Farming

Wednesday 20 August 2014

Banks rediscover love of solid but dull agri-sector

Darragh McCullough

Published 17/10/2013 | 04:00

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'You couldn't walk a yard without hearing a fellow giving out about being turned down for a bank loan." This was a typical comment at agricultural shows in recent years – until this year, that is.

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Several observers noted how little conversation the banks were generating at the Ploughing Championships this year. That's a good sign.

When the crunch came in 2008, every business was indiscriminately caught up in the paralysis that subsequently struck the banks.

Solid agri-enterprises that had long-standing relationships with their bankers suddenly found their overdraft facilities being slashed and interminable delays in getting loans approved.

Of course, farms were being treated no worse than any other business.

There was also a small bubble of borrowing to be washed out of the agri-sector.

The massive Farm Waste Management scheme that grant-aided a shed-building spree to the tune of 40pc led to a 25pc spike in overall borrowing in the sector for four short years. That has now fallen back to €4.5bn, according to the Central Bank.

But the check in activity is much less pronounced than that in almost every other sector.

Recent figures from the Economic and Social Research Institute (ESRI) show that while lending to the agri-sector has fallen by 12pc since 2010, the equivalent figure for hotels, construction, retail, transport and professional services are all multiples of this value. Only manufacturing, with a fall of 7pc, had a lower value than agriculture.

At least part of the reason for this is the general ramping up of the value and volume of output from Irish farms in the last few years. Booming food commodity prices are encouraging farmers to invest.

Banks have suddenly rediscovered their love of the solid, if slightly dull, assets that underpin the sector.

ESRI research shows that the agri-sector had the lowest rate of credit refusal, compared to any other.

Indeed, it appears that farmers are enjoying some of the cosiest arrangements going in terms of their financing facilities. They paid the lowest rates of interest at an average 3.7pc, compared to 5.9pc for professional services, according to the ESRI report.

"We suspect that this is due to the abundance of collateral these firms can offer as security in the form of both farmland and equipment as well as to the availability of risk-free income streams through EU subsidy supports," commented the ESRI researchers.

The average farm loan currently stands at €78,000, but in reality a huge proportion of farms have no borrowings at all. It is only the intensive pig, poultry, cereal, fruit and vegetable growers along with dairy and a handful of beef farmers that have the cashflows to allow any form of regular borrowing.

The dairy sector is the one that interests the banks most at the moment, with 18,000 operators, most of whom are viable operations with one eye on expansion when quotas go in 2015.

Bankers know that indebtedness on most dairy farms is relatively low. A good farmer can handle borrowings of €4,000 per cow. In other dairy nations, both inside and outside the EU, the figure is often a multiple of this.

So the Irish dairy farmer is a good bet. He's the guy out there buying land at €10,000 an acre and securing loans at interest rates of 3.7pc.

There is some concern about a possible dairy bubble forming on the back of the record prices that farmers are getting for their milk at the moment.

The only hope is that our bankers have learned their lessons from the last party.

Irish Independent

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