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29 June 2018

Spring 2018 – The Financial Implications

Posted By: AIB Business
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2017 will be remembered as a good year in farming overall from a financial perspective, says Eamonn O’Reilly, AIB Agri Advisor, with improvements in aggregate farm incomes across most farm sectors, most notably in dairy following a recovery in milk price. However, that said, the year ended on somewhat of a sour note, with farmers, particularly those in the North West, forced to house livestock earlier than anticipated due to poor grass growth and adverse weather conditions – the precursor if you like to the fodder shortages and operational challenges that unfolded nationally through Spring 2018.

From a financial perspective, it undoubtedly resulted in higher costs too, however to date we have not seen a material increase for working capital support and no material pressure on farm current accounts. At the end of Qtr 1 2018, our internal metrics showed that average cash balances for the agriculture sector were up considerably year-on-year, while average overdraft utilisation for the sector were actually down year-on-year. 

We understand that averages can conceal a lot and that there are, and will be, individual challenges as merchant credit, tax liabilities and outstanding bills fall due later in the year.

I would encourage farmers who may need support to quantify the level of working capital they require and make early contact with the bank to consider an appropriate solution to their circumstances. We will work with customers on a case by case basis to find the best solution to suit your farm.

I’ve included below an example and some key considerations to bear in mind when quantifying your potential working capital need:

  1. Identify the additional costs incurred/potential production losses in 2018 (see example below)
  2. Establish your current cash position
  3. Identify the level of Creditors/Merchant credit outstanding and the interest being charged
  4. Estimate the potential impact on 2018 sales
  5. Collate the above and establish if Bank support is required.

Illustrative example:

Farmer finishing 150 bullocks every year, selling in Autumn. Cattle are usually out to grass from 1st March onwards (mean turnout date 15th March) but this year the cattle remained housed until 16th April (an extra 31 days). The farmer only had silage stocks sufficient to 28th March, which meant he purchased 110 bales silage (average quality) at €30/bale and fed an extra 8t of meal (€220/t). Combined, the total cost for extra inputs came to €5,060 [i.e. 110 x €30) + (€220 x 8)].

However, when you take reduced thrive into consideration for the 150 herd (i.e. 0.6kg/day housed vs. 1.2kg/day at grass for the extra 31 days indoors (18.6kg/day @ €2.30/kg = €42.78 x 150 cattle = €6,417) the total impact increases to €11,477.

Whilst the cost of additional inputs (€5,060) will be immediate, the impact of reduced thrive (€6,417) will not be realised until stock sales in November. By completing similar to the above calculation, the impact of Spring 2018 can be identified.

In AIB we have a long tradition of supporting farmers through periods of income volatility. Whilst it is not possible to predict the possibility of all externalities including weather, financial planning will help somewhat mitigate against periods of income pressure.

 

Please be aware that all of the views expressed in this Blog are purely the personal views of the authors and commentators (including those working for AIB as members of the AIB website team or in any other capacity) and are based on their personal experiences and knowledge at the time of writing.

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Allied Irish Banks, p.l.c. is regulated by the Central Bank of Ireland. Copyright Allied Irish Banks, p.l.c. 1995.

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