Seán Farrell, head of agriculture with Bank of Ireland, has told the Irish Farmers Journal that despite the rise in commodity prices, the bank is not seeing an increase in debt being paid down.

“Farmers continue to pay down their loans in line with the originally agreed repayment schedules,” says Farrell, adding that any surplus cash is being used to create a buffer.

However, the bank is now seeing more farmers using available surplus funds to invest in new farm buildings, livestock and infrastructure.

Dairying is the sector from which we are seeing the greatest demand and it is mainly for farm development

He says around 70% of overall farm development costs use bank loans with the balance coming from cash that has built up in the business.

He says the bank includes increases in livestock numbers as part of the investment and that typically is what is funded from cashflow.

“We saw a very significant increase in the number of loans approved and drawn down in the first six months of the year driven by the Government’s low-cost loan scheme,” according to Farrell.

He adds that “it does appear that some farmers chose to borrow earlier in the year to avail of the attractive interest rate on offer”.

Most farms in Ireland continue to be debt-free, with just over one-third (35%) of farms having borrowings. Of those farms with debt, the average level of farm borrowings is around €60,000.

Tillage and dairy farms have higher than average debt levels of around €80,000 and €100,000 respectively because of the need for tillage farmers to keep their machinery updated and the increased investment on dairy farms to support the growth in milk production.

Typically, farmers who are borrowing to fund a gradual increase in farm production are applying for loans over a five- to 10-year period, according to Farrell.

He says those farmers who want to grow more than 30% within one to two years tend to prefer to look for terms up to 15 years. He also says that younger farmers tend to structure their loans over longer terms than older farmers.

Cashflow crisis

To date, the bank has seen limited impact of any fodder shortage on farm cashflow and loan requests from customers, says Farrell.

He expects that they may see an increase in requests for working capital support in the new year as farmers look to supplement their remaining feed stocks with additional purchased fodder.

Dairying growth

“Dairying is the sector from which we are seeing the greatest demand and it is mainly for farm development,” according to Farrell.

He says that while average debt levels per dairy farm are increasing, so too is average production per farm, so the level of borrowings per litre of output has fallen in the past year.

He notes due to the favourable milk prices, dairy farmers have invested heavily from cashflow this year. This he says has generated surplus funds which have been invested in farm buildings and infrastructural improvements.

He warns that funding long–term dairy investment projects from cashflow does carry the risk that if milk prices fall, existing overdraft facilities may not be sufficient to meet working capital expenses on some farms.

If this does happen, he adds that one potential solution is that farmers can borrow retrospectively for the capital investment completed and use the loan proceeds to replace the funds originally invested from cashflow.

He says: “We are seeing very few farms with cashflow difficulties at the moment and where we are encountering cases, it is typically because of investment in farm buildings, machinery or infrastructure that has been funded from cash without sufficient accompanying loan funding.”

Expanding farms typically take a couple of years to realise their potential.

His advice to any farmer considering expansion is to complete a business plan with cashflow projections. He says cashflow budgets which are regularly reviewed are critical to support expanding businesses and dairy farms are no different in that regard.

Bank of Ireland loaned around €65m through the Government’s low cost loan scheme.

Farrell said that while a follow-on scheme for farmers was mentioned in the recent budget the bank has yet to see the detail of how this will be structured.

He says given the popularity of this year’s low cost loan scheme that the bank will definitely engage further with SBCI and will look to pass on any financial advantage that will be available from a 2018 scheme to our customers.

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