Agri-finance – is it time for another way?

As we enter into the final 12 months under a milk quota regime, never before has there been such optimism and opportunity. Banks, the pillars of a functioning industry, remain fragile and there is a need for solid foundations to support an industry poised for growth.

The banking system in Ireland has continued to contract, reflecting the ongoing deleveraging efforts by the Irish-owned credit institutions, as well as the wider retrenchment of all banks to their domestic markets. And even though the market sentiment towards Ireland continues to improve, new lending continues to be depressed.

In March 2007, the agri-banking market was worth €4.3bn and peaked in March 2009 at €5.2bn.

The latest set of figures from the CSO shows that outstanding amounts have reduced in the last 12 months, by €15m to €3.8bn.

This shows that, over the past four years, farmers have been paying down debt at a greater rate than taking it on. While agriculture accounted for over one quarter of all new loans to SMEs in 2013, the sector still repaid over 4% of outstanding borrowings in 2013. While the figures show that new lending increased by €8m to €173m in December 2012, this includes restructured loans and is not necessarily new money.

With farmers paying down debt when they have surplus cash, banks must appreciate this attitude to risk and recognise the prudent way in which farmers run their businesses. This is something which clearly was not evident during the boom years in other sectors.

With all banks saying they have the capacity to meet the needs, and with foreign-owned banks exiting the market, there is a wall of credit to be filled. Farming has always been a good borrower and we don’t want a disconnect of a desire to lend money at the top with the disability on the ground. Banks don’t make money by saying no, but we do need a careful yes.

It is no wonder that new lending patterns in the form of peer-to-peer lending and crowd-source funding are gaining pace, as Peter Young outlines on pages 6 and 7. Although this is not regulated, it can be an option when smaller amounts are required.

Farmer banks

When the Agricultural Credit Corporation (ACC) was founded by the Irish Government in 1927, it was set up specifically to finance the Irish agriculture industry.

Twelve years ago, the Government sold it to Dutch lender Rabobank for what now seems a paltry €165m. ACC, although effectively gone, will close for business at the end of May.

In the Netherlands, where farms are more highly geared, Rabobank was founded over 115 years ago by enterprising individuals who had no access to the capital market.

Today, it comprises 141 independent local Rabobanks. The hub organisation owned by the local banks, Rabobank Nederland, services their needs and owns a number of specialist subsidiaries. Rabobank, traditionally the farmers’ bank, still holds an 85% market share in the agriculture sector in the Netherlands.

In Canada, Farm Credit Canada (FCC) is the country’s largest agricultural lender. Although once exclusively a farm lender, FCC is now also organised to provide funding to enterprises that are closely related or dependent on farming. The directors are appointed by the Minister of Agriculture.

FCC, now in its 50th year, has a loan portfolio of over $16bn with 1,300 employees across Canada.

In the US, the Farm Credit system operates through a co-operative structure. It was established in 1916 as a government-sponsored enterprise to provide a reliable source of credit for farmers. Today, it provides more than $199bn in loans to farmers, agribusinesses and agricultural co-operatives. It has assets in excess of $260bn, nearly 500,000 member-borrowers and 13,000 employees. The system raises finance on the capital markets for lending through its network of subsidiaries as it does not take in money from farmers as savings or deposits.

With the agri-food industry in expansionary mode and with food and drink exports touching €10bn, it is essential that we have banks willing to lend capital at a competitive rate. As the banks focus on driving profits and growth, agriculture with its proven track record will continue to be one of the safest sectors in which to invest.