While traditionally banks would have looked at primarily the financial metrics and performance of a farm, the environmental sustainability of a farm is now of increasing importance.
Farms’ environmental sustainability has recently been incorporated in Bank of Ireland’s lending process. Agriland spoke to its head of agri Eoin Lowry about the sector’s green transition.
Banks are in a “unique” position to enable any sector in the economy to transition to a greener footprint, he said, as investment and finance will be needed to ensure this transition happens.
Environmental sustainability
Bank of Ireland, he said, wants farms to be sustainable in the future, as well as customers, consumers, and processors who are already looking for higher sustainability standards.
Due to new regulations and reporting disclosures coming in for all companies in the coming years, he said companies will have to disclose how sustainable their supply chains are.
Banks must also report on those sustainability metrics. “Our investors are more interested in where and how our lending is in terms of its green credentials,” Lowry said.
“We want to ensure that the lending that we do is sustainable and supporting the economy and our customers to transition to a greener footprint,” he explained.
“Our biggest challenge is that there is a real lack of clarity in terms of what the future environmental policies will look like for farmers, and that is reducing confidence on farms to invest in their farms for the future.
“What farmers are telling us is that they would like much more certainty particularly if they are taking out loans to ensure that their income is not going to be at risk in the future,” he added.
Investment needs on Irish farms
Bank of Ireland currently banks 82,000 farming customers, mainly mixed and beef farmers. Lowry said that there will be a significant investment need on Irish farms, particularly for land.
There has been a “huge increase” in the demand for land from farmers since the start of 2023 but supply remained static, Lowry, who said that this has been driving up prices, added.
While the national average price for land is around €13,000/ac, there are parcels of land that are making all the way up to €30,000/ac, he said, particularly in dairy intensive areas.
This is in line with farmers trying to comply with current and increasing nitrates regulations, he said. Bank of Ireland believes there will be an increase in investment in slurry storage units.
The bank also sees an investment in calf housing and, albeit slower, continued investment in upgrading of farmyards such as milking parlors, grain stores and animal housing, Lowry added.
In terms of tillage, the bank sees a “strong future” for the sector, albeit grain market volatility. However, land availability for the sector is one of the biggest challenges, Lowry said.
It is “very difficult” to see how the target to increase the tillage area to 400,000ha by 2030, set by government, will be met due to environmental pressure on the dairy sector, he added.
Lending process
Each farm’s environmental key performance indicators (KPIs) – fertiliser application rates, slurry spreading quantities and stocking rates – are reviewed as part of the bank’s lending process.
However, the review, of fertiliser application rates for example, only applies to loans of a larger scale generally exceeding €500,000, particularly for farms that are highly stocked, he said.
“We need to understand the organic nitrogen levels and the stocking rate levels and then we review what the application rate of fertiliser is,” Lowry, who stressed that there are no limits in place, said.
These KPIs, he said, are to ensure farmers have adequate repayment capacity in the future due to environmental regulation and policy changes coming down the road.
The introduction of KPIs of farms and how Bank of Ireland assess loans is first and foremost to “protect” its customers, according to Lowry who stressed that they are not “barriers”.
The bank’s head of agri highlighted that a farmer can take out a loan for anything up to 15 and 20 years, and thus decisions made today will be on the farm for a significant amount of time.
Bank of Ireland is, Lowry explained, stressing the repayment capacity to a lower level of intensity in terms of stocking rates, and also taking account of the slurry storage on the farm.
Farm debt
Bank of Ireland has 52% of the market of new lending to farmers, according to the head of agri who said that the bank’s lending is in line with the overall market.
The market for lending has decreased in the first quarter of this year compared to last year. This is a reflection of farmers’ strong profitability and cashflows in 2022, he said.
While total debt on Irish farms has been declining over the past 15 years along with the numbers of farmers with debt, the average debt on farms has been increasing, Lowry explained.
The number of farms in Ireland with debt has fallen from 53% five years ago to 39% last year, according to the Teagasc National Farm Survey 2022.
“The latest figures from the Central Bank show that total bank debt on Irish farms stood at €2.8 billion at the end of March 2023, down €72 million compared to March 2022.
“At the same time, new lending to Irish farms in Q1 2023 fell by €11 million (-6%) compared to the Q1 2022, reflecting the strong farm output prices, cashflows and profitability in 2022,” he said.