Joint Committee on Agriculture, Food and the Marine díospóireacht -
Tuesday, 10 Feb 2015

Dairy Industry: (Resumed) Discussion

Chairman

I welcome Mr. Maurice Crowley from the Banking and Payments Federation Ireland; Mr. Ken Burke, Dr. Anne Finnegan and Mr. Tadhg Buckley from AIB; Mr. Mark Cunningham and Mr. Sean Farrell from Bank of Ireland; and Dr. Ailish Byrne and Mr. Nigel Walsh from Ulster Bank. I express the joint committee's appreciation to them for coming before us to discuss the potential difficulties and price volatility facing the dairy industry in the next 12 months and beyond.

Witnesses are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by it to cease giving evidence on a particular matter and continue to so do, they are entitled thereafter only to qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person or an entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the Houses or an official, either by name or in such a way as to make him or her identifiable.

Mr. Maurice Crowley

Although the joint committee's invitation originally came to the Banking and Payments Federation Ireland, we thought it would be useful to bring representatives of a number of the banks which are working at the coal face of the agriculture sector. We welcome the opportunity to brief the committee on this very topical subject. Agriculture has always been a very important sector for our member banks and the banks have been very supportive of farmers during the years, through good and bad times such as the fodder crisis. We are joined by representatives of AIB, Bank of Ireland and Ulster Bank, each of whom will make a short opening statement on the topic. We will focus particularly on what banks are doing to assist farmers in the dairy sector as the transition from milk quotas occurs, in terms of the capital expenditure they need to make and their working capital requirements, given the volatility of milk prices.

Mr. Ken Burke

I thank the Chairman and members of the joint committee for giving AIB the time to provide the Oireachtas and the public with an update on the bank’s strong, through-the-cycle support for the dairy sector, including finance for development and expansion and supporting farm cash flow through income downturns. I am head of business banking with AIB and with me today are Dr. Anne Finnegan, head of our agri-sector division and Mr. Tadhg Buckley, senior agri-adviser with responsibility for south Munster. I refer members to AIB's presentation which we submitted to the clerk to the committee in advance.

AIB has a long association with the agrifood sector. The bank is the main lender to farmers and accounts for 40% of total Irish farm lending. Our market strength in the sector is the result of a strong relationship with farmers extending back many decades and cemented with the establishment of AIB's agri-adviser team in the early 1970s. We have kept our agri-adviser team in place since that time and throughout a period when so many regarded agriculture as a sunset industry. As a core part of our SME business strategy, today we have an agri-sector team comprising 16 dedicated agricultural science graduates, all regionally based. The team provides significant training for our front-line staff ensuring they are equipped to support farmers throughout the cycle. It has worked closely with all customer-facing staff to support farmers through various cycles and crises, including the dairy sector downturn in 2009, the weather and fodder crises of 2012 and 2013 and various downturns in the pig sector.

In recent years we have seen strong growth in farm investment, driven primarily by the dairy sector, in land, farm buildings, machinery, equipment and stock. Our recent agri-financial services survey, completed in January this year by Ipsos MRBI, indicates that half of dairy farmers have plans to invest in the coming three years. Our analysis of the market predictions from all of the main forecasting agencies indicates that the medium-term outlook for global dairy remains positive. On this basis, AIB maintains a strong, positive long-term outlook for the dairy sector, in which we are very comfortable to support investment. Our experience of the sector has been positive, with dairying experiencing substantially lower levels of credit difficulties than other SME sectors.

While the outlook is for generally strong dairy prices, volatility will remain a key feature of the sector, aligned with changes in input prices, output prices and weather or a combination of any of these three factors. Our dairy sector outlook report shows 30% of dairy farmers perceived milk price volatility as a key challenge in the next five years. We have written extensively in our quarterly farming newsletter, Agri Matters, about managing farm cashflow through the cycle and planning for income volatility. We have also contributed to many external publications on the same theme.

In the past three months we have held seven large regional farmer meetings to discuss the prospects for the farming sector. Approximately 2,400 farmers have turned out at these events. There is a full list of the meetings in the presentation, including some which are taking place this week and next week. AIB has always advocated that the opportunity to expand dairy output should be considered by farmers only after they have achieved an efficient cost base. Our core message at the meetings was and is "better before bigger". While we know that all farmers are vulnerable to income volatility, an efficient and lower cost base producer is better positioned to withstand a period of reduced income. This is illustrated on slide No. 6 of our presentation. At AIB we consider volatility to be the new norm. For farmers, managing farm cashflow is now key and requires a planned approach to allow the business withstand both the peaks and troughs of the cycle.

When it comes to lending, we must, from day one, factor in the reality that not every year will be a great one. The average milk price for 2014 is estimated at 38 cent per litre, the second highest annual milk price ever paid to farmers. The average 2015 milk price is forecast to be 26 to 28 cent per litre. AIB takes a through-the-cycle view of milk prices, factoring in periods of low and high milk price. We recognise that, in reality, some years a farm will generate a cash surplus and in others a cash deficit that must be managed. Milk price is only one component of income; we also take account of cost of production which varies significantly among farmers.

It is useful to look at farming sectors that have been dealing with volatility for many years. AIB has a lot of experience of banking the pig farming sector which has long been exposed to the vagaries of the world market, receives no market support and experiences a high level of income volatility which has been exacerbated in recent years by feed price fluctuations. Pig farmers have responded to this volatility by improving production efficiencies on an ongoing basis; managing their cost base, particularly feed costs; undertaking strong financial management, including cashflow budgeting; and building a buffer cash fund in good years to support the business in lean years. In our presentation members will see that there is scope to improve efficiency in all livestock sectors. AIB plays a key role in supporting pig farms through tough periods, knowing that the cycle will turn. We take a strategic view of long-term challenges in the sector and continue to do the same in the dairy sector.

The current downturn in global milk prices comes after five years of strong milk prices by historical standards and may give rise to cashflow pressure for some dairy farmers in the months ahead. Analysis of AIB’s dairy farmer customer base indicates that the sector is well positioned, with strong cash balances, available overdraft limits and an overall strong credit performance relative to other SME sectors. This is in marked difference to 2009.

As in 2009 and 2012-13, AIB will this year work with affected dairy farmers to support them through the current income downturn. In 2009, when milk prices averaged 23 cent per litre, we worked with farmers on an individual basis to find an appropriate solution to their cashflow problems. We are well on our way, through a programme of proactive engagement with the sector, to encourage dairy farmers to make early contact with their bank. We are asking affected customers to estimate, as best they can, the likely deficit in their 2015 annual cashflow. Experience has shown us that there is no one universal solution at a time like this. Instead, there are a number of support measures available which we can tailor, depending on the individual circumstances.

Our support package for dairy farmers can include the following: a review of monthly repayment commitments; short-term increases to working capital facilities; short-term loan facilities; and an interest-only period for existing borrowings. We will utilise our existing core lending products to support the sector at this time, including our farmer credit line which has the lowest cost of any working capital product in the farmer market, at 4.2% variable. This is extremely competitive relative to the cost of merchant credit. We are very conscious of the significant opportunity expansion of milk output offers to farmers, the dairy industry and the economy, but we are also aware of the heightened short-term volatility that must be managed. As the leading bank to the dairy sector, we recognise the key role we play not only in supporting the development of the sector but also supporting it through the fullness of the cycle.

In summary, on behalf of AIB, I express thanks to the committee for inviting us. We very much appreciate the opportunity to discuss what is one of our most important SME sectors. We look forward to receiving questions from committee members.

Dr. Ailish Byrne

I thank the Chairman and committee members for the invitation to address the joint committee. I am the senior agricultural manager in Ulster Bank. I am joined by my colleague, Mr. Nigel Walsh, head of sectors and specialist business. I have worked in Ulster Bank for over ten years, in the agriculture sector, and have a PhD in farm financial management which I completed under the guidance of Teagasc in the school of agriculture in UCD. I also farm actively in the Carlow area.

At Ulster Bank we believe the imminent removal of dairy quotas represents a major and long-term opportunity for efficiently managed grass based family dairy farms. However, we also realise that dairy market returns and, by extension, farm gate milk prices have become more volatile in recent years. The Ulster Bank strategy for the dairy sector is reflective of these issues. Ulster Bank is lending to the farming sector and provides support for its customers in periods of volatility. It provides banking services for one in every five farmers and approximately 25% of young trained farmers. We have a team of 30 agri-specialists, based in agriculture communities and the Ulster Bank credit department. These specialists are supported by our central agri-team which consists of Dr. Anne-Marie Butler and me.

In 2014 we launched our inaugural advance agri-accreditation course, which is accredited by the chartered banker programme and was developed by Dr. Anne-Marie Butler, previously a lecturer in the school of agriculture in UCD. This advanced agri-accreditation course supplements our annual agri-training courses which are completed by approximately 150 of our colleagues each year. Our accredited agri-specialists typically come from farming backgrounds and have completed various agri-qualifications. They have the necessary expertise and insight to support farmers in their day-to-day financial affairs. Also, our agricultural managers are available to meet farmers on their farms at times that suit our customers.

Ulster Bank has a range of products tailored specifically to the needs of farmers. For example, in October 2013 we launched the Ulster Bank dairy expansion loan to support the growth plans of dairy farmers. This loan provides an interest only option of 24 months to cover the natural timelag between on-farm investment and the generation of additional cashflow. We also have a competitive offering for young trained farmers which provides unsecured loans of up to €30,000. Also, this year we launched the Ulster Bank pasture loan. We believe the profitability of farms is intrinsically linked with the production and utilisation of grazed grass. Therefore, this pasture loan can be used by farmers to invest in soil fertility and reseeding activities and providing paddocks and waterways on farms.

Ulster Bank has extensive two-way engagement with all key stakeholders and influencers in the agri-sector, including dairy processors, farm organisations, advisory bodies and farm consultants. The bank also participated in the Department's and Bord Bia's trade missions to China in 2012 and 2014.

I highlight an event organised by Ulster Bank in 2014 to support the growth plans of dairy farmers, an event which focused, in particular, on the young farmer sector. We held a young farmer seminar, to which we invited 50 young farmers who were considering entering the dairying sector. We had a panel discussion with a number of experienced dairy farmers who had had expanded their businesses in the previous ten years. The panel also consisted of a number of pig farmers with experience of working in a volatile business. We used this discussion to highlight for young farmers the challenges and risks they might encounter if they started or expanded in the dairy farming sector. We also used the opportunity to educate young farmers on the importance of embedding financial management techniques in their businesses.

As we work hand in hand with our dairy farming customers and the wider industry, we realised in 2014 that dairy farmers might face some financial challenges in 2015, owing to a low milk price, perhaps a superlevy fine and possibly a large tax bill. All of these issues arise at a time of expansion on farms. Therefore, we have taken a proactive approach to providing support for our dairy farmer customers in 2015 and developed the Ulster Bank dairy farmer tool kit. This tool kit will provide solutions for farmers on a case by case basis and can include options such as increased working capital facilities, a capital repayment holiday or an interest only option, or a combination of both, depending on individual circumstances. However, to avail of any of these options, we strongly encourage farmers to complete a capital budget and know their cost of production.

I thank the Chairman and committee members for affording me the opportunity to address the committee. My colleague and I will be happy to address questions members may have for us.

Mr. Mark Cunningham

On my own behalf and that of Mr. Sean Farrell, our chief agricultural adviser, I thank the Chairman and committee members for affording us the opportunity to engage with them. In Bank of Ireland we are acutely conscious of the opportunity for the economy in the dairy and agri-markets, but we are equally conscious of the role we play in supporting that economy. We are keen to ensure that, as a bank, we are adequately resourced to fulfil our mandate and help that economy to expand. To that end, we have completed extensive research on our own behalf and in conjunction with Teagasc to try to understand the needs and demands of the market, particularly in the dairy sector as we look towards the abolition of milk quotas. We are acutely aware of the risks and challenges this new free market poses and have looked to ensure we have the products and capability that will safeguard and protect farmers and their investment as they move into this uncertain environment. My colleague, Mr. Farrell, will talk at some length about that issue.

Bank of Ireland is the number one business bank, with more than a 50% share of non-property lending in the agri-market, while agriculture is the largest stand-alone sector for the bank in its business banking portfolio. Agriculture accounts for over 10% of the exposure in the business banking market. Last year alone, over 23% of our new lending in business banking was to the agriculture sector, which gives some indication of the important role the sector plays in the bank's portfolio and the necessity for us to ensure we have the appropriate products and safeguards for our customers. I now ask Mr. Farrell to take the committee through some of the issues involved in that regard.

Mr. Sean Farrell

I wish to pick up on the points introduced by Mr. Cunningham. Bank of Ireland approved €620 million for the sector last year, which represented an increase of 19% on the previous year. During that time approval rates within the bank continued to rise and the bank is currently approving 94% of agri-credit applications presented to us.

The importance of agriculture to Bank of Ireland is particularly evident in the branches located in smaller towns which rely most heavily on the agricultural economy. Within those branches agricultural-related lending typically represents more than 60% of all the business lending.

Looking towards the marketplace, land purchase, farm development and annual seasonal loan requirements are the areas where our customers are typically looking for financial support at this time. We have seen an increase in farm building and farm development requests from the dairy sector over the past 12 months. We anticipate this trend will continue in line with milk quota abolition later this year.

As Mr. Cunningham outlined, Bank of Ireland recently partnered with Teagasc to sponsor a research report which identified a dairy sector investment requirement of €1.5 billion to achieve Food Harvest 2020 targets. Aligned to this research that we funded with Teagasc, Bank of Ireland anticipates significant investment in the dairy sector post milk quota abolition. To this end we have put in place a €1 billion investment fund to support dairy expansion at farm level.

Based on the analysis of the research, Irish dairy farmers have low debt levels relative to our European counterparts and have lower average costs of production, which in our view position the sector very well to increase output and to compete on the international export market. For example, average debt levels on all farms holding debt in Ireland are approximately €24,000; on all dairy farms €62,000; and on those dairy farms with borrowings €94,000. Those figures are significantly lower than our European counterparts.

On volatility management, our view is that the outlook for agricultural commodities is positive and that prices will continue to increase over the next five to ten years, but that this increase will not be linear, and there will be peaks and troughs as was experienced between 2009 and 2014. Bank of Ireland has developed a suite of products, marketed as AgriFlex, which takes this volatility into consideration and allows customer to revert to interest-only repayments on their borrowings with Bank of Ireland during a time of reduced incomes.

On 2015 and the potential impact of reduced milk prices, to date there have been few enough requests over and above what we would normally receive from additional customers. The requests received to date have not typically been milk price-related but are more as a result of super levy issues. However, we anticipate that requests for cash-flow support will grow as the year progresses and we have plans in place to meet these requests.

Our farmer overdraft utilisation levels remain very low with 2014 having been a very strong year in this regard. Similar to how we supported our farming customers in 2009 and previously when farm-gate prices fell significantly, we will support them as necessary and AgriFlex is just one of the ways we can offer this support.

I trust this gives an overview of our current activity, future plans and our ability to support our customers through commodity price volatility. I look forward to answering any queries members of the committee may have.

Chairman

I thank the witness. I am conscious that Deputy Penrose may have to leave and I call him first.

Deputy Willie Penrose

I thank the representatives of each of the banks and Banking and Payments Federation Ireland for their presentations. There are many sweet sounding words. If I was a farmer listening to the witnesses today, I would not have any worries, but I know the reality of life on the ground is different. I was an agricultural consultant for many years and I heard this previously. I negotiated some significant loans and indeed some write-downs eventually on behalf of farmers in the 1980s. I am glad to hear about the suite of products. All the banks have strongly resourced agricultural consultancy or advisory functions, on which I salute them. We do not want to have a conflation because lending to agriculture is totally different from lending to other businesses.

Does each of the banks tailor a suite of products to be pitched at the individual farmer as opposed to a generic group of farmers? In the dairy sector as elsewhere, no two farmers are the same, just as the outcome of two accidents are never the same notwithstanding that people might say they had the same injury and attended the same doctor. That is not life. Any two farmers will have different skills, different technical abilities and different inputs. Is that where the banks are working in terms of it?

We are all aware of the volatility and the reduction in the price per litre of milk from 34 cent to 27 or 28 cent, or maybe even further down. We all know the Fonterra price of 20 cent a litre. We have done a lot of work through the Chairman and our colleagues, and we have listened to that. Have the banks looked at the likely outcomes for the world prices over the next 12 to 18 months? Farmers now have the freedom to produce, which is great.

The AIB presentation used a very wise phrase, "better before bigger". I am convinced of that. I have consistently sent the warning from this committee that I am scared of everybody heading to the hills and expanding like nobody's business. It has to be very rational, particularly for those getting into it anew. Whoever coined that phrase has his or her finger on the pulse.

Farmers will be faced with the super levy of €50 million, €60 million or €70 million. We would all like to magic that away but it will not happen. That is their problem going back to the mid-2000s. We have to deal with reality, whether it will be applied to individual farms or at a sectoral level. How will the banks deal with that?

There is always an investment cycle in terms of normal investment. Do the banks have something for that? Do the banks have products or options for people? For example, in 2014 there was a significant output. Unless the income-averaging principles apply, that is likely to lead to a significant tax bill for farmers. So there could be a confluence of factors that could eat up farmers' incomes and leave them with virtually nothing on which to live. The superlevy bill will need to be faced over the coming months or years. There is a likely price drop, a tax bill and then normal investment. Is there a suite of products to suit each of those in the aggregate?

Have any of the banks carried out an analysis of the investment likely to be required to achieve the 2020 targets? That is over the next five years so the banks should be on the ball on that. Mr. Farrell referred to the troughs and peaks and the need to look at it in the round. Have the banks prepared investment strategies given the likely level of investment farmers would have to make to achieve the 2020 targets, assuming all the other factors are built in at a discounted level to achieve that?

It is interesting. We would be delighted to get any written submissions the banks might have. Having written submissions is always very useful because we do not just ditch them; we actually review them later on.

Deputy Martin Ferris

I thank the representatives of the three banks for their presentations. One cannot stress enough the contribution the agricultural sector makes to recovery, hopefully, of the rural economy.

As Deputy Penrose said, there are many issues facing farmers in the medium and long term.

From the presentations, the witnesses seem to be preparing for that. Rather than just focusing on short term, they are considering the situation down the road. For those from a farming background, volatility includes price and weather. Where people are depending on harvest or silage for the summertime, they always look at the weather to see whether they have adequate feeding for stock for the winter.

The major opportunity is the dairy sector. This also comes with a warning because there is a suggestion that the price could drop as low as 28 cent per litre from 37 cent per litre, which is the second highest price ever paid for milk in this country. In farming, everything recovers although it may take time. Things turn around after a couple of bad years and the same thing will apply to the dairy sector. I am not so pessimistic to think that it will drop as low as 28 cent per litre but I think the price per litre will drop to the low to mid 30s.

Have the witnesses considered the age profile of the people they are lending to? The presentations suggest a huge percentage of the farming community is over 65 years of age. In lending, that comes into the equation irrespective of the asset involved. What is needed are unsecured loans up to €30,000 for young farmers getting into the industry. With regard to renting land with long-term leases, are capital investment or stocking density part of the lending opportunities for younger people?

With regard to training courses, the AIB representatives referred to 2,400 farmers turning up to these events at regional farming meetings. This is an educational process for young farmers coming into the industry. Was there a greater demand and did more people want to attend these courses?

The witnesses mentioned reviewing monthly payment commitments, short-term increases in working capital, short-term loan facilities and an interest-only period on existing borrowings. The superlevy will be an immediate problem in the dairy sector and finance must be made available to farmers to meet that demand. There may be lending to farmers who are paying off because of overproduction. The AIB variable rate is 4.2%. Is there a possibility of freezing the rate for the short period over which the superlevy will be paid back? Is that not in the interest of the development of farming when farmers will be borrowing and paying back for asset development? It would be a big investment from dairy farmers to capitalise on the opportunities with the quota gone. Can they have a commitment on the superlevy? Can it be frozen and set aside until things turn?

Banks can be very secure because farmers probably have the best record on lending. Investment in the agricultural and farming sectors has the most potential for rural communities. Anything that inhibits growth will create problems nationally. I hope the banks will look at that in a positive way. It is also good publicity for the banks, coming on the back of bad publicity, and something that will encourage people and put a human face on the situation.

Senator Michael Comiskey

I thank the witnesses for their presentations. It is good to see good news coming through. Hopefully, it will be delivered on the ground. The question we are often asked was whether the banks were open for business. This particularly applied to land purchases. We often get comments from farmers who have long-standing relationships with banks that they are still put through strict procedures when they apply for loans. Perhaps it is no harm as it may have been too relaxed at some stages.

My question for Ulster Bank concerns the closure of some of their branches in smaller towns, which affects some of the areas I come from. Some small farmers dealing with Ulster Bank may not move to the branch in the nearest town. It may be 15 miles away and I see this as being a negative point for Ulster Bank.

Recovery always happens after two or three bad years and this is happening now in the beef sector after one bad year. We see a good buoyant trade for beef and store cattle at the moment. Hopefully it will last. Dairy is a bit worrying, with the predicted cut in price, but hopefully farmers will be able to overcome it and develop continue to develop.

Deputy Tom Barry

I welcome the witnesses. It is good to see the banks. As a commercial farmer, the level of engagement from banks has been very good. I have considerable experience in this matter. It is popular to give out about banks. I know there are difficulties but the experience levels of the people I dealt with means we are quite happy with it.

Mr. Maurice Crowley mentioned income downturns. Does he have any idea about income upturns? While we are discussing a negative situation, we should be looking forward. We should put away something in the good day rather than spending it on equipment capital and wasting it on expensive conacre. What are the views of the witnesses on the reduction of the single farm payment over the coming years? How will it affect productive farmers, as they are the ones who have borrowed most? What are the views of witnesses on land lease costs? I am not referring only to conacre, a term we all love. At the moment, we have land being leased with taxation incentives for the person letting the land. That is right the right approach but most of the advantage is being given away by paying over €300 per acre for ten or 12 years. There is a drag to get the land. Do the witnesses know about the merchant credit available? Do the banks have a tie-in with larger farm businesses? There could be a false level of credit because of that.

The witnesses mentioned dairy farms, and it seems to be all about dairy farms, but I ask them to keep in the back of their heads that there are also tillage farmers and beef farmers. Will beef farmers in some of the dairy areas be cannibalised? There will be competition for land.

What are the views of the witnesses on retirement? As a farmer hits 45 years, his or her borrowing potential is considerably reduced because the repayment term must shorten. It is a lot to ask for health and wealth for 20 years when someone is 50 years of age. Are the banks actively discussing their retirement plans and transfer costs, which will be considerable?

One thing I am worried about is the 90% stipulation. It is based on €3 million. Do the witnesses think €3 million is enough? What figure would they suggest? Many people have very valuable herds and equipment and milking products that cost huge sums of money.

What are the witnesses' views on forward selling? In the grain industry, we forward sell all the time. Last year was quite a good year if one had forward sold last March. The prices for wheat and barley were sound.

Are the witnesses encouraging diversification? Are they looking at the business plan and encouraging whatever potential for diversification exists within farms? In the last budget, income averaging was brought across for five years but it also includes off-farm income which is quite important because any diversification that can happen profitably on a farm will also bolster this peak and trough, which is very important.

Mr. Farrell mentioned an increase in lending of 19% and that 94% of those were approved. This goes for all the banks. Does that include people moving from being a sole trader to being a limited company, which is a very simple way to go because the operator is already with a bank but under a different name? In those circumstances, what would be the average increase in interest rates when one is switching one farmer over?

To conclude, the witnesses should be aware of the existence of tillage and beef farmers.

Chairman

That is Deputy Barry's sign-off plug for the non-dairy sector.

Deputy Tom Barry

It is hard to mention it as it is getting a bit lonely.

Chairman

We have a list of questions and comments. Could I add a couple?

Senator Paschal Mooney

I apologise for interrupting the Chairman. I have a brief question that has possibly already been dealt with. I could not be here for the presentations earlier. I thank the witnesses for being here. It is very important and sends a very strong message of support to the agri-food sector for which the witnesses are to be complimented. As Deputy Barry said, the banks do not always come in for praise so looking at the presentations, particularly that of AIB, I can see that they have taken a very professional view. There is a great deal of uncertainty as to what is going to happen once the milk quotas come up. An issue that arose during a recent meeting with our colleagues from the agriculture committee in Northern Ireland was the fact that there was a lot of investment in the dairy sector which went somewhat awry. It did not always work out.

I know the term "better rather than bigger" was used earlier. While I appreciate that the market has changed considerably and banking procedures and lending practices have changed, all for the better, are the witnesses concerned that because it is such a volatile sector - the witnesses drew parallels with the pig industry which went through a period of volatility - some farmers might be biting off more than they can chew? Have the banks put in place proper procedures in case investment proposals which may look good on paper and where all the research has been done do not work out? I am sure the banks do not just give money away willy-nilly but a concern was raised in Northern Ireland that some farmers found themselves at the wrong end of a financial investment because of this volatility. It seems that in agriculture generally, there are certain flavours of the month. For a while, it was sheep. Everybody was into sheep because of the premiums coming from Europe and then that fell through. After that, it was pigs which also did not happen. Given the banks' vast expertise and the structures they put in place with its agriculture graduates around the country, are they satisfied they can handle the demand that will inevitably come once the quotas are lifted and in a manner that will ensure we will not see farmers who have over-extended themselves and are in very serious financial difficulties in another two or three years time?

Chairman

The witnesses have two definitions of people who are farming - people who own land and people who operate land. The cohort that own it are generally older on average. A higher proportion of the people who are now operating the land - there has been emphasis on young farmers - will not own it. There is a land mobility effort. We have had the agri-taxation review. It relates to share farming and people being able to undertake capital investment other than just stock investment into properties they may never own but they nevertheless get their value out of it through some arrangement. Somebody mentioned unsecured loans of up to €30,000. In reality, that will not do very much except for working capital. It will not be investment capital.

Some of the rural development programme options, particularly with regard to the targeted agricultural modernisation scheme measures and farm safety, are not mandatory or essential but are very important. Are the banks prepared to look at that as an investment that does not yield a return per se except the safety and well-being of those to whom the banks are lending? This needs to be focused on.

We have had presentations from the Irish Dairy Board, Bord Bia, the Irish Co-operative Organisation Society and Positive Farmers, the latter body being led by Mr. Michael Murphy who I am sure the witnesses are aware of. He farms extensively and not just in Ireland. He drew a comparison with New Zealand. Ms Byrne mentioned agri-specialists and agri-managers. Somebody who is in trouble can expect up to 20 contacts per year with their contact person in the bank. Are the banks geared towards working with people in financial difficulties due to the front-loading of investment in the face of possibly two years of challenging market conditions, where prices will be very difficult and where things will probably go backwards as opposed to eating into their financial obligations or indebtedness?

The ratios of available specialists to those to whom the banks are lending are very important. If we drew the comparison with what happened in the building sector, there were too many people given extensive facilities without any experts in the field lending to them who understood the complexities of the market. One could say the same about agriculture. Unfortunately, Deputy Penrose had to leave. I will let the witnesses manage the questions any way they wish. Perhaps Mr. Crowley wishes to start?

Mr. Maurice Crowley

Each of the banks is taking notes so it is up to the Chairman to decide whether he wants every bank to answer every question. That could take a while.

Chairman

There are a couple of key points on lending. Does Mr. Burke want to take some of the earlier questions or are there questions he particularly wishes to answer? If somebody else wants to answer the same question, they can feel free to do so.

Mr. Ken Burke

There were a number of specific questions relating to AIB so I will try to deal with those. We have been working with our farming customers and through the seminars for over a year now to get the "better before bigger" message out there. A number of analogies were drawn around other markets such as New Zealand and Northern Ireland. As part of those seminars, we have done case studies of the Republic of Ireland versus Northern Ireland and the investment that took place in Northern Ireland in terms of growth in milk output because it was not constrained by milk quotas to the same extent as the Irish market. We also drew analogies showing that the actual net margins in the Republic of Ireland with the net margins being achieved in Northern Ireland.

My colleague Mr. Tadhg Buckley travelled to New Zealand to observe some of the experience in that market. There were key things to be learnt in terms of the way the market expanded, the level of debt taken on per farmer, the level of interest only and inter-generational borrowings that occurred. We have been putting the message across that it is a case of "better before bigger".

Senator Mooney asked if we were constrained in the number of people who could attend conferences and seminars. It is a consistent part of what we do, we will be in Enniscorthy tomorrow night and Cootehill next week. We were in Limerick last week. We meet the demand for the seminars, where we take those learnings and share them. There is great debate and discussion at the seminars which is not necessarily limited to the bank support; it is more a case of sharing the learnings from the experiences of other jurisdictions and economies.

We were asked if there were suites of products available to match individual needs. We take a tailored approach. To deal with super levy bill or large tax bills, we have a product called prompt pay where the bill is paid up front and paid over a period of time.

We were asked if we were prepared to offer interest-only repayments or to park levels of debt. Some of the new money we are lending is interest only repayment from the outset, acknowledging that 2015 will bring challenges but when we take it through the cycle price we know it is an enterprise that we wish to back.

On unsecured loans for farmers up to €30,000, the typical dairy farmer borrows less than €100,000, it is closer to €75,000 to €78,000. The question of collateral comes down the line, behind the capability and the experience of the promoter, the veracity of the business plan that is put forward, the prospects and the outlook for the sector. The decision on collateral comes after other considerations. We are not prescriptive in terms of taking collateral at a certain given level. Each enterprise is looked at on its own. Do we lend up to €100,000 unsecured? Yes, if the business justifies it, if the farm enterprise and the blend between the level of investment by the promoter and the amount of debt that is being sought justifies it.

We can speak on the experience in Northern Ireland if that helps to flesh out the example.

Mr. Tadhg Buckley

I will talk about the experience in Northern Ireland, as we were keen in our seminars to share that experience and have farmers learn from it. Since Northern Ireland no longer has quota constraints, milk output has effectively increased by just under 40% but dairy cow numbers remain static. What actually happened was that yield went up by 2,000 litres per cow. They have increased significantly their milk output but effectively this has had no effect on their net margins. Teagasc has a dairy profit monitor. If one looks at their average net margin, it is lower than what we are achieving in the South. The removal of milk quotas gives a massive positive opportunity for the sector but it is important that we do not look at expansion just for the sake of it and that it is done efficiently. We have done analysis on the reports from the Teagasc dairy profit monitor and provided it to farmers. Between the top 10% and the bottom 10% of the dairy profit monitor in 2014 and taking an average farm of 70 cows, the difference in net margin was €66,000. This is a frightening gap. The figure in 2013 was €61,500. The figure is consistent. If one looks at the figures for 2009, it was about €40,000 when we had a very difficult milk price.

If one is looking at volatility, there is a lot that we can do as banks to help farmers get through volatility. The best way to deal with volatility in farming is to try to make oneself as efficient and lean as possible. That is what we have tried to get through to our farmers in advance of the removal of quotas. While we acknowledge it is a great opportunity, we need to do it properly. When we are lending to the sector for expansion we are aware that it presents a great opportunity but we must ensure it is done in an efficient way.

Mr. Ken Burke

With the permission of the Chair, I will close with two other points. I have statistics that show some positivity around the ability of the dairy farmer to weather what might be coming in 2015. I have the Central Bank figures for 2009 of the total outstanding balances to Irish agriculture, which was €5.5 billion. In the most recent figures from the Central Bank, the total outstanding balances to Irish agriculture is €3.4 billion. The level of farm debt has reduced quite considerably post farm waste management investment. I have statistics on working capital, which will be particularly relevant in terms of managing milk price volatility. We are seeing credit balances in farmer's current account up 27% year on year. For every euro that a dairy farmer has borrowed from AIB, there is €3 held in credit funds with AIB. Over that utilisation rates have been dropping, in particular during the past 12 months. If a farmer has an overdraft limit of €50,000, 38% was the average overdraft utilisation in the past 12 months. It has dropped back to 33%. There is headroom there and capacity in terms of being able to weather it.

My colleague, Dr. Anne Finnegan might cover the question on the investment cycle and outcomes over the next 12 to 18 months and the investment required.

Dr. Anne Finnegan

I will address Deputy Penrose's questions. At the end of 2014 we conducted a study that was as comprehensive as we could at the time, of the outlook for the dairy sector for the year ahead. We engaged with representatives from the Irish Dairy Board, individual processors, farming organisations to get their views of the dairy commodity markets in the year ahead. At that point we took the view that milk price would fall - and this is widely accepted - on average by 26 cent to 28 cent a litre. There has been some firming in the markets in recent weeks. We keep that under constant review but we are aware of issues that may materialise on farms. We stress-test farm cashflow in order to support farmer at those levels. I respect the comment that not all farms will be impacted equally and everybody's circumstance will be different. Certainly our own experience from last year would be that on some farms there has been considerable investment from farm cashflow last year. Some farmers forward purchased inputs at the back end of the year. Some people will have a significant tax bill and superlevy bill, as was pointed out. We will consider all the factors when we are working with people on an individual basis, looking at the factors of their individual circumstances and the right support for their situation. For some, it may be something in the short term to get them through a six month period where cashflow is tight, for others it may mean something more long term, such as refinancing some of the capital investment they did from their cashflow in the previous year. There is a range of options we can work on.

We have to watch how this year pans out, but not everybody will be impacted to the same degree. There are dairy farmers who have plans to invest and will continue to invest as the year goes on. We will be supporting them. We take a very long-term view of short-term problems. Farming by its nature is a cyclical business but the volatility we are seeing means that we will be lending to those farmers who have capital investment plans. We will be taking a long-term view and a long-term average budget price of what we think milk will cost in the next ten to 15 years. We will support them on that basis. While they may need some short-term support from us we do not see that as an inhibitor to supporting the investment in the sector in the year ahead or in the years after that.

Mr. Maurice Crowley

Chairman, may Ulster Bank comment on some of the next set of questions?

Dr. Ailish Byrne

I will address some of the issues raised by Deputy Penrose. All farmers are individuals experiencing different sets of circumstances. Each case is different. We at Ulster Bank take pride in that we visit each individual on his or her farm.

We look at their infrastructure, stock levels etc. This allows us to put in place a tailored solution for the individual farmer.

The repayment capacity of farms is linked with dairy processors and industry stakeholders, looking at long-term outlook for milk price. This is built in to Ulster Bank's repayment capacity calculation for farmers. Repayment capacity is stress tested to ensure farmers can get through periods of volatility. On the €30,000 figure, that is an open statement from Ulster Bank that it will provide that level of unsecured debt for young trained farmers. If an individual has a good track record and has built up equity, Ulster Bank will go beyond this level. Following discussions with Microfinance Ireland, we looked at providing support to the farming sector particularly in terms of arrangements such as share farming and leased land. This is another option for young trained farmers to access additional finance.

The decrease in single farm payments is an issue; it is a fixed figure which will not increase. We use the Department's single farm payment calculator to give a good view on how the single farm payment will move between now and 2020. It is built in to the repayment structure.

Mr. Sean Farrell

I will start with issues raised by Deputy Willie Penrose. Each loan is individual to each farmer, no two cases are the same. Changes to commodity prices; dairy, grain or beef income, is one part of an overall cashflow cycle for farms. Bank of Ireland takes all income and expenditure into consideration. Most farms have some source of off-farm income - the single farm payment was mentioned earlier - and all factors are considered when applying a loan solution. The Deputy asked about estimates for investment requirements. We partnered with Teagasc on its investment needs report. It highlights that €1.5 billion will be needed by the dairy sector to achieve Food Harvest 2020 targets. Bank of Ireland has a €1 billion investment fund specifically to meet this need.

On merchant credit, if farmers do not wish to avail of this credit and essentially become cash purchases, there are seasonal and stocking loans available as part of our overall suite of products for cash purchases or working capital. Where farmers wish to invest in their farms and are availing of grant aid, we can provide bridging loan solutions in conjunction with approved departmental schemes such as the TAM, targeted agricultural modernisation scheme. This allows work to progress.

Having spent time in New Zealand reviewing its farming and banking practices, there is a lot to learn from it but it is not a panacea for us. Development has occurred there at an aggressive pace but it has its own financial challenges and while lessons can be learned from international example, Bank of Ireland wants to put sustainable, prudent solutions in place.

On assessment criteria, we seek the information we do in order to make the right decisions for the bank and the customer to ensure we are lending sustainably.

Mr. Mark Cunningham

Chairman, I might pick up on a couple of points. The banks and the Department of Agriculture, Food and the Marine are acutely conscious of the age profile of the industry. Schemes to help with land transfer and young farmers' entrance to the market, on an unsecured basis or in additional schemes, are being looked at. There are two cashflow issues affecting farmers, namely the tax payments this year and the superlevy issue. We are conscious of the need to be able to reschedule debt where that is required but the majority of farmers in question are relatively lowly geared at present. Bank of Ireland approved over €135 million for land purchase, about 24,000 acres, last year. This is up some 25% on the previous year. On income upturn forecasts, long-term modelling would anticipate a milk price in the low 30's, factoring in an income upturn on that basis.

Deputy Barry was concerned we were forgetting about the beef and tillage sectors but I assure him we are not. They are a core part of the agricultural offering and we will continue to support and lend to these sectors. Interestingly, according to the Teagasc research, investment demands for the beef and tillage sectors are low, the bigger demand being in the pig and milk sectors. On forward selling, we have worked with co-operatives providing commodity hedging type products with a view to the co-ops themselves doing forward prices for farmers rather than us engaging directly in forward selling arrangements with farmers.

Our volume statistics do not include conversions from sole traders to limited companies which would be viewed as a restructure; it would all be new money. Debt levels in New Zealand were examined and there was a collective concern about our farms expanding too far too fast. By our own estimate, almost €2 billion was already invested by the dairy sector most of which came from farmers' own resources and cashflow rather than going into debt to expand. This may cause short-term cashflow problems in terms of the super levy and tax payments this year which need to be addressed. In terms of flexibility and capability and overdraft utilisation, which in Bank of Ireland's case is as low as 20% for farmers, we feel there is plenty of headroom and we will be as flexible as possible regarding any requests received.

Chairman

Reference was made to intervention and market insurance schemes. It is said it is always easy for farmers and co-operatives to talk about this when the price is low but not when the price is high. There seems to be a trigger in, trigger out when prices reach a certain point. Intervention is set at world market prices, which really means it is ineffective. Have the banks any comments or observations on that?

Mr. Mark Cunningham

One of the issues we have found - which is perhaps more acutely relevant now because of the fall in oil prices - is that there are low levels of hedging taking place across our business in general. Oil prices are at $50 per barrel and it is only when oil prices start to rise that one begins to see people looking to start fixing prices, which we have begun to see in the last ten days. We are working with the co-ops to try to ensure that we can come up with some commodity pricing instruments for them to enable them to forward purchase or forward sell some product on the market. We have already seen a number of the co-ops subventing or supporting prices based on some of the contracts that are in place. That is something we are working on with the industry but we believe that the products that will be brought forward will be initiated by the co-ops and the processing industry rather than by the banks. Obviously, however, we are very happy to act as an intermediary to try to supply those through our trading operations.

Chairman

One would imagine that it would be of benefit to everyone to have a little more certainty and less risk and volatility, in the context of business plans, expansion, security for the borrower and reassurance for the lender.

Deputy Tom Barry

I ask the witnesses to give us their views on land lease costs which are a big concern at present.

Mr. Tadhg Buckley

Yes there are a couple of issues related to land lease costs. We have seen a significant increase in land lease costs over the past couple of years. In Munster, for example, it is estimated that costs increased by 12% in the last year alone. That is being driven by a number of factors and is not just the result of increased demand for ground in the dairy sector. Changes to the single farm payment scheme have also led to an increase in the requirement for land and recent legislative changes also favour a movement towards land leasing over the 11-month lease or conacre option.

Where this goes in the future will very much depend on the sentiment within different sectors. The more profitable a farmer is, the more he or she can pay for land that comes on the market which is available for lease. On average, dairy farmers have been operating more profitably than other farmers, which gives them a competitive advantage in terms of what they can pay to lease land, particularly if that land is adjoining their milk production platform. Such land will give them the capacity to increase their milk production in an efficient way by increasing the amount of grass they graze or grow on their platform. I cannot see land lease costs reducing in the short term. The supply of suitable land is relatively limited while demand is strong and is likely to continue to be so for the foreseeable future.

In terms of demand from the other sectors, the Deputy raises a valid point. It is not just all about dairy farming. We have commercial farmers in every sector. In the area I cover, for example, we have some of the best commercial cereal farmers in the country and they are very important customers of ours. Similarly, in the dry stock sector and the pig sector, we have a significant market share. The same principles apply to pig, dry-stock and dairy farmers - it is about efficiency and ensuring that the farmer has the capacity to repay any borrowings. When we are lending to these guys, we must lend to them on the basis that their cashflow can support their repayments.

The Deputy referred to the single farm payment and changes to that scheme mean that we now have visibility in terms of where it is moving over the next five years. Therefore, if we are lending on a medium-term basis - and much of our lending now is for capital investment - we build in the reduction in the single farm payment over the next five years. We factor that into the cashflow calculations.

On market insurance and fixed prices, I did some research on this in the past. In the Chicago Mercantile Exchange in the US there are fixed price options but only 20% to 25% of US dairy farmers avail of fixed pricing even though it is available to all farmers. That said, it is a very important tool that farmers should have available to them. At the moment Glanbia is offering that option and it is interesting to note that even during the period of high milk prices, there was strong demand for that fixed-price scheme. I know that Connaught Gold also offers a fixed price and I am aware that the dairy industry as a whole is examining this area. It is important that the fixed-price option is available to all farmers. Farmers should look at such schemes as giving them the opportunity to reduce the potential risks in periods of high price volatility. They should even consider entering into fixed price arrangements during periods of high market prices in order to cover themselves for future price drops.

Deputy Tom Barry

I am concerned about the rush to expand. Doubling one's holding does not mean doubling one's efficiency. Land is being taken at the moment without any metrics. How many people are taking soil samples beforehand, given that the costs of increasing land fertility are huge? While banks are lending they must also ask relevant questions, such as: "Is this adjacent to your milking platform or is it five miles away?"; "Is access okay?"; "Will you, in five year's time - with two poor years in a row - be able to pay out those funds?". There is a surge in optimism now but enormous sums are being demanded and paid for land without the necessary due diligence and without even fixing ahead. Before one would even grow cereals, one would forward sell. I am not suggesting that banks should set up such a system but I am interested in whether they are telling farmers to spread their risk.

Mr. Sean Farrell

The point is well made and ultimately when we run the rule over business plans and question their viability and the likelihood of success, the land rental or land lease charge is factored in. Such costs are taken into consideration and if we are of the view that the price that is factored in is not sustainable in the overall context of the business plan, then we certainly will flag that and make the farmer aware of it.

Dr. Anne Finnegan

On that point, this time last year when we set about expanding our agri-advisor team we were very focused on hiring technically excellent people. We were not looking to put a sales team on the ground but rather a team who could look at the plans that farmers were presenting, evaluate them and ask all of those questions. That is very important. There is a sense in the dairy industry at the moment that this is a sprint but at AIB we see this as a marathon. We have very ambitious targets to 2020 which are very welcome. Those targets serve to focus the industry but this is a long-term sector. Investment will be long-term in the dairy sector and it is very important that the plans and investments that we support today hold up in the long term.

Deputy Éamon Ó Cuív

I want to raise a slightly wider issue. Do the witnesses have any information on forced sales of farms by banks? I am referring to sales conducted by the farmers themselves at the behest of the banks or by receivers over the last four to five years, since the downturn. Many farms were given as collateral against loans. How prevalent has the forced sale of such farms been? What quantities are we talking about? Is it normally done by the old house trick of the person having a gun put to his or her head and told to sell or else the bank will sell at an lower price? How prevalent is that at the moment? Is it likely to become more prevalent in the next three years, for people who got into trouble four or five years ago?

Mr. Mark Cunningham

I am happy to take that question but I can only speak for Bank of Ireland, although I do not think the situation is any different for the other banks. In the majority of situations the farmer is willing to engage and to reach a reasonable compromise and there are very few forced sales of farms. In the case of Bank of Ireland, we have only appointed three receivers to farmland over this period.

In most instances we have been able to reach an accommodation whereby any outstanding debt has been resolved to everybody's satisfaction.

Mr. Nigel Walsh

To echo Mr. Cunningham’s point, the engagement with the farming community has generally been very good. We work with customers on a case by case basis, focusing on returning their businesses to viability and in the process saving jobs. We also have a very small number of instances where, as a last resort, we have used the full mechanism to secure the assets. This responds to Senator Comiskey’s point about the rigorous assessment at the outset to cover the long-term viability of the business and the number of variables at play. The number has been quite low in challenging times.

Mr. Ken Burke

AIB’s approach has been to maintain the viability of the enterprise and work with individual farmers. We do not have any material instance of forced sales or receiverships. There would be fewer than five. They arose only when there was no co-operation. We have tested our own creativity in responding to challenging levels of debt. Typically, some of that has been off-farm debt. We want to protect the core viability of the farming enterprise and have had to offer intergenerational and long-term debt, taking into account the next generation in the family. It is dealt with very sensitively.

Deputy Éamon Ó Cuív

The witnesses all seem to indicate that they actually meet with the borrower and sit down to discuss this. That seems to be totally at variance with what banks do with householders. I know of many cases where the banks have refused to sit down and engage with the borrowers. They keep ringing the borrowers, asking them to send in financial statements but if the borrower asks for a meeting to resolve the issue the banks will not give it. Do the witnesses always sit down to meet the farmers person to person and have a discussion with them? I do not understand the logic of the wide variance in the procedure, treating farmers one way and householders in a totally different way. The meetings do not take place with the householders.

Mr. Ken Burke

Our approach is to be available to meet farmers and try to understand the enterprise on an individual basis.

Deputy Éamon Ó Cuív

There is a different policy.

Mr. Ken Burke

Yes.

Chairman

We are discussing agriculture today.

Deputy Éamon Ó Cuív

I understand that but I wanted to clarify that there is a different policy for farmers. AIB does not always meet people with household debt.

Mr. Nigel Walsh

We have made a significant investment in our people so that they when they meet the farmers they have the expertise to bring value to those discussions.

Mr. Mark Cunningham

We meet with farmers and with householders.

Chairman

The rationale behind inviting the witnesses in was to discuss potential difficulties caused by market volatility. We might have expanded a little on that to discuss owners, farm operators and long-term leasing. I may be as guilty of that as everyone else. Deputy Barry hit on the very relevant point of trying to eliminate conacre for everybody’s benefit because it becomes very difficult for people in the lending institutions to lend year on year. Prudence is needed.

The reason for inviting the witnesses was to hear at first hand and in a public forum in the Oireachtas whether the banks have a handle on the concerns that have been raised. We are reasonably satisfied that they have. The question of reach is probably an issue, if there are a significant number of farmers. The Health and Safety Authority told us that 58% of all farm fatalities were on dairy farms which account for 17% of all farms. That is a concern. Farmers may improve the herd size, roadways and land to produce more milk but be slower to improve safety features. It is important that everything is done together. That is why I raised that point.

It has been interesting from the committee’s point of view to hear about the different products and approaches from the banks. They are very similar in ways but they have to work with this industry which is worth €10 billion and has over 100,000 primary producers. If this was bio-pharma with a turnover of €10 billion it might have ten producers, ten multinationals. The farmers are more important from the point of view of dispersed rural economies. Every loan, every farmer, every contributor to the local co-op or meat processing plant is an important integral part of the community.

One lesson learned from the pig industry in New Zealand is that sometimes efficiency means consolidation but that has been the enemy of many farmers. I lived there in the early 1980s when farming was totally grass-based and dairy farms averaged probably 150 cows when there were 50 here. A few years ago a friend of mine was there and said the difference between a conversion to a 1,000 cow herd after the downturn, before the earthquakes, when construction rose again, was €1.5 million. What did it cost when one could not get a plumber or electrician? We have to be wary of consolidating in an open expansionary period but learn from the lessons of others. There is production and sales and the people who support the players. The primary producers must be supported in everybody’s interests. There are animal welfare issues and many others we could go into. We wanted to hear that the banks are standing shoulder to shoulder with farmers to protect family farms and give people a decent quality of life. We want to emphasis this and that is why the committee engaged in it.

We thank the witnesses for coming in and appreciate the fact that they came here together because they are competitors in one sector. I thank the members of the committee for their questions and observations. There is a certain wealth of expertise among the members too.

Mr. Maurice Crowley

I thank the Chairman and the committee for having us in here today. I hope we demonstrated the kind of support that is available. We are pleased to have the opportunity to show that.

The joint committee adjourned at 3.50 p.m. until 2 p.m. on Tuesday, 17 February 2015.