Unfilled credit gap of nearly €1 billion in potential loans to Irish farmers revealed
There’s an unfilled credit gap of nearly €1 billion in potential loans to Irish farmers, according to an EU-funded study of financial needs.
The opening in the lucrative Irish farming credit industry is 60% for long-term investment loans, and 21% for medium-term loans, according to study findings based on EU surveys on access to finance for more than 7,600 farmers and 2, 000 agri-food enterprises.
Medium-sized Irish farms, in particular, have unfilled credit needs, which are described as “a serious obstacle to the development of the sector, since they represent a segment with significant growth potential.”
“Their size, growth, and increased efficiency could be key for the overall competitiveness of the sector in the future,” according to the European Commission and European Investment Bank’s fi-compass platform for advisory services on financial instruments under the European Structural and Investment Funds.
Their surveys revealed that many loan applications submitted in the past years by viable enterprises were rejected by banks, or resulted in loan offers being refused by the applicants due to non-acceptable lending conditions.
They also estimated the value of loan applications not submitted by viable farmers due to fears of being rejected.
Being discouraged may be based on past rejection, or farmers’ awareness of their poor business planning.
Surveys also revealed many farmers think there is a lack of understanding in banks of the specifics of cash flows in farming, and price volatility.
This report shows that there is a potential for new financial instruments for farmers in Ireland, with a gap in the credit market estimated at between €822 million and €1 billion.
The total supply of finance to farmers was estimated at €741 million in 2018.
The report says financing supply is dominated by two banks (Allied Irish Banks and Bank of Ireland), each accounting for 40% to 45% of all agricultural lending.
“The supply of finance to agriculture is constrained by lack of competition amongst key financial players, by their compliance and regulatory requirements, which often reduce their capacity to offer flexible products to farmers, and from moving away from providing relationship management services at the local level,” says the report.
Farmers’ access to finance is also hindered by their economic non-viability, lack of appropriate collateral, and farming risks considered too high by the banks.
For young farmers, lack of collateral and credit history are the main constraints.
In addition, sometimes farmers lack the knowledge on how to present their farming practices as a viable business plan.
In addition, the interest rate for agriculture loans was approximately at 4% in 2017 for new lending, higher than the EU average, despite the agriculture portfolio being the best performer for all banks.
Brexit is also adding investment uncertainty, and could affect demand for finance amongst farmers, and increase the risk aversion of banks.
The analysis identified several main farmer investment drivers.
As operating costs increase, the demand increases for working capital and cash flow to cover the high costs of energy, electricity, labour, fertilisers, and maintenance and development of a farm’s infrastructure and buildings.
Credit is needed to lease land and invest in livestock, machinery and equipment, particularly for young farmers and new entrants who face extra difficulties in financing instalment investment, where the full investment is not made in a single amount or payment, but there is an agreement to pay/invest in instalments.
Agricultural land is mostly needed by farmers for grazing livestock and for horticulture.
Upgrading machinery is also an investment driver for Irish farmers, in order to reduce costs and improve efficiency. Compliance with environmental and safety standards is considered as the fourth investment driver of the Irish farm sector.
According to the fi-compass study, credit unions and co-operatives are gaining popularity as credit sources among farmers.
The study recommended that because lack of collateral has been identified as one of the main constraints limiting farmers’ access to finance, the use of risk-sharing instruments and guarantees supported by the EU could be further developed, as “the current offering seems to be insufficient to ensure the full functionality of the market.”
The focus of future financial instruments should be on medium-sized enterprises, young farmers, and new entrants.
With financing costs for farming higher in Ireland than the EU-28 average, and above the average of all Irish economic sectors, instruments with a higher impact on reducing the cost for finance are recommended, including a possible combination with EU grant support. Additional working capital instruments/schemes could be developed, given the reported success and general appreciation of a similar instrument deployed in Ireland in 2016-2017.
Enhancement of the technical support for farmers to develop investment projects and sound business plans could also be beneficial, considering the lack of financial literacy still present in the sector. Also recommended were initiatives to open the market to new banks, including possible technical support for financial intermediaries, to increase their knowledge and understanding of farming sector specifics.
