A Review of the Financial Status of Farms and Future Investment Requirements:

Transcription

1 A Review of the Financial Status of Farms and Future Investment Requirements: Fiona Thorne, Emma Dillon, Trevor Donnellan, Kevin Hanrahan, Thia Hennessy, Anne Kinsella, Doris Laepple, and Michael McKeon Report launch January 14 th 2015 BOI, Mespil Road, D 4,

2 Overview Acknowledgements Context Main findings from the research Historical review of Irish Farm financials Comparison of current Irish and EU farm financials Identifying determinants of investment on Irish farms Investment needs of dairy farm sector to 2020 Investment needs for the pig sector to 2020 Scenario analysis exploring future investment needs Conclusions and caveats

3 Members of Advisory Group DAFM (Sinead McPhillips/Brian Kennedy) Macra (Derry Dillon) BOI (Sean Farrell) UCC (Michael Keane) Teagasc (Kevin Connolly, Financial Management specialist) ACA (Martin O Sullivan) IFA (Rowena Dwyer/ Gerry Gunning) ICOS (TJ Flanagan/Seamus O'Donohoe) ICSA (Eddie Punch) ICMSA (John Enright/Paul Smyth/Mary Buckley)

4 Context Financial health of farms can be measured in several ways How indebted is the Irish farm sector? How does that indebtedness compare with rest of EU? What determines investment decisions on farms? Policy makers & banking sector needs to quantify investment needs Capacity of Irish Ag sector to sustain debt Especially in the context of volatile profitability Future investment needs of Irish Ag sector (in context of FH2020)

5 A Review of the Financial Status of Irish Farms 2002 to 2013 Emma Dillon, Anne Kinsella and Fiona Thorne

6 Farm Financial Performance: Background Several financial indicators used Overview of debt and assets Solvency Liquidity Financial efficiency Important to view financial indicators collectively rather than in isolation Analysis uses Teagasc NFS and faced some challenges Discontinuities in Teagasc NFS data Change in sample selection post 2011 Change in system definitions post 2009

7 Farm Financial Performance: Summary Remarks Average debt level on dairy & tillage farms significantly higher than on livestock farms Average debt levels in 2013 All farms holding debt is 24,000 All dairy farms 62,000 Dairy farms that have debt 94,000 Majority of recent loans used for buildings Aggregate Debt Picture 2013 Closing balance of NFS debt 1.9 billion 80,000 commercial NFS farms Not to be confused with debt levels recorded by the Central Bank

8 per farm Source: Teagasc, NFS various years Average Farm Debt ( ) Nominal Debt Real Debt (Constant 2002 prices) Average debt level now 24,000 per farm; Sharp incline up to 2008, but levels still high in nominal terms; But not as steep an increase in real terms.

9 Farm Financial Performance: Summary Remarks Teagasc NFS data indicates that: Increase in nominal liabilities on farms in recent years Historically low level of debt relative to assets and equity Reaffirms the farm sector s strong financial position Irish farm sector has remained well insulated from risk: Weather Macroeconomic conditions Fluctuations in farm asset values

10 EU farm financials comparison Fiona Thorne

11 EU Farm Financials Comparison: Summary Remarks Today s globalised market place for agricultural commodities Competing on a world stage Inter country comparisons are increasingly important EU FADN assessment of Irish farms On average have low debt High asset values relative to the EU average Evident that Irish farms are in a very healthy position in comparative EU terms Solvency Liquidity and Financial efficiency

12 EU Farm Financials Comparison: Debt / Asset ratio total Liabilities / Total Assets EL IT RO SI IE ES PT MT CY PL UK AT SK LT EU27 BU HU DE LU CZ FI BE EE SE LV NE FR DK Debt/asset ratio for all EU farms shows a healthy solvency level for Irish farms Similar story for more indebt dairy farms i.e. 5% in Ireland versus 20% EU average Source: Based on authors estimates from FADN data (2014)

13 EU Farm Financials Comparison: Summary Remarks Previous work by Teagasc Illustrated the competitiveness of the Irish dairy sector Irish farms increasingly exposed to market price volatility The ability to demonstrate resilience will be important in the future Level of debt and financial status of Irish dairy farms Not servicing high debt levels in years of extreme market volatility Should provide a relative advantage in resilience terms

14 Review of Farm Financials and Investment Requirements of the Pig Sector by 2020 Michael McKeon

15 What are the Credit Requirements of the Irish Pig sector? Credit required to Improve efficiency Move from merchant feed credit to conventional bank financing Credit required to increase pigmeat output Provide additional housing

16 Improving Efficiency in Irish Pig Sector Largest potential efficiency gain identified is reducing feed credit Average cost 6 cent/kg dwt Farm pig feed credit in Ireland is quite long in duration Estimated at 3.75 months High pig feed prices associated with long credit terms Increases production cost/reduces international competitiveness e.g. in Netherlands pig feed credit is just 7-14 days Refinance pig feed credit with 5 year term loan from banking sector Benefit from lower bank interest rate 5 per tonne decrease in feed price (competition in feed sector) Total estimated borrowing required to eliminate feed credit 70 million

17 Increasing Pig Output Scenario 1 Increase Irish sow to 200,000 sows Last reached in 1997 Additional 56,000 5,000 / sow place Require a total capital investment of 280 million But not the most likely scenario Scenario 2 Sow herd was is decline for long period More likely scenario: maximise efficiencies of current herd Increasing sale wght (+5 kgs) and pigs per sow (+2 pigs) Produce same pigmeat volume as the original 200,000 sows target Require capital investment of 141 million. Cost per kg (including higher financial cost) would reduce by 2 cent

18 Investment Requirement Pig Sector Summary Remarks Substituting Feed Merchant Credit with Bank Credit A potential borrowing requirement of up to 70m Credit required to invest in new housing to achieve FH2020 target for sector Capital investment of 141 million in pig facilities

19 Determinants of Investment Doris Laepple and Fiona Thorne

20 Determinants of Investment: Summary Remarks Setting the context for the who is investing what Descriptive analysis of investment levels and farm types Econometric model to identify factors that affect investment decisions The analysis is based on 2013 Teagasc National Farm Survey data

21 Average Net New Investment by Farm System Net New Investment: Gross new investment in machinery, buildings and land improvements (including forestry) minus sales and capital grants received during the year. Net New Investments ( ) Dairy Cattle Sheep Tillage All farms Average 18,010 4,652 3,295 11,810 8,140 Average (investing farms) 23,514 8,849 6,899 20,663 18,406 Almost 60 percent of all farms had positive net new investments in 2013

22 Determinants of Investment Decisions Positive Negative No significant impact Dairy farming Farm size Family farm income Off-farm job spouse Cattle, sheep and tillage farming (in comparison to dairy) Farm size squared Age Household size Off-farm job farm holder Large dairy farms, with higher family farm income, and an off-farm job held by the spouse, are most likely to invest

23 Investment Requirements of the Dairy Sector by 2020 Trevor Donnellan, Kevin Hanrahan, Thia Hennessy and Doris Laepple

24 Investment requirements to 2020 Dairy Overview Objective: What investment is required to achieve the Food Harvest 2020 target of increasing milk production by 50% Depends on investment already undertaken by dairy farmers Will depend on an uncertain economic environment

25 Investment in the Dairy Farm Sector ( ) millions Buildings Land Improvements Machinery Quota Total 1.94 billion Average farm output increased by 32%

26 Achieving the Food Harvest 2020 Target 50% more milk relative to the base 37% more relative to 2013/14 quota year Most of the extra milk will come from existing farms Increasing deliveries per cow (no capital cost) Converting beef to dairy (moderate capital cost) Significant expansion on land base (high capital cost) Cost of 1,500 to 3,000 per cow Remainder will come from new entrants Substantial capital requirements 3,500 per cow (excluding land)

27 Investment required million Investment by Existing Farms Acquisition of dairy cows 401 New Milking Parlour (on 2,900 farms) 649 Conversion of beef housing to dairy (for 176,000 cows) 76 Upgrading of existing milking facilities (on 8,000 farms) 63 Extension to existing housing (for 60,000 cows) 53 Investment by existing farms 1,241 Investment by New Entrants* Investment 233 Total New Investment 1,474 * Based on 500 new entrants average herd size 130 cows

28 cent per litre Dealing with an Uncertain Future Can t accurately predict future Historic highs (2013) and lows (2009) How severe will such shocks be? How long will such shocks persist? Examine 3 future scenarios Contrasting visions for future dairy demand & milk prices History Weak Steady High Source: Donnellan & Hanrahan (2015)

29 Three Milk Price Scenarios Scenario 1: Stable international demand for dairy commodities underpins stable Irish milk prices over the period 2015 to 2020 Scenario 2: Strong international demand for dairy commodities leads to an increase in the milk prices received by Irish farmers Scenario 3: Weak international demand for dairy commodities reflected in low dairy prices over the period 2015 to 2020

30 Investment Requirement Dairy Summary Remarks Farms have invested almost 2 billion since 2007 Farm output increased by 32% About 140m per year in machinery & land improvements ( normal investment ) Total farm-level investment required to meet the 50% increase in production target by 2020 Depends on price scenario Ranges 1.5 to 1.9 billion Investment does not equate to demand for credit, internal sources will also be used for example investment in cows

31 Concluding Comments (1) Irish farmers in general have a sound financial structure Financial indicators for Irish farms are good Compare favourably with our main competitors in Europe The Irish pig industry continues to improve its efficiency levels Despite tight financial margins Pig sector investment required for feed credit and capital ex. Estimated investment of 141 million Investment on dry stock & tillage farms is expected to follow recent trends no major changes expected Approx. 270 million invested by these farms each year

32 Concluding Comments (2) Traditionally, dairy farmers the most active investors Likely to continue given the impending removal of the milk quota Dairy investment of 1.5 to 1.9 billion up to 2020 Significant investment and credit will be required If farm sector is to achieve Food Harvest 2020 targets Sound financial planning will be critical Safeguarding farmers from financial stress 32