Some dairy farmers facing big decisions over future

Over the last 18 months there has been a perfect storm brewing with an oversupply of milk in the market at the same time as demand from big commodity markets such as China has weakened, creating a huge imbalance that has driven prices down.

Prices hitting a low of 17/18p per litre have put farm cash flows under pressure and meant that many farmers have needed their bank to be flexible and supportive.

Danske Bank is the largest agri-bank in NI and we are committed to providing long term support to the industry. As well as extending overdrafts to many customers we have developed flexible funding solutions through our Dairy Support Loans. The facility has been a key to ensuring that cash was made available in a controlled and planned manner to allow the farm to continue to trade. The product is unique in that repayment terms are deferred until the farm can repay from increased milk receipts or alternative income streams.

To date we have been comfortable in supporting the majority of our customers who have been able to demonstrate that in normal circumstances they have a fundamentally sound business and the current milk price is just a cycle that needs to be worked through. Having said that, all additional lending needs to be taken on board responsibly and repayment expectations will always form part of the discussion. Cash support conversations have increased in the last six months as people who haven’t needed support before are now coming forward. We are comfortable to support these businesses, most of which have demonstrated remarkable resilience in the face of the prolonged slump in the global milk price.

There are, however, a small percentage of dairy farmers who have needed frequent bank intervention and ongoing viability is now a pressing concern. They have been waiting for things to get better, but even though they are working hard, that in itself is not a solution. Things haven’t got any better and the sad reality for some is that their debt levels are now at a point or reaching a point where some of them just won’t be able to trade their way out of the position.

As a farmer myself I know that any decision to wind down or exit the industry, even in an unsustainable situation, is not one any farmer will take lightly. Farming is a business but decisions are often driven by emotion, with responsibility for family farms passed down through the generations taken very seriously. Sound financially based business decisions should not be overridden by emotion. The stakes are high and decisions made with an eye to the future will serve better than with an eye to the past.

But farming is a business, and increasingly more customers are saying “I don’t want to continue to lose money and erode my asset base so how can I leave the industry or wind my business down”. Our response is that the bank will work with you. We will give you time to make your decision, whatever that may be. Whether it is a sale of cows, sale of part of farm, or a total exit, we will develop a plan with you and your accountant or adviser to manage an orderly run down of the business in its current form. Clear communication and forward planning are key.

I believe the long term outlook for the dairy sector is still very good. But the industry needs to learn from this cycle, expect volatility and put measures in place to deal with it. From the farmers’ perspective that means having cash reserves, making decisions based on need rather than tax, not being over borrowed and focusing on the decisions that are within their control in terms of technical efficiency, grassland management, overheads etc.

We have all heard the phrase “cash is king” and through the current crisis that has never been truer. Cash is the lifeblood of all business and when it dries up, then the business often fails. There is therefore a very clear message that cash must be managed prudently, which invariably means that current cash holdings must be used sparingly and if other assets need to be turned into cash then so be it.

All farmers have options, even though some may not be particularly palatable, but at least they are options and they are still within your control

Banks have been engaging regularly with the industry, politicians, the Union and farmer representatives and there is a growing recognition that this is fundamentally an overproduction issue and that some will leave the industry. Any decision to wind down a business will be treated with respect and understanding by the bank and will enable a planning and accommodation process to take place. From the banks’ perspective I would prefer that farmers have an understanding of the capability and sustainability of their own business rather than having to be encouraged to think differently. Increasing debt levels to an already financially stressed business would be irresponsible on the banks’ part and will only further dilute the net worth of the business to the detriment of the owners.

Keeping some perspective, the number of dairy farms really struggling is still quite small, but the time for some of those farms to make big decisions on their futures is right now and not postponing for another six months as there is little prospect of any significant change in the global trading environment within such a timeframe.