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01 October 2019

Key Considerations When Contemplating Farm Investment

Posted By: AIB Business
View of a farm from a hill with a view of green fields in the backdrop.

The nature of farming like any business, is that farmers are continually investing in their farms, undertaking investments in land, infrastructure, buildings, stock, and machinery to improve on-farm efficiencies or productivity.

In AIB we are seeing strong demand for credit, particularly for farm buildings / infrastructure, and given the continued availability of TAMS II grant aid, expect the level of farm investment activity to remain largely buoyant in the months ahead, notwithstanding the market challenges in some sectors.

Below are a few key considerations if you are considering investing in farm infrastruicture:

  1. Take the necessary time to plan your investment carefully
  2. Give strong consideration to your potential options – visit similar projects and seek strong professional advice where required to support your future plans.
  3. Ensure the investment fundamentally serves to enhance and strengthen your existing operation, otherwise, what’s the point?
  4. Be realistic in terms of what the investment will deliver - base projections on conservative market prices, levels of output and operating costs.
  5. Maximise existing on-farm efficiencies before embarking on any further investment or expansion. Otherwise, the result will be a multiplication of inefficiencies that can result in either no, or low, increased profits for your farm business.
  6. Don’t underestimate the length of time involved, from the planning process, attaining quotations/planning permission for the development work where relevant, and finally carrying out the development work itself.
  7. Understand the effect, if any, the construction project will have on existing on-farm operations / processes, particularly if building on an existing farm yard
  8. Understand the effect, if any, the investment may have on farm cash flow. Returns are not often immediate and take time to fully materialise.
  9. Structure bank finance appropriately - short term financing of long term assets, or trying to repay a loan for capital expenditure items over too short a time frame can often put significant pressure on farm cash flow.
  10. Cost the investment properly - starting an investment from cash flow and running out of money may lead to delays and add further to costs. Get quotations from a number of reputable suppliers, using detailed specifications where possible, and include a contingency cost of around 10-20% in all plans for ‘unforeseen extras’. Often we find farmers use their ‘last job’ as the principal point of reference. However, given the long-term nature of farm investment, costs may have risen significantly since, and that’s before you even account for labour costs!!
  % change in Wholesale prices 2018 vs. 2010
Sand and gravel  +70.3%
Cement +9.1%
Ready mixed mortar and concrete +3.5%
Concrete blocks & bricks +10.6%
Structural steel & reinforcing metal +16.3%
Rough timber (incl. plain sawn) +17.1%
Electrical fittings +11.2%
Lighting equipment +16.6%
Pipes & fittings +27%
Plaster +18.9%

(Source: CSO, 2019)

As a leading bank for the sector, AIB believes that the long term prospects for the sector are largely positive. We have partnered the sector through its development over many years and remain committed to playing our part in supporting the sector to maximise its potential. If you are contemplating farm investment, visit your local AIB branch, call 1890 47 88 33 or click here to see how best we can support your individual needs.

 

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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