High land prices are the biggest challenge in extensification

During the presentation of Rabobank's 2023 annual figures earlier this year, it emerged that dairy farmers applied for less financing last year than a year earlier. The requested credit decreased by 35%. And in 2022, 40% less credit was applied for than in 2021.

Boerenbusiness will discuss the underlying reasons, the returns in dairy farming and the political uncertainty that holds the sector in its grip with Marijn Dekkers, Livestock Sector Manager.

Of Rabobank's special sustainability pot for the agricultural sector of €3 billion, only €31 million had actually been provided as of December 2023, 35. That amount has now increased further. More than 270 loans have been granted. Of these loans, 92% were granted to dairy farming, mainly for extensification. And according to Dekkers 'this will certainly continue'.

When it comes to sustainability in dairy farming, the biggest steps can be taken in the field of extensification, Dekkers confirms. "More land under the companies and therefore a lower livestock density." That's just not easy. "If you want to get more land, that is quite a challenge. The land price is going towards €100.000 per hectare and the interest rate is now relatively high compared to a few years ago." The options for purchasing land are therefore more limited. Dekkers expects that in the coming years more attention will be paid to securing land (for example from retired livestock farmers) in collaboration with others, such as arable farmers, partly through lease structures. "Buying is an expensive option. The competition with crops such as potatoes and onions, but also field vegetables, is fierce."

Longer terms or grace period
Financing land completely interest-only is not one of the possible solutions. This is not allowed under the Basel Accords (agreements between central banks with the aim of protecting the solvency of banks). Banks are strictly regulated internationally, which means that, for example, interest-only financing is not possible. Even if it were possible, it would still not be desirable according to Dekkers. "It is good to pay off, then you also have financial space for other plans." What Rabobank is looking at 'is to extend the terms'. "We are now also doing that with the €3 billion. And if someone switches to organic, for example, they may not have to repay for a certain period, one or two years. With a longer term of 28 instead of 25 years if you buy land, the space can be created to take that step."

What is possible depends on three situations, according to Dekkers. "How much private land - read: how much equity - is there, what is the condition of the buildings and what is the moment of the generation change? With an old company you have to repay faster than with a recently acquired company with modern buildings." New Basel agreements do not provide any relief. "In general, you see that more attention is paid to returns and less to certainty. These will therefore be somewhat disadvantageous rather than advantageous."

When taking over a family business, the financing that is already available forms 'the basis on which you leave'. "That often gives an advantage in value, but not in yielding capacity, says the sector manager. "If you need additional financing because you want to purchase land or start fermenting, your current costs must first be examined. The fact that you are allowed to fertilize less results in a different return that the company must adapt to."

According to Dekkers, in addition to financing sustainability from the 3 billion fund, 'standard investments' are also financed, such as company takeovers, milking robots and warehouses. "We continue to help our customers in their business development. In principle, expansion can still be financed, but expansion in animal numbers is currently of very little importance, the location is very decisive for this and little is being built at the moment," says Dekkers. "Each cow entails manure costs and phosphate costs (although that is less), and there is no placement space. So we don't see much demand for that." When financing - even if it does not concern sustainability - the sustainability performance of the company is now standardly taken into account.

Political uncertainty
Political uncertainty has gripped the sector for five years, according to Dekkers. "That is starting to become a long time for entrepreneurs. Investments are made over long periods. You want to be sure that it has not been in vain and not that things will have to be done differently later. A stable must be able to last thirty years. You cannot have a stable. that will look very different in a few years, there is no such space. Dairy farmers are very much looking for a certain degree of security and so are we as a bank."

"It is very desirable that more frameworks are set in the near future about what things will look like in fifteen years' time. In the absence of clarity, we have therefore already drawn up the agri-food vision 2040. To provide direction. We are of course well aware that a vision is not is the same as having legal certainty with the legislator. It must also be clear which innovations are future-proof and legally guaranteed. So that you can, for example, install a Lely Sphere or a mono-digester with which the nitrogen target is also ticked off with daily defertilization in addition to the CO2." Rabobank is positive about mono-manure fermentation. "That could certainly be part of a solution. It ensures more sustainable energy consumption, reduction of emissions and it is a revenue model." There are also a few barriers, the sector manager indicates. "You see that the SDE subsidy is not sufficient everywhere, that the blending obligation has been postponed and permits are also quite an issue, especially for the larger digesters 
who can also receive manure."

According to Dekkers, in addition to the higher interest rates, high land prices and the business climate, what also plays a role in the low willingness to invest are the current milk prices and fertilizer costs. Dekkers: "The dairy farmer structurally needs a milk price of just under 50 cents per kilo. "It is a pity that if nothing changes in the short term, the return will go to manure costs instead of sustainability. If dairy farming wants to retain financial scope to become more sustainable in a broad sense, manure costs must really come down. High fertilizer costs in the coming years will put dairy farmers at a disadvantage to take further steps. ." With the phasing out of the derogation, less animal manure can be applied and the manure production ceiling will be reduced by another 1% on January 10 of next year.

"We cannot change the revenue model, but we do try to offer favorable financing with the €3 billion," concludes Dekkers. "We also indicate to the government that a solution must be found for the manure market. We cannot determine the milk price and the revenue model, but we can see what is possible."