Stephen Cadogan: Credit caution needed to sustain dairy farming boom
Interest rates worldwide are at such low levels now that they can be guaranteed to go to higher levels at some stage during the borrowing terms of expanding dairy farmers.
In the 1980s, when interest rates rose, over-borrowed farmers encountered severe difficulties.
This time round, farmers are the favoured customers of banks, getting 23% of the value of bank loans extended in recent times, with the vast majority of these loans going to dairy farmers.
Farmers are only one in 16 of the population, but are getting nearly one quarter of the funds being advanced by banks.
Farmers are now in the position of those who said yes to the runaway credit offers of the Celtic Tiger years – and many of those boom borrowers would undoubtedly now warn dairy farmers of the risks of careless borrowing.
Not only are borrowing farmers risking over-indebtedness, they are paying over the odds to put themselves in that dangerous position. This was one of the interesting points made by Agriculture Minister Simon Coveney in last week’s Dáil debate on the dairy industry.
“Much of the available loan facilities provided to farmers in Ireland involve an interest repayment rate which is significantly higher than the rate for loan to farmers in other European countries.
“We need to examine this aspect and to ensure sufficient competition in the banking system,” said Minister Coveney, during the debate .
He wants a sustainable dairy industry, and warned that farmers becoming overly indebted is one of the threats to sustainability — along with protecting biodiversity on dairy farms, managing greenhouse gas emissions, and sustaining the fabric of rural Ireland. So indebtedness is up there with climate change as an Irish farming worry.
What’s needed, according to Minister Coveney, is a banking system that is cautious in terms of how it lends to a sector that is planning to expand dramatically.
Already, dairy farmers can see how some of their colleagues are suffering at the hands of banks which are withdrawing from lending in Ireland.
Two of these banks were named in the Dáil debate and accused of restricting dairy expansion, through practices which TDs said merit examination by the Central Bank.
The debate also heard of one very successful dairy farmer, whose family have given their lives to building up a massive business.
“When they sought to transfer some intergenerational loans because the farm was being taken over, they experienced great difficulties,” said Michael Moynihan of Fianna Fáil.
Seeing their colleagues’ difficult dealings with banks – and some facing court demands for payment – is a sobering experience for farmers contemplating big borrowings, and will serve to prevent them from over- extending.
The Dáil debate was sought by Fine Gael TDs John Deasy and Michael Creed, and Mr Creed pointed out that a dairy farmer can expand at any time he chooses — and the prudent time is when he has maximised the output of his current operation, and therefore has potential to expand.
He called on bankers to encourage farmers to get better, before they get bigger.
Mr Deasy said the new dairy industry forum which emerged from the debate will have to keep an eye on look at their lending practices.
He said the banks are in serious competition with each other to get a piece of the expanding dairy industry (and we all know how a similar situation in the boom years ended up).
Meanwhile, IFA welcomed Minister Coveney’s announcement of a dairy forum — and said one of its aims should be to put pressure on banks to provide farmers with investment products with flexible repayments which take into account expected volatile dairy income variations.
