As borne out by the recent Teagasc report that was supported by Bank of Ireland on the financial status of Irish farms, there is a history of modest levels of on farm debt (3%) in Ireland, driven in part at least by the family farming model, which has seen farms gifted from one generation to the next without significant financial considerations. Grant aid for farm development has also supported on-farm improvements and capital investment without the necessity for long-term borrowings.

For Irish farmers who are planning to expand either the size of their farms or their stock, the fact that they have modest current borrowings will likely be to their advantage. The agri sector has always had a strong repayment track record, a large consideration when it comes to assessing loan requests.

Lending decisions made by banks are based primarily on cashflow analysis and the customer’s ability to repay whatever borrowings are proposed. The availability of lands to secure borrowings and the extent of a customer’s own equity contribution to a loan request are also considerations, with the analysis of projected repayment ability remaining the most critical factor. In many instances, farmers will have invested heavily in their farms from cashflow in recent years and the bank may recognise that investment as the equity contribution where confirmation of this investment is made available to the bank.

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Cost of credit

Credit, like all other inputs, carries a cost. Therefore, the more highly borrowed a farmer is, the greater the annual cost of servicing that borrowing will be.

At Bank of Ireland, our focus is to lend on a sustainable basis and support our farmer customers’ growth ambitions where they are based on reasonable cashflow projections, and where there is evidence of the ability to repay borrowings over an agreed loan term. Taking a medium-term view of the prospects for agricultural commodity prices, Irish farmers will have competitive advantage over international competitors in the cost of many critical inputs, including financial costs linked to lower debt levels.

Lowly borrowed farmers are typically best placed to withstand the reduced prices indicative of a commodity supply/demand imbalance. Sustainable and responsible levels of bank debt will be necessary to support the growth of the sector. However, the increasing instances and severity of commodity market volatility dictates that planned repayment schedules may need to be reviewed throughout the course of a customer’s planned debt repayment schedule.

Even though a bank may be comfortable about a customer’s viability in the long term, it is in everybody’s interest, including the banks, to provide short-term support or look to restructuring the debt where it is needed.

During periods of high commodity prices, farmers also have the option of saving surplus cashflow which can be called upon when needed to support loan repayments, or of paying down their debt ahead of schedule when they have funds available to do so.

Greater market volatility and increasing levels of farm debt should prompt farmers to place more emphasis on financial plans that can be adjusted to take short-term changes in input and output prices into consideration. Having a plan in place will make it easier for farmers and their banks to make the adjustments necessary to support them during times of cashflow volatility.

Outlook

In overall terms, our outlook for agricultural commodities is positive and we believe that prices will continue to increase over the next five to 10 years. However, this increase will not be linear and there will be peaks and troughs, which we will need to work through with our farming customers.