A borrowing limit €2,000 per cow should be farmers' target
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.
That's a lot of money before drawings, tax and pension are paid. The total principle and interest alone on the 200,000 litres equates to 13.4c/l (3.4c/l of interest and 10c/l of principle).
The above might seem like an extreme case, but I have met a number of farmers who borrowed to the tune of €4,000 per cow and the fodder crisis of this year and the weather of 2012 put them under enormous pressure. It's only when you sit around the kitchen table with the bank manager and discuss the next six months that the enormity of the problem sinks in.
Usually in financial problem cases more money needs to be spent to bring the farm up to scratch. This cash isn't available, so production isn't maximised, receipts don't rise fast enough and the whole vicious circle keeps going on its depressing way.
Admittedly, there are farmers surviving and expanding at €4,000/cow. But they are technically very good with decent soils. I have even seen some borrowed up to €6,000 per cow, but that's not for the faint-hearted.
How does one access repayment capacity? Yes, there is a loan repayment template that Teagasc advisors use, but in my view the key here is the person borrowing the money. Before any banker gives out money, he/she should walk every inch of the farm, look at the infrastructure, the paddock layout, the buildings, the stock, the ICBF report and have a long chat with the potential loan holder.
Some dairy farmers should have no bank borrowings, even €500 per cow. Most should be able to handle €2,000 per cow, but when the figure begins to creep up to €3,000 per cow, alarm bells should start to ring.
At €4,000 per cow, other people providing services to the farmer such as vets and contractors end up waiting for their money in the event of a shock to the system. Generally, the milk processor takes its slice of the milk cheque before the farmer is paid. The vet and contractor must wait and hope for the best. Don't put yourself into that situation. Leave a decent safety margin and if you want a good reason why you should do this, ask yourself how you survived the first five months of 2013.
John Donworth is a Teagasc dairy specialist and regional manager in Kerry and Limerick.