Farm Ireland
Independent.ie

Sunday 11 December 2016

Take a deep breath and stop stressing about your finances

Despite recent high profile cases, debt should not be an issue for the majority of farmers

Mike Brady

Published 04/05/2016 | 02:30

The majority of farmers are worrying unnecessarily about banks.
The majority of farmers are worrying unnecessarily about banks.

Farmers throughout the country are currently asking lots of questions about banks. Recent media coverage of loan sales, tactics by some sub-prime lenders and high profile repossessions have forced farmers to think about their own situations.

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The wall to wall coverage combined with poor weather, rock bottom commodity prices for milk, corn and pork have created an uneasiness amongst farmers. Should farmers be worried or not?

There is absolutely no need for the vast majority of farmers to worry about their financial situations in Ireland.

Worrying about the price of milk or the weather is frankly a meaningless exercise as one cannot change either. A farmer with a cashflow problem is better off dealing with it rather than worrying about it, there is a solution to every problem big or small.

National Level

The big picture according to the Central Bank is that Agriculture accounted for almost 19pc or €649m of credit advanced to Irish small and medium sized enterprises in 2015. Agricultural lending is firmly back in fashion since the end of the economic boom, all three of the main banks Allied Irish Bank, Bank of Ireland and Ulster Bank are active in the agricultural market and lending to farmers.

They have employed agricultural graduates to better understand farmer needs and their applications for finance.

Immediately after the property crash in 2008 all of the banks set up bad debt resolution departments or 'bad bank departments'.

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These initially dealt with the big money property loans in excess of €10m who were mostly in negative equity ie loans were greater than the value of the property held as security, there were very few farmers involved in this process, more recently theses departments are dealing with smaller loans of under €3m.

A small number of farmers have ended up in these 'bad bank departments' having purchased expensive residential/commercial property or land during the boom. Many of these cases have been resolved or are presently being resolved, so much so that these bad bank departments are being closed or amalgamated in most of the banks.

These cases tend to get much more publicity than their numbers would support.

The reality is that Irish farmers have greatly reduced their level of bank debt since 2009. Irish agri-lending peaked at €5.2bn in Q1 of 2009 and has steadily fallen to less than €3.2bn by Q4 of 2015.

The peak in bank lending happened when farmers borrowed to fund farm buildings done under the very popular Farm Improvement scheme and Dairy Hygiene grant schemes in 2007/2008.

The reduction in lending since is quite spectacular especially given the reputed massive investment going into dairy expansion.

Putting the €3.2bn of current agri-lending into perspective is interesting when one compares this level of bank debt with that of large property developers.

A number of the top 10 property developers in the 2007 had individual bank borrowings in the region of €2bn each, two of them would have had the same bank borrowings as all the farmers in Ireland added together.

Another interesting comparison is to look at the ratio of debt to equity or assets.

When applying for a mortgage to buy a house in Ireland today you must have a 20pc deposit, therefore your mortgage or debt will be 80pc of the value of the house.

If one adds up the value of all Irish farmers land, buildings, livestock and machinery it would come to €78bn and compare that to the level of bank and trade creditor debt of €3.7bn, the comparable debt to equity ratio is only 4.7pc.

Farm level

Even though Irish farmers as a whole are not heavily borrowed of course some individual farmers have high levels of bank debt.

Low commodity prices like the current price of milk will exacerbate a deficit of cash to meet all financial commitments in a bad year.

In fact many smaller dairy farms with no bank debt and a small Basic Payment Scheme entitlement will not make enough cash to meet personal drawings at a base milk price 22c/l, a price some of the banks are requesting as a base for 2016 cashflow budgets.

So how does one kill the worry of not being able to feed your family or meet your bank repayments?

The answer is simple, do not ignore it and hope it will improve or go away, DEAL WITH IT.

Firstly get your 2015 financial accounts done, then do a farm business plan or cash flow budget for 2016 to see if you have a deficit of funds ie not enough cash generated to meet all financial commitments.

It is important to be realistic when doing the projections for 2016, perhaps one should even be a little pessimistic, do not assume the milk price will rise at the backend of the year or that you will cut feed fed by 100kgs a cow, in fact assume it will not happen.

It is better to over perform rather than over budget.

When you have established your position you must then set about dealing with the problem as soon as possible.

Some farmers have cash reserves in a deposit account to fund a deficit of cash, others have enough space in their current account overdraft facility to cover the bad year.

Most will need to speak to their bank about getting an interest only repayment schedule or in some cases even a holiday from bank repayments altogether for a period of time.

Of course there will be some who have a more serious cancer in their business which will need surgery but these are few and far between, there is a solution to every problem.

I find the mere fact of talking about it helps every farm family it is never as bad as it appears inside your head, a problem shared is a problem halved.

The majority of farmers are worrying unnecessarily about banks in the current climate, assess your financial position, stop worrying and deal with it.

Mike Brady is an agricultural consultant and managing director of the Brady Group - email: mike@bradygroup.ie

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