With profitability on Irish dairy farms in 2025 set to be very positive, many farmers are considering how to best invest their money in the coming months.

Debt is a major area of concern for many farmers and the idea of paying it down quickly is something that many like the idea of.

At a recent Teagasc event, Liam Phelan of AIB stated that he receives questions in relation to debt worry on a daily basis.

ADVERTISEMENT

He said that in his experience, Irish farmers “just don’t like the idea of debt hanging over the business and the majority wish to pay it off as quickly as possible”.

In this piece, the Irish Farmers Journal is looking at the pros and cons of debt repayment to the business and whether it should take priority over alternative investments.

Insulating

It’s worth noting that before a business makes any investment decision, they must prioritise insulating the business from volatility first.

Building up some level of cash reserve is an essential component of protecting the business and should be prioritised over debt repayment or most other investments.

Teagasc recommends having a cash reserve of at least €300 to €500 per cow before considering alternative investments opportunities.

This cash reserve can bridge the gap should the business come under pressure in future years. These pressures may come on the back of a lower milk price, input prices rising or a potential disease issue such as TB.

In a case where this cash reserve is already in place, it might be time to look at debt repayment. A major consideration when deciding whether or not this is a good option will significantly depend on the interest rate of the debt.

If the interest rates of the borrowings are high - let’s say 6% - there are advantages to paying this back quickly. However, if the interest rates are lower at 3% or 4%, money might be better invested elsewhere.

Productive assets should always be the first port of call when investing. These are areas such as soil fertility, grazing infrastructure, reseeding or in the herd itself through genetics and breeding. Developing these areas can have significant return on investment, often well above 10%.

If investment in some of these productive assets will offer a return higher than the interest rates being paid, you are better off investing in those first.

In the scenario that these productive assets are maximised, let’s look at some of the savings that can be made from paying down debt at a faster rate.

Savings

Making an additional contribution to debt repayment works by reducing the principal amount of the debt. In turn this saves money in interest, as the farmer won’t be paying back the debt for as long.

The earlier in the term that the additional contribution is made, the more money will be saved.

Take an example of a farmer with a loan to the value of €200,000. Let’s say the loan was taken out for building a parlour a number of years ago. The term of the loan repayments is for 10 years and an interest rate of 6%.

Table 1 compares three scenarios for the farmer.

Scenario A is one where the loan repayments are left as they are and repaid over the 10-year term.

Scenario B looks at the same loan, except this time there is a lump sum payment made after three years to the value of €50,000. This reduces the repayment term from 10 years to seven years and saves approximately €18,883 in interest repayments.

Scenario C also looks at making an additional contribution of €50,000. However, this time the payment is made at the end of the fifth year of repayments. The term of the loan is reduced to seven years and eight months and the interest saved is €12,171.

The decision

The decision to pay down debt will depend on the individual scenario and the attitude of the farmer to debt.

If a farmer is considering this as an option, it makes more financial sense if the loan is at year three of the term than a loan that’s already at year five, as the interest savings are going to be less by year five.

A return on investment calculation of this financial decision shows a return of 4.6% per year by paying the lump sum after three years and a 4.4% return by paying the lump sum after five years.

While this return is not insignificant, it is relatively small compared to alternative investment opportunities in productive assets.

Understandably though, a person may feel more comfortable with the thought of less debt, particularly if they’re looking to borrow again in the next number of years.