A Government review of the low-cost loan schemes offered to farmers and agribusinesses in the past two years suggests that they are more appropriate for dairy farmers, and reveals that the latest approach adopted since last year amounts to a guarantee scheme without direct Exchequer spending.

Financial instruments may represent an appropriate policy support for profitable dairy farmers

"This paper recommends that (in some cases) financial instruments may represent an appropriate policy support for profitable dairy farmers in light of the lower upfront Exchequer costs compared to direct grant-type funding," the Government's Economic and Evaluation Service concluded. For example, low-cost loans may be beneficial for dairy farmers seeking to make financially viable on-farm investments, they added. "Direct grants and other subsidies are likely to remain an important policy tool for primary agri sectors characterised by low average incomes, e.g. drystock and sheep farmers."

Despite higher interest rates and lower competition between banks than elsewhere in Europe, "there does not appear to be evidence of a significant market failure, particularly for working capital finance," the study found. It lists many avenues available to borrow, including the Milkflex scheme, cashflow finance offered to Glanbia suppliers and the Cultivate loans available from some credit unions.

Brexit targeting

The author suggests that future loan schemes should "include an element of additionality," to verify that taxpayers' money is used to help those who could not otherwise access finance, and are better targeted – for example to businesses most affected by Brexit.

The report also warns of the risks of exposing borrowers to more debt ahead of potential Brexit shocks, and creating "a dependence on State-supported low-cost loan schemes and demands for scheme rollovers".

Subsidy vs guarantee

A key difference has emerged from a comparison of the €150m Agri Cashflow Support Loan Scheme offered to farmers in 2017 and the €300m Brexit Loan Scheme opened this year to non-farming small and medium companies, with 40% reserved for food businesses.

While the terms and conditions of the new loans promised in Budget 2019 are not yet known, the Government appears to be using the guarantee-only approach again

The farm loan scheme included both a 2% subsidy on the interest rate paid from Exchequer and EU funds and a guarantee that the banks would incur only 20% of any losses on defaulting loans.

Meanwhile, the more recent Brexit Loan Scheme provides only the guarantee. This helps bring down interest rates from the 5% market rate to below 4%. "In the event that the losses and administrative costs do not amount to the full Exchequer provision of €23m, the difference will be returned," according to the rules of the scheme.

While the terms and conditions of the new loans promised in Budget 2019 are not yet known, the Government appears to be using the guarantee-only approach again, after Minister for Agriculture Michael Creed said last week that interest rates would be under 5%.

Read more in this week's Irish Farmers Journal.

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