Oireachtas Committee on Agriculture, Food and the Marine
Tuesday, February 10th 2015
Opening Statement by Allied Irish Banks, p.l.c. – Ken Burke, Head of Business Banking
Chairman and Members of the Committee, thank you for giving AIB the time to provide the
Oireachtas – and the Irish public -- with an update on the bank’s strong through- the-cycle support
for the Irish dairy sector, including finance for development and expansion and supporting farm
cashflow through income downturns. My name is Ken Burke, Head of Business Banking with AIB and
with me today are:
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Dr. Anne Finnegan – Head of Agri Sector
Tadhg Buckley – Senior Agri Advisor with responsibility for South Munster
AIB has a long association with the Irish agri-food sector. This bank is the main lender to Irish
farmers and AIB accounts for 40% of total Irish farm lending. Our current market strength in this
sector is the result of a strong relationship with Irish farmers extending back over many decades and
cemented with the establishment of AIB’s Agri Advisor team in the early 1970’s. We kept our Agri
Advisor team in place since that time and throughout a period when so many regarded agriculture as
a sunset industry. As a core part of our SME business strategy, today we have an Agri-sector team
comprising of 16 Agricultural Science graduates, all regionally based. The role is to provide sound,
objective farm financial and technical analysis in individual cases. The team provides significant
training to our frontline staff ensuring that they are equipped to support farmers throughout the
cycle. It has worked closely with all customer- facing staff to support farmers through various cycles
and crises, including the dairy sector downturn in 2009, the weather and fodder crises of 2012/2013
and various downturns in the pig sector.
Over the past number of years we have seen strong growth in farm investment, driven primarily by
the dairy sector, in land, farm buildings, machinery and equipment and stock. Our recent Agri
Financial Services Survey, completed in January of this year by Ipsos/MRBI, indicates that half of
dairy farmers currently have plans to invest in the coming three years. Our analysis of the market
predictions from all of the main forecasting agencies1 indicates that the medium term outlook for
global dairy remains positive. On this basis, AIB maintains a strong positive long term outlook for the
dairy sector and we are very comfortable to support investment in the sector.
1
Food and Agriculture Organisation of the United Nations (FAO), Organisation for Economic Co-operation and
Development (OECD), United States Department of Agriculture (USDA), Rabobank
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Furthermore, our experience of this sector has been positive with dairying experiencing substantially
lower levels of credit difficulties than other SME sectors.
While the outlook is for generally strong dairy prices, volatility will remain a key feature of the sector
aligned to changes in input prices, output prices and weather or a combination of any of these three
factors. Our own Dairy Sector Outlook Report shows 30% of dairy farmers perceived milk price
volatility as a key challenge in the next five years. We have written extensively in our own quarterly
farming newsletter, Agri Matters, about managing farm cashflow through the cycle and planning for
income volatility. We have also contributed to many external publications on the same theme.
In the past three months we have held seven large regional farmer meetings to discuss the prospects
for the farming sector. Approximately 2,400 farmers have turned out at these events. AIB has
always advocated that the opportunity to expand dairy output should only be considered by farmers
when they have achieved an efficient cost base. Our core message at these meetings was and is
‘better before bigger’. While we know that all farmers are vulnerable to income volatility, an
efficient and lower cost base producer is better positioned to withstand a period of reduced income.
At AIB we consider volatility to be the new norm and for farmers, managing farm cashflow is now
key and requires a planned approach to allow the business withstand both the peaks and troughs of
the cycle.
When it comes to lending, we must, from day one factor in the reality that not every year will be a
great year. The average milk price for 2014 is estimated at 38 c/litre, the second highest annual milk
price ever paid to Irish farmers. AIB takes a through-the-cycle view of milk price factoring in periods
of low and high milk price. We recognise that, in reality, some years the farm will generate a cash
surplus and some years a cash deficit that must be managed. Of course, milk price is only one
component of income and we also take account of cost of production, which varies quite
significantly among farmers.
It is useful to look at farming sectors that have been dealing with volatility for many years. AIB has
much experience of banking the pig farming sector, which has long been exposed to the vagaries of
the world market, receives no market support and experiences a high level of income volatility
exacerbated in recent years by feed price fluctuations.
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Pig farmers have responded to this volatility by improving production efficiencies on an ongoing
basis, managing their cost base (in particular feed cost), undertaking strong financial management,
including cashflow budgeting and building a buffer cash fund in good years to support the business
in lean years. AIB plays a key role in supporting pig farms through tough periods, knowing that the
cycle will turn. In essence, we take a strategic view of short term challenges in this sector and we
continue to do the same in the dairy sector.
The current downturn in global milk price comes after five years of strong milk prices by historical
standards and may give rise to cashflow pressure for some dairy farmers in the months ahead.
Analysis of AIB’s dairy farmer customer base indicates that the sector is currently well positioned
with strong cash balances, available overdraft limits and overall strong credit performance relative
to other AIB SME sectors. This is a marked difference to 2009.
As in 2009 and 2012/2013, AIB will this year work with impacted dairy farmers to support them
through the current income downturn. In 2009 when milk price averaged 23 cent/litre, we worked
with farmers on an individual basis to find an appropriate solution to their cashflow problems.
We’ve begun a programme of proactive engagement with the sector to encourage dairy farmers to
make early contact with their bank. We are asking affected customers to estimate, as best they can,
the likely deficit in their 2015 annual cashflow. Experience has shown us that there is no one
universal solution at a time like this; instead, there are a number of support measures available
which we can tailor depending upon the individual circumstances.
Our support package for dairy farmers can include the following; review of monthly repayment
commitments, short term increase to working capital facilities, short term loan facilities and an
interest-only period on existing borrowings. We will utilise our existing core lending products to
support the sector at this time, including our Farmer Credit line (4.2% variable)2 which has the
lowest cost of any working capital product in the farmer market and is extremely competitive
relative to the cost of merchant credit.
2
Correct as at 06/02/2015
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We are very conscious of the significant opportunity that expansion of milk output offers farmers,
the dairy industry and the Irish Economy but are also aware of the heightened short-term volatility
that must be managed. As the leading bank to the dairy sector we recognise the key role that we
play in not only supporting the development of the sector but supporting it through the fullness of
the cycle.
In summary, on behalf of the bank, I want to again express thanks to you for inviting us here today.
We very much appreciate the opportunity to discuss with you what is one of our most important
SME sectors.
Thank you and we look forward to your questions.
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