Farm Finance: the ‘Day-3’ focus of the 2021 YFCU Agri-Food conference

28 January 2021

Farm Finance: the ‘Day-3’ focus of the 2021 YFCU Agri-Food conference

  

Farm Finance: the ‘Day-3’ focus of the 2021 YFCU Agri-Food conference
The role of farm finance took centre stage on the third evening of the 2021 Young Farmers’ Clubs of Ulster (YFCU) Agri-Food conference. The virtual event was marked by presentations from representatives of Danske Bank’s agribusiness team.
The significance of the basic payment in determining farm incomes, particularly within the cattle and sheep sectors, was repeatedly highlighted throughout the evening, with the issue of how the bank would respond to changes in farm support being discussed in some detail.
 The various members of the Danske Bank group stressed that farmers must continually strive to improve the levels of technical performance they achieve while also pointing out that that the top 25% of benchmarked farmers in Northern Ireland can generate profits without a reliance on the basic payment.
Senior Agribusiness manager Seamus McCormick added:
“The banks will have to re-assess their approach to farmer: customers if changes to the current subsidy arrangements come to pass.”
Accessing finance was another of the evening’s central themes. According to Danske’s Mark Forsythe, farmers must have as much homework as possible done before sitting down with the bank manager.
He added:
“The bank will want to see at least three years’ accounts for the business. So ensuring that these are available when a loan application is named is crucially important.
“The bank will also be keen to assess the actual cash generation ability of the business.  Cash is king. If there is not enough money coming through on a regular basis, then it will be difficult for a bank to green light any new arrangement.
According to Johnston, the physical performance being achieved by the farm will be a critically important aspect to any loan making decision process. He added:
“The availability of benchmarking reports are highly significant in this context. We would need to know how good the farmer is at running his current operation, before considering any expansion of the business or the establishment of a new enterprise.”
The issues farm structure and the steps that can be taken by farmers to shield their businesses from volatility were also discussed. According to Danske’s Matthew Johnston, operating a sole trader is the simplest farm business model to follow. He added:
“However, the person owning the farm takes full and personal liability for the business. Partnerships can vary in terms of the profit sharing agreed between the people involved. This particular aspect of the business must be legally clarified from the get-go.
“The formation of a limited company is by far the most complicated farm business arrangement that can be established. Incorporation does shield directors from personal liability. However, specific account reporting and tax procedures must be followed.”
Commenting on the challenge of volatility, Johnston highlighted the benefits that buying groups can deliver. He continued:
“Dairy farmers should also seek to commit a proportion of their milk to a fixed price supply contract.”
Interest rate risk management was the subject discussed by Danske’s Senior treasury manager Alan Lam. He confirmed that two interest rate alternatives are available, when it comes to repaying a loan: a fixed rate or a variable rate option. He explained:
“Variable rate interest payments will mirror trends taking place on the world’s financial markets. So they can go up and go down in an unpredictable manner. One major plus to a variable rate interest agreement is that it facilitates early repayment of the full loan.
“This is not the case if a fixed interest rate option is agreed. The upside to this is that the repayments remain the same throughout the entire repayment period, thereby offering a degree of stability for the person or business borrowing the money.”
The benefits of using Hire Purchase (HP) were also discussed. Danske’s Joan Maneely can be used as a finance source for machinery and other related investments that are: drivable, identifiable, moveable and saleable. She continued:
“Repayments are structured to fit-in with the expected lifetime of the item purchased. This can be up to 10 years in the case of robotic milking machines.
“The minimal purchase cost is £10,000. The funding made available is secured against the asset.”