In his latest Developments & Insights analysis, Bank of Ireland head of Agri Sector Eoin Lowry reflects on the past year’s weather challenges and how farmers are gearing up for a more sustainable future.
“The scale of this transition and the supports required from all stakeholders including Government, the supply chain and the market to enable farmers to complete same cannot be underestimated”
Analysis: A year of two halves
Weather has dominated the agri sector conversation over the past 12 months. Weak profitability coming into 2024 due to increased costs and subdued markets impacted the mood on farm in the first half of the year. This has impacted farmer confidence to invest in the short term with farm buildings investment and machinery purchase all back on last year (Bank of Ireland data).
The second half of the year, particularly the dry Autumn has turned around the financial prospects on many farms for 2024. Supported by higher prices for milk, grain and beef, average farm profitability in 2024 looks set to rise over 2023 (Teagasc Mid Term Outlook Report 2024).
It is important in a year like 2023 and 2024, to look at the sector through a longer-term lens. The sector is performing well, with consistent average profitability (despite price volatility) over a 3-to-5-year period. The sector continues to deleverage with Irish farmers geared lower (on average) compared to their global peers. Alongside this, farmers are sitting on increased cash balances (on average) compared to the turn of the decade (Central Bank).
But over the longer term, there is recognition that this sector will evolve significantly in the years ahead as it transitions to a more sustainable way of farming. We are beginning to see the first signs of these new environmental compliance costs hitting all farms – for example through lower stocking rates, additional slurry storage, removal of certain pesticides or more limited use of chemical fertilisers. For farmers this is an obvious yet significant challenge and one that will continue to shape the future direction of the sector. The scale of this transition and the supports required from all stakeholders including Government, the supply chain and the market to enable farmers to complete same cannot be underestimated.
At Bank of Ireland, we are proud to partner with over ten coops nationally to offer our Enviroflex sustainable loan scheme to farmers who are on their own sustainability journey to farm in a more environmentally friendly way.
Farm Financial Health improving
A key indicator of the financial health of farms is overdraft use. So far this year, farmers have reduced the usage of overdraft facilities. At the end of October, overdraft utilisation rates have fallen from 17% in the Spring to 11% at the end of October.
While this is normal over the summer months, this Spring, overdraft usage was higher than 2023 but is now lower than October 2023. Coming into the winter where costs and bills generally increase on farm, Bank of Ireland has over €300m of unused overdraft facilities in place to support cashflow over the winter months (Bank of Ireland data).
Another key financial health indicator is deposit balances. Despite the long winter and the poor Spring weather (which impacted individual farms differently), overall deposit balances have recovered over the summer months and are up 4% in the 12 months to end of October 2024. Stronger farm output prices have supported farm cashflows and profitability over the summer and Autumn. Deposit balances remain at historically high levels and are +50% higher (on average) than 2020 (Bank of Ireland data). This increase was predominately driven by strong farm profitability in 2022 where output prices increased 30-50% driving average farm incomes up 33% compared to 2021 (Teagasc National Farm Survey 2022).
Static new lending but overall debt levels continue to fall
The new lending market to farmers has remained static in H1 2024 compared to the same period in 2023 (Central Bank). Notwithstanding the fact that some individual farms experienced cashflow pressure in the Spring, on average there was no increase in new lending as a result of the difficult start to the year. What is interesting, is funding proposals to Bank of Ireland for farm investments such as expansion, upgrading animal housing, milking facilities and farm machinery have reduced in 2024 compared to 2023. Farmers have been postponing investment decisions due to weaker market prices/profitability, weather and poor cashflows but also questioning the future direction of the industry given the lack of clarity around key agri policies such as nitrates or nature restoration and land use change.
While new lending has not fallen, it is being supported by strong demand and increased prices in respect of land acquisition. As the sector continues to deleverage with overall farm debt levels now at 25-year lows (Central Bank), this positions the sector well in terms of global competitiveness and price volatility.
However it does point to a broader question as to the level of sustainable investment and debt required in order to support environmental transition while maintaining the economic output of the sector and its impact on rural Ireland.
Main image at top: Photo by Michael Starkie on Unsplash
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