Financing of the dairy sector has entered a critical phase

A survey of a number of large accounting and consultancy firms reveals the dire current situation. "At the moment, all negative developments for dairy farming are coming together - high costs and low income - and they are putting them in a bind," says Lubbert van Dellen, Agro market director & senior business advisor at Flynth. "My advice now is, if you can, to stay put in terms of financing and only do what you can influence. This includes reducing feed costs as much as possible. If you need extra land, look what you can reach foundations, churches, (groups of) private individuals or via leasehold."

High milk price dispelled concerns
Last year the picture for dairy farming was very different. The dark clouds that existed at the time regarding the nitrogen problem were pushed back by the exceptionally high milk price. This also meant that dairy farmers had to rely on the bank much less often. Last spring the milk price fell sharply, while it is only now starting to rise again, but only gradually. Last summer, interest rates started to rise sharply. Now the average is above 6%, previously closer to 7%. That is more than double compared to last year. Many other costs have also risen sharply.

More credit space is a new request
Simply increasing the credit limit on the current account is difficult. This has been going on for some time, but it is even more pressing in the current situation. In the past, this could be done with a few phone calls, but in recent years an increase has been seen as a completely new credit application. That costs a lot of extra time and money, and more interest. Sometimes something can be improved, says Erik van Gorp, from Abab Accountants and Adviseurs. For example, anyone who has recently installed solar panels can regularly apply for and receive financing on those panels retroactively via a bank loan or financial lease.

Number of options is shrinking
Unfortunately, there are not many options for the borrower. "In recent years, banks have paid less and less attention to smaller loans. Under 5 loans, in practice you have to deal with a team of remote employees instead of one permanent contact person. In addition, not everything is financed anymore. Phosphate rights, for example, have actually become a no-go at most major banks. The background to all this is that the average returns and margins in dairy farming have become quite thin."

Hans de Bie of Alfa Accountants and Adviseurs points out, like many colleagues, that dairy farmers themselves also face uncertainties. He also points out the still large differences in cost price and returns between dairy farmers.

No more benefit of doubt
"The differences in cost price can still amount to 10 cents per kilo of milk, and that also explains a lot of the difference in treatment by the banks between companies, but on balance company financing is now much more difficult than a number of years ago. Banks want to know what challenges your company is facing, for example what the average nitrogen load is or what the nitrogen load can be expected from your company based on the area plan. The effect of the derogation loss on your company must also be taken into account (which means that for manure placement and the costs?). Furthermore, a sustainability test is necessary. Banks are tightening their ratios because of all the uncertainties and where you may have previously been given the positive benefit of the doubt, they now opt for caution."

Shrinking loan portfolio
Rick Hoksbergen of Countus sees it no differently. He also refers to the macro indicators. "In previous years you always saw a growth in the agricultural loan portfolio. That is no longer the case. This is partly because the banks are imposing increasingly strict requirements." Switching banks is not at all convenient at the moment, Hoksbergen knows. "You can no longer get in, because banks are blocking the boat. Existing customers are served normally, he sees. This also applies to PAS detectors, but in general everything takes a lot more time and effort. The processing time for credit applications is Much longer, because all kinds of internal committees at the bank have to give an opinion on it and the criteria are therefore stricter."

Digital street instead of sparring
Smaller loans, of several hundred thousand, are also becoming less attractive to the banks. No relationship manager comes by to spar for that anymore. That's too expensive for the bank, you end up in the 'digital street' as they are called. "In a number of cases it is more attractive for farmers to do business with other parties. It can work more smoothly and can currently represent a 1,5% to 2% difference in interest, to the advantage of the private parties. You have to be careful not to enter into a stranglehold contract, but it is an option worth considering."      

Clamped between Brussels and The Hague
Van Dellen sees what the banks do in terms of lending, but notes that in essence the banks cannot do much else. "They fully base their lending on the Basel 4 criteria, which European banks must adhere to. This means that they look at your current earning capacity. This requires a liquidity margin of at least 5%, the current yield per kilo of milk must be at least 42 cents, the manure disposal must not cause any problems in the coming years and you must be able to repay it in 6 years at the current interest rate of about 25%. That is the current picture. Just take a look at it."

"It is therefore not without reason that Rabobank sent a letter to Brussels some time ago with the message that the pressure from monetary policy (Basel 4) could lead to the end of land-based agriculture. Agriculture is stuck between monetary requirements imposed on banks by Brussels, and the sustainability requirements imposed by The Hague."