Banks issue loan caution warning to dairy sector

Farmers are being advised to exercise more caution on borrowings.
Farmers are being advised to exercise more caution on borrowings.

Martin Ryan

Financial institutions are urging farmers to exercise more caution on borrowings amid concerns of overheating in the dairy sector as it gears up for expansion.

Projected income from milk, as well as land values, are being discounted by 30pc as part of far stricter repayment capacity stress-tests which are being carried out by banks. The tests are being ratcheted up during the loan approval process to make farm loans more secure.

Representatives from each of the main banks told farmers at a North Tipperary IFA seminar in Nenagh last week that they were very concerned about the scale of some plans being presented for loan approval.

AIB, Bank of Ireland, and Ulster Bank officials all stressed that they were still "open for farm business" and keen to fund cost -effective expansion plans for good farmers. However, they all insisted that farmers needed to examine their efficiencies before deciding to expand.

Bank of Ireland's Pat Byrne said that bankers did not want to see farmers running into financial difficulty.

"Know why you want to expand and know what you expect the results to be in five years. If there is no extra money in it then why are you doing it?" he asked the audience.

"Going from 80 cows to 150 cows is poles apart in terms of the management skills required and you will probably have more money in your pocket if you went part of the way rather than taking that leap," he added.

"Back in 2009, the farmer milking the most cows in a high-cost system lost the most money. How will you manage in that situation, since it is not a case of if, but when that happens again?," he warned.

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Mr Bryne said that it should be more about the efficiency rather than the numbers of cows a farmer was milking.

Ulster Bank's Ann-marie Butler said she had seen a lot of stress on farms in recent months.

"Some farmers won't discuss their business at home because their wives or partners are not aware how serious it is," she claimed. She said that some planning expansion in dairying were budgeting on a milk price of 42-43c/l, but the bank was basing assessment on 28c/l and stress testing the borrowing capacity of the farm on that basis.

AIB's Pat O'Meara said that taxation had become a bigger issue for many farmers because they had used up their allowances.

He added that the bank had €500m earmarked for the agri sector, but applications had to be realistic, with loans for land purchase being capped at 70pc of the land's market value.

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