A borrowing limit €2,000 per cow should be farmers' target
Published 27/11/2013 | 01:00
Banks are giving money out to dairy farmers. By and large they will get the bulk of it back. Banks don't want to be lending money to clients where the account turns sour. Loans not performing eat up a sizable amount of time that could be put to better use I would imagine.
But with the best will in the world, things will go wrong. Animal disease, milk price drop and events like the recent fodder crisis can all result in less money coming onto the farm compared to projections.
High borrowings per cow can be a nightmare when this happens and while you may have been making repayments in the good times, a sudden shock to the system may result in you struggling to meet both principle and interest payments.
Your farm accounts may suggest you are making good money but the profit and loss account only includes bank interest. It doesn't include the principle part of the loan and it is the payment of this that can cause cash flow problems.
Previously, some banks gave out money based on the amount of milk quota attached to the farm. A figure of €4 for every one gallon of milk quota owned was a widely used yardstick. So, a milk quota of 50,000 gallons would attract a loan of €200,000.
Fifty cows would have no bother filling a milk quota of 50,000 gallons. If this was the yardstick used then this farmer would have borrowings per cow of €4,000. To me a farmer who is borrowed to the tune of €4,000/cow is very, very heavily borrowed.
If the €200,000 is borrowed over 10 years at an interest payment of 6pc, and the loan is paid every quarter out of the milk cheque, the yearly payment is €26,800. That's €6,700 each quarter.