Facing financial challenges head on

Bank of Ireland’s most recent agriculture outlook report reviewed the past year and looked forward to how 2024 might shape up. Eoin gives a recap of 2023: “Last year was a very difficult period with poor weather conditions affecting agricultural production across all commodities. We know from a milk-producer perspective, milk prices fell severely, as did grain prices. It was a challenging year for farmers overall. Bank of Ireland reflected on the financial implications and what we particularly saw was that after strong years in 2021 and 2022, farmers came into 2023 in a good cash position, with a cash buffer built up, and luckily so. Those buffers were well eaten into during 2023 as commodity prices went down right through the year. One of the main issues that pertained across the year was that input costs, especially fertiliser and feed prices, stayed high. It was only in the second half of 2023 that fertiliser prices began to fall from historic highs. Farm debt levels did reduce in 2023 but so did farm cash reserves in farm accounts.”

There is cash tightness on farms. That needs to be managed

Cash tightness on farms

It has been a long and wet winter, and pressure in various forms has been felt: “A lot of animals were housed early in autumn 2023 and fodder supplies have been under pressure on many farms,” says Eoin. “From a financial perspective, while we anticipate a better year in terms of profitability and income on farms, versus last year, there is cash tightness on farms. That needs to be managed. What that essentially means is that farmers may be looking for some extra working capital. We will be happy to support that need because we know that, in the longer term, farms are sustainable and financially viable. There is an ability to put more cash into farm businesses where it is required.
“Cash reserves may have been used up because of being drawn on to finance infrastructure such as additional slurry storage or the purchase of new machinery. We can retrospectively finance those investments with longer term loans and we are doing that at the moment for many farms. That will free up some cash to pay immediate running costs including feed, fertiliser and, in some cases, fodder purchases.”

Interest-rate trends

It is anticipated that interest rates will continue to stabilise, but Eoin says that the days of low interest rates are over for now. "What the markets are telling us is that European Central Bank interest rates, which have increased 10 times since inflation began to rise, are stabilising. That’s a total rise of around four per cent. Markets are indicating that we are now at that peak level and, over the next six to 12 months, interest rates should start to come back. I do think that the era of low interest rates is over for the foreseeable future.
“From a Bank of Ireland viewpoint, we use our cash deposits, and we have a unique funding model, to ensure that we haven’t had to increase our interest rates to the highest level in the market. Generally, farmers are paying about one per cent higher than they were before interest rates went up. We are in very uncertain times and a lot will depend on when those inflation figures start to come back. At the economy level, all the indications are that inflation has peaked and is retreating at this stage.”

New-project barriers

Eoin speaks about some of the frustrations facing farmers seeking to develop new and existing enterprises: “The dairy sector is very topical especially around the nitrates issue. There is a lot of concern among farmers regarding the future status of nitrates thresholds. And there are questions around how many cows can be stocked, and to what extent it will all impact on farm productivity and profitability? There is a very real lack of defined policy and certainty and that is frustrating farmers and impacting investment confidence on farms. We are seeing our best customers preparing for an era where, potentially, there will be further changes to that Nitrates Derogation. That means it may be lower in future than the current 220kg per hectare. We are still confident about the dairy sector. We are very adamant that farmers need to continually invest in their enterprises and to do so they need banks that are supportive. That means making finance available. What we would like to see is greater clarity around the future policy direction coming from Europe.”

An uncertain future

Eoin agrees that financial planning and investment are very difficult when future regulation change may impact the ability to recover that investment: “It absolutely is difficult. Every individual farm is different and, ultimately, it is up to farmers to decide for themselves, for instance, the true value of slurry and whether there really is good value and return from building additional storage facilities. Will further investment allow more discretion in management practices, and will that deliver a viable return on investment? The reality is that there is inadequate slurry storage on the majority of of farms right now for the livestock currently on those farms.
“The difficulty is that farmers cannot be certain how many livestock their farms will be allowed to carry in the future. And there is no point in investing in assets that may not be required in the future. We are very conscious of that, and we are having discussions with our customers on a case-by-case basis to try and understand and support the future of that farm over the longer term.”