee of €75 per €100,000/year to Glanbia to cover the administration costs and the work carried out over four years setting it up.

The additional costs see the annual percentage rate (APR), which includes all fees around loans, at 4.31% over the eight years. This drops to 4.12% over 10 years, simply because the up-front fees are divided over a longer period. Glanbia says this compares well to similar loans, especially as farmers do not have to put up security.

It is available to all Glanbia milk suppliers?

Yes. All in the Republic of Ireland, but you don’t have to be a co-op member. You do have to sign a milk supply agreement for the term of the loan as part of the process. This would be for eight years and could be extended to 10 if the volatility triggers kick in. Farmers also have to be in Glanbia’s sustainability programme.

What can you apply for?

The business plan can make a case to invest in any investments that increase production, except for land purchase. This means investments for most infrastructure, such as milking parlours, buildings, roadways. It includes pasture improvement, such as reseeding and drainage works.

Stock is also allowed, which is a welcome element. The other area of investment in environmental controls, which Glanbia believes is also a risk to farmers. Glanbia said 35% of the fund can be used to refinance existing debt – either merchant credit or bank borrowing – to help farmers get their funding structure right.

They will also allow you to make a case for the loan for investment made on the farm since March 2014.

Who makes the decision on whether a farmer gets the loan?

Glanbia has clearly structured the partnership so that the company has no decision whatsoever on who gets the loans.

You can understand why. This is the job of Finance Ireland which, along with the two other partners, has set the lending policies. Finance Ireland deal directly with farmers.

Glanbia will be writing to suppliers in April outlining the details and asking them to send an expression of interest directly to Finance Ireland. Finance Ireland will then run workshops for farmers in April/May to explain what is needed for loan applications.

The applications will be dealt with on a first-come, first-served basis, which will create considerable interest as farmers might be concerned that the fund will run out. A lot of emphasis will be based on the business plan and details submitted. This is because there is no security required with the loan, a big positive for farmers.

Farmers will be required to furnish accounts for the last few years, bank statements, stock, details of other loans and any off-farm income. The farmer will also sign a form allowing Glanbia to forward the milk volume and quality.

Finance Ireland will visit every farm before making a final decision. If successful, the farmer will be asked to sign a form allowing the priority of the repayments to be taken out of the milk cheque. Glanbia will not have access to any of the farmer’s financial data.

Are the repayments spread across the year?

No. Glanbia wanted to match repayments to the spring calvers milk supply profile (see Graph 2). This means that 15% of the yearly repayment is taken out of the four biggest milk cheques from May to August.

There will be 10% of the yearly repayment taken in March and April and again in September and October. No repayments will be take out from November to February.