Funding Dairy Expansion

The abolition of milk quota’s in 2015 will present obvious opportunities for Irish dairy farmers to increase milk production from present levels, writes Sean Farrell, Head of Agriculture at the Bank of Ireland.
calendar icon 14 December 2011
clock icon 9 minute read

The Opportunity

Whether or not the increases will be as forecast in the Food Harvest 2020 report remains to be seen, however Bank of Ireland anticipates a significant increase in Irish dairy output post 2015 supported by:

  • Growing world population
  • Increasing urbanisation and westernisation of developing countries dietary requirement
  • Supply deficits in key dairy importing regions, e.g. China, India
  • Ireland’s grass based system of milk production supports lower costs of production per litre of milk produced than more intensive grain based systems
  • Dairying offers consistently higher income levels than most other farming enterprises

While the discussion is ongoing about who will process, market and sell the additional milk produced by Irish dairy farmers, for the purposes of this paper we are assuming that additional milk produced will be purchased and delivered to market by the Irish dairy processing industry.

Similarly, we expect to see instances of new large scale green field farms; however the Bank of Ireland view is that the bulk of additional production will come from dairy farmers who upscale their existing levels of output; perhaps at the expense of discontinuing another less profitable enterprise. This paper will focus on the options available to those existing dairy farmers who plan to grow their businesses.

Measurement and Planning:

Before considering expansion, we recommend that you first of all appraise your farming operation to identify the existing strengths and weaknesses, and then make whatever changes are necessary to become as efficient as possible at present production levels. Completing Teagasc’s E-profit monitor will quantify historical output and production costs in €c per litre and is a good way of measuring efficiency levels relative to the average and the most profitable farmers who complete profit monitors.

Once you make the decision to grow your business, we recommend that the expansion is well planned before you start out. Development plans can take many forms and the extent of the development will likely determine how detailed a plan will need to be. Regardless of the scale of growth proposed, you always need to consider what needs to happen, when it needs to happen, who will make it happen and how the development will be funded.

Expansion may typically be funded from a combination of savings, grant aid, cash-flow and bank loans.

When a development is being funded using grant aid a bridging loan can be provided which is repayable once the development is complete and the grant has issued from the Department of Agriculture. Though less common in recent times, bridging loans were prevalent when the department of agriculture offered grant aid through the farm waste management scheme; and can be made available to fund grant supported developments.

Cash-flow should rarely be used to fund an expansion programme, and certainly should not be used as a permanent source of funding for capital development. Doing so will reduce your farm’s available working capital and will likely result in increased reliance on your overdraft facility.

Loan Application Requirements

When you approach your bank for a loan, the main consideration the bank will have will be your future repayment capability. Security is also usually required to support a loan application however it is a secondary consideration to repayment capacity. Security to cover farm development loans generally takes the form of a first legal charge over farmland (provided through your solicitor) plus an appropriate level of life insurance cover.

Financial track record (as evidenced through the operation of the farm current account) and your management ability are also considered when determining how likely you are to have the capability to repay loans issued to you.

Standard information which you are likely to be asked to provide will include:

  • Details of the development which you are planning; if it involves a building project, then what type and extent of building is proposed. Have planning permission requirements been met and are costings* available for the expansion as proposed?
  • An up to date stock listing.
  • An overview of your land base; the number of hectares owned, leased, rented, etc. and the proportion of each allocated to the dairy grazing platform.
  • Confirmation of your existing milk quota and direct payments receivable, i.e. Single Farm Payment, REPS, Area based Compensation, etc.
  • Confirmation of any off-farm income receivable, (P60 and wage slips if available)
  • Certified financial accounts and profit monitor reports where available.

* Farm Development Costings typically are underestimated with additional building works to what was initially planned often taking place. Stock required to produce additional volumes of milk are often not considered as a cost as they may already be in the herd. Where this surplus stock would usually be sold, the opportunity cost to the farm cash-flow of this sale not taking place needs to be considered.

Repayment Capacity

Repayment capacity on a dairy farm can be determined as follows:

  Net income from milk sales: Perm. milk quota x margin, e.g. €0.12 (1)
+ (plus) Income from other farm enterprises (2)
+ Single Farm Payment (3)
+ Area based compensation
+ REPS / AEOS Payments (4)
-(minus) Rented / Leased Land expense
- Hired Labour charge
=(equals) Total Farm Income
+ Non Farm Income (5)
- Taxation Liability / Pension Payments
- Living Expenses (6)
= Total Available for all Repayments (7)
  Existing Annual Farm Loan Repayments (8)
+ New Farm Loan Projected Annual Repayments
+ Annual Hire Purchase / Leasing Repayments
+ Annual Home Loan / Personal Loan Repayments
= Total Projected Loan Repayments

Total Available for Repayments


Total Projected Loan Repayments


Repayment Cover

Repayment Cover must be > 1.
  1. The margin will vary depending on your efficiency. This will be determined by assessing historical farm accounts, profit monitors and in some cases by a farm inspection.
  2. As with the margin, income from other enterprises, e.g. beef, tillage, etc is generally verified through financial accounts.
  3. Single Farm Payment is assessed for sustainability beyond 2013.
  4. REPS / AEOS payments are included for the confirmed period of either the REPS or AEOS contract.
  5. Income included here will typically be net PAYE income from a farmer and his / her spouse. Rental income from a Residential Investment Property, Share Portfolio dividends, etc. will also be considered.
  6. Living expenses will vary depending on family circumstances, standard of living, etc. Historical financial accounts will be used as a guide to estimate projected living expenses.
  7. This amount is assumed as available to service all loans, both existing and proposed.
  8. All loan repayments are stress tested to take future interest rate increases into account.

When the existing farm business combined with the other sources of income listed above has sufficient profitability to support the repayment of all debts, (both existing and proposed), then it is likely that you will be able to secure bank support for your expansion project without submitting further information.

Farm Business Planning:

If repayment capacity will be reliant on additional income from your expanded farm business; then your bank is likely to want to see a more detailed business plan including projected cash–flows as provided by the Teagasc Five Year Farm Planning programme.

We would typically expect the medium term profitability levels projected in the farm plan to be comparable (on a per litre basis) with what has been achieved in the past. Significant increases in projected profitability above what has been achieved historically are likely to be queried. If the development proposed is an aggressive large scale expansion, then past experience tells us that profit per litre in the early years of the development may actually reduce until the expanded farm becomes fully established. New stock, additional grazing ground, the introduction of new workers to the farm and new buildings or accommodation facilities all have the potential to impact on herd performance and farm profitability.

The following are general areas which you should consider addressing within a business plan:

  • Your experience and track record to date; How long are you farming? How have you previously invested in your farm? (Land purchase, increased stock numbers and quality, prior farm development, etc).
  • Provide a summary of the project proposed; including a breakdown of the bank support sought and additional sources of funding available; savings, grant, etc. Your bank will like to see some personal equity commitment. An accrual of savings from historical farm profitability reflects positively on your ability to repay any borrowings proposed. This is not always a requirement however, and the extent of your recent farm investment will be taken into account.
  • How realistic are projected cash flows in the business plan? Are they based on historical performance levels averaged over a number of years?
  • What land base will be available? Specific detail on the extent of the grazing platform and its reliance on rented and leased land should be commented on. If a significant portion of the grazing block comprises rented land, then how likely is it that this rented land will continue to be available in future?
  • Projected stock numbers and breeding policy. If stock are to be purchased as a means of growing the herd, is there a health screening and vaccination policy in place?
  • As mentioned earlier, your business plan should detail the infrastructural developments proposed, i.e.
    • Accommodation: new build / conversion / alternatives
    • Milking Facilities
    • Machinery
    • Roadways, Water system, etc.
    • Milk Quota availability and purchase plans if applicable. How will you manage the super levy risk between now and 2015?
    • Labour Requirement; will there be additional farm labour employed and if so have you identified the person whom you intend recruiting?

The provision of such a business should help you and your bank to identify the key risks which you will be exposed to by undertaking your proposed expansion programme.

Debt per Cow

How much debt should a typical cow be expected to service? In reality, there’s no simple answer to this question. Is there such an animal as a typical cow? Output per cow, efficiency levels on farm, rented land, labour and family living expenses all majorly impact on the debt levels which a dairy herd can service. Take the following two examples. In the case of Cow A and Cow B, assume that both come from a 100 cow herd, that the rented land expense for A’s herd is €10,000 and B’s is €15,000,and that family drawings (including taxation) from A’s herd were €40,000 and from B’s herd were €60,000.

  Cow A Cow B
Output per cow (litres) 6,000 7,000
Net margin per litre (€) 0.16 0.12
Net dairy cash flow per cow (€) 960 840
Rented land per cow (100) (150)
Hired Labour per cow 0 0
Family Drawings and taxation per cow (400) (600)
Available to service debt per cow € 460 90
Debt per cow over a 15 year loan term (six per cent interest rate) c. €4,500 c. €890
Debt per cow over a 10 year loan term (six per cent interest rate) c. €3,400 c. €670

When considering these “debt per cow” figures, we should take into account that most farms will have more than one loan in place, that these loans will be over varying loan terms and that most farms will also have an overdraft or seasonal loan which will make interest demands on the farm’s cash flow. No hired labour charge was included in either of the above cases and is likely to be a consideration on many farms.

The variability in debt servicing per cow in the above example proves the point that each case has to be assessed on its own merits and that each individual case is different. Additional income from other farm enterprises, off farm employment, single farm payment, etc will also affect overall repayment capacity.

December 2011

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