Farmers shun debt, but savvy borrowing can unlock success

Farming enterprises are just like any other business with the same investment and working capital needs. Farmers need to continuously invest in machinery, stock, land management, farm buildings and so on. And the question facing many of them is how these investments should be financed. The seemingly obvious answer is through borrowings, but Irish farmers have traditionally shied away from taking on too much debt.

It is little surprise then that the overall level of farm indebtedness in Ireland is quite low. “To put it in context, only a third of Irish farmers have debt,” says Eoin Lowry, head of agri with Bank of Ireland. “The sector has a very low gearing compared to other sectors. The average level of indebtedness of Irish farmers is only €65,000. Yes, there has been huge expansion in recent years, but the majority of the investment has been paid for through cashflow. For the majority of farmers, dairy in particular, it has been a very profitable business in recent years. Farmers were in good shape coming into Covid and were in a strong position with lots of financing options.”

He notes farmers’ relative reluctance to borrow. “Farmers are not comfortable holding large amounts of debt and they try to pay down debt as quickly as possible. In a low-interest rate environment, you could argue that is not a good idea. But farmers remember when interest rates were high, and they want to de-risk their businesses.”

That discomfort with debt has its roots in the cyclicality of the agriculture sector. “Farmers are price takers in a low margin business,” Lowry explains. “It goes back to the volatility which is a prevalent feature of agri commodity prices. In times of high prices like now, everything is going well. Farmers don’t want to be exposed when the cycle turns, and prices fall. That’s why when we are assessing a loan application, we look at three to five year average profitability. That protects the farmer and the bank.”

AIB head of agri Donal Whelton agrees with that assessment. “It’s in Irish farmers’ DNA to clear debt as quickly as possible,” he points out. “But they should take loans out for as long as possible when the business is generating cash. Business investment is not the same as personal debt.”

According to Whelton, farmers should take a view of the nature of the asset being financed and the likely timeframe for a return on the investment when considering financing options.

“Farmers often want to pay loans off as quickly as possible, but volatility is a feature of Irish agriculture. Only in 2018 we had a nationwide drought or individual farmers may experience a disease outbreak. Farmers should take loans for the longest period they can get with a variable rate. They can always speed up the repayments later. The last thing you want to do is have to extend a loan because you have overpromised and underdelivered. And if take a loan out for too short a period the repayments will eat up cashflow.”

Financing the spending with debt also allows time for the investment to pay off. “The real benefit of investment in expansion doesn’t become apparent for about three years,” says Whelton. “It’s important for farmers not to let drift happen in their existing farm business during that period. They can’t take their eye off the ball when it comes to things like net margin per hectare or per cow.”

Working capital

The term of the loan should be matched to the nature of the asset. Both AIB and Bank of Ireland offer terms of up to 20 years for land purchase, 15 years for infrastructure spending on farm buildings and so on, and seven years for spending on new stock or machinery. Working capital can be funded through traditional overdrafts or invoice discounting products.

Bank of Ireland also has product called Agri Flex which allows farmers to take a capital repayment break of up to 12 months should they experience difficulties in their business. “The product was introduced as a result of the fodder crisis in 2018,” says Lowry. “There are always going to be external factors outside farmers’ control, and we have to support them for the long term.”

The bank also offers unsecured lending of up to €120,000 to farmers. “There is no charge on land or other security sought. The amount is quite high, but we are very comfortable with the sector.”

Whelton advises farmers to seek support from key stakeholders.

“Farmers should make sure they surround themselves with the right people for the business. They should talk to professional advisers like accountants and become part of farmer discussion groups where they can learn from like-minded farmers. Dairy co-op managers are other important sources of advice. Regular engagement with the bank manager is also key. If there is a drop in the milk price or other difficulty, we would like our farming customers to come and talk to us as early as possible so that we can help put appropriate solutions in place for the business. We recognise that it’s not a smooth curve. There are going to be bumps in the road and farmers might need additional support from time to time.”