Robert McCullough: 'I was born into farming, so I understand needs of industry'
Chris McCullough talks to the head of agribusiness at Danske Bank about the farming crisis in Northern Ireland and what ways banks can help the industry.
Q. How long have you held your current post within the bank and what is your background in agriculture?
A. I consider myself born into agriculture, with my background on the family farm near Carrickfergus, which I still enjoy working on. We have always kept suckler cows and sheep as the main aspects of the enterprise, but like many Northern Ireland farms we have kept some of almost everything at one time or another.
The whole essence of rural Northern Ireland and its people is important to me and from early days in the Young Farmers' Club of Ulster I have always stayed involved in organisations linked to the industry and its people.
I have held responsibility for the agribusiness team in Danske Bank for just over four years and have managed to be at the wheel through a fodder crisis, a weather crisis with areas (including our own) seeing some of the worst snow in living memory, and now a dairy crisis. The words "interesting", "challenging", "eventful" all come to mind, but especially the word "rewarding". The resilience of Northern Ireland farmers is remarkable and seeing people pick themselves up and be successful in challenging environments always gives me pride when we have played a small part in the plan.
Q. We have just entered a new year. How was 2015 for the bank in terms of agricultural lending to farmers?
A. Generally, it was a successful year in terms of lending, with good numbers out across a wide range of sectors as customers develop their businesses.
It would be fair to say a small percentage of lending over the year has been in direct cash support to farmers, and obviously will add no value to those farms other than sustain them to better times. This is necessary for fundamentally good farms and demonstrates our commitment through the bad times as well as the good.
Q. For the past 12 months and more farmers have been suffering financially crippling low prices for their produce. This is affecting their cash flows, and therefore their ability to pay bills. How has the bank helped farmers in these situations?
A. We have always taken a long-term view of our customers' financial circumstances and the reality is that the better managed farms always come through in the end. We do not have a difficulty in helping them over the bumps along the way.
A banking relationship with a customer has to be about so much more than just asset purchase support.
Working capital support is more difficult and requires a clear understanding at farmer and banker level as to what is being funded, for how long and where the expected repayment is coming from. Extensions in overdrafts are the simplest method for smallish amounts relative to the business, but short-term loans will also be used where the bank is comfortable a repayment strategy can be adopted in the near future.
Q. The dairy industry in particular has suffered a great deal in terms of low prices. Dairy farmers could be regarded as those who take out the higher loans for machinery and equipment. With incomes so low, how are your agri-managers dealing with repayments?
A. Firstly, low milk prices are not a new phenomenon, although I agree that this particular cycle is looking like it will set new records.
However, we have developed good strategies and experience in dealing with farmers through these cycles.
The tools are similar to other sectors in that we will sanction increases in overdrafts and utilise our dairy support loans, which we will arrange in conjunction with cash flow forecasts and draw down on an agreed basis over a period of months.
These loans are unique in the sector in that repayment terms are deferred until the farm has demonstrated an ability to repay through increased milk receipts.
I regard these loans as cash "life support" to the businesses in order that standard day-to-day operations can continue on a prudent and managed basis.
Q. There is not an indefinite period of time that a bank can continue to restructure loans to help alleviate the problems of making repayments in a period of volatile prices. Has Danske Bank gone past the stage of restructuring loans to farmers?
A. We have restructured very few loans in the current crisis, as there is little point in developing a repayment programme when there is no clear forward knowledge of the farm's repayment ability. Constant restructuring kicks the can down the road, and eventually limits the farm's investment and growth ability, but also leaves less of a cushion to deal with future volatility.
We will definitely have a lot of restructuring after this current malaise, but I will be encouraging farmers to pay down as much debt as possible when they have the ability to do so - otherwise they will have no financial flexibility going forward.
Q. Even though milk prices were forecast to recover at the end of 2015 they still have not. There is speculation that prices could drop to 15 pence per litre very soon. How would the bank cope with that in terms of supporting your dairy farmer customers after a year of low prices?
A. Short-term prospects are not encouraging, but most farmers, and indeed the banks, have been working off average milk prices of 17/18ppl in their cash flows, so with winter bonus payments in the last couple of months I think we are reasonably well within broad assumptions.
We have spent a lot of time working with farmers to put facilities in place for most of this year, so broadly we are as expected, and while I am not comfortable with the milk price, I am confident that we have taken the right steps to be supportive and I do not see that changing.
Q. Let's call a spade a spade. Farmers who are coming under increased financial pressure need to wake up and take a closer look at their bottom line, their incomes and outgoings. With a period of uncertain prices ahead of us in 2016, what will the bank be advising on this?
A. Unfortunately, we are at the stage where a decision to just hope that things get better is not an option. Farming is a business at the end of the day and every business owner - whether he or she runs a stall or a top 100 company - needs to constantly evaluate the performance of that business and take responsibility.
There will be things within your control and things outside your control, and although milk prices are largely outside the farmers' control it must drive decisions within their control, such as hire purchase commitment, costs and efficiency focus.
Q. Overheads are high on some farms, as are repayments for high ticket items of machinery and other equipment that are only used some of the year. If these items are not on hire purchase agreements with other companies these are all assets that the bank can easily recall should farmers get behind with payments. What is the bank's view on this?
A. I believe that the machinery costs on some farms are unsustainable. Every asset on a farm needs to justify its existence, whether it's a piece of machinery, a cow, or something else, and although there are lots of farms justifying machinery expenditure, there are plenty who are not. My preference is that farmers manage their own cash position and turn under-utilised assets into cash if that is what is required to support the survival of their business.
Q. How many farming customers does Danske Bank have and how many of them are in financial trouble?
A. We have long been known as "the farmers' bank", and probably bank about half the farmers in Northern Ireland, although it is difficult to be exact.
In terms of how many are in financial trouble? Actually, very few. How many are experiencing difficult trading conditions? Quite a few, as would be expected with market conditions. It must be remembered that a core strength of a farm business is its ability to deal with cycles, whether they be weather-driven or market-driven. Those who cannot develop a business model that can sustain volatile trading conditions will always struggle.
Q. For years banks secured loans by holding the deeds to farms or land. With prices on the floor the values of these securities have also fallen, leaving what could be a negative equity in some cases. How is the bank addressing these situations?
A. Most agents would suggest that they have not seen any significant softening in the value of land assets and that feels right at this stage.
Farmers are obviously large players in the land market, but they are by no means the only players, with many professionals or individuals with access to outside sources of income ensuring that there is still a healthy enough market.
We must not lose sight of the fact that all the banks still have farmers on their books who can and will continue to buy land.
The management capability on the farm and the ability to generate cash profits is more important to us than the value of the asset, but I agree that security does give any lender more comfort.
Q. For the past 12 months industry leaders, banks, milk processors and farmers have all believed that the long-term future of the dairy industry is secure and prices should start to change soon. But they have not. In this new year, has the bank changed its outlook on the dairy industry?
A. It is all about the definition of "soon", I suppose, and nobody can be clear about that. The crux of the problem is a supply and demand imbalance, and although there are thin rays of light around supply easing off and some players coming back into the market, this has not manifested yet in terms of farmgate prices.
I think it is a case of planning for "soon" to be some time away and hoping that's not the case. We have not changed our outlook for the industry, but we have to be realistic and understand that there is only so much debt that a farm can handle.
Q. European Union Farm Commissioner Phil Hogan refuses to change the goalposts when it comes to raising intervention prices for milk. Would the bank support such a move?
A. I think that all avenues have to be explored to give some relief to the local industry, but the fundamentals are market forces - which even Phil Hogan has little control over.
The challenges for Mr Hogan in supporting an intervention review are more complex I suspect than most appreciate, but there is certainly strong local justification in getting the price reviewed.
Q. There are around 2,400 dairy farmers left in Northern Ireland and that number is already likely to drop in January. What is the bank doing to ensure its share of these dairy farming customers stay in business?
A. All the banks have strong dairy farming clients, who will work their way through this, but I think it would be naive to believe that some rationalisation within the industry is not inevitable. From our perspective, we are supporting all our dairy customers (who need support) either by way of direct cash support or where we feel that it would be inappropriate to increase debt levels, we will allow capital moratoriums and time to adjust their businesses. I think we all need to be upfront enough to say that exiting the industry is maybe the right move for some businesses and that could be for a number of reasons, with low milk prices just being the accelerant to the decision.
Q. How many dairy farming customers does Danske Bank have in Northern Ireland? How many of these are the bank concerned about?
A. Over half of dairy farmers in Northern Ireland bank with us, but many of them carry no debt or very small levels of debt, and I would have no concerns about their ability to get through this. Ultimately, the higher borrowed clients carry an elevated level of concern, although many have taken steps to strip costs out of their businesses and have relentlessly pursued efficiency improvements. Those who have yet to do so need to address this urgently. The best we can hope for at the moment is a brake on the price falls and a steady, slow recovery. That means that businesses will have to work on a lower milk price for some time than they had been accustomed to.
Q. What needs to be urgently done to ensure farming has a future in all sectors in Northern Ireland?
A. There are a number of factors, with no one silver bullet. As farmers, generally, we could be more efficient. The efficiency gap between the top and bottom quartile of farmers is huge.
We have some of the best technically skilled farmers in the world who set levels of excellence that others should aspire to, and even if they do not reach it they will have improved. We also need to fully exploit the natural advantages that we have in terms of grass and water abundance.
We need to develop into new markets and increase penetration in existing markets. Lots of work is being done on this front, but we must keep that focus.
I can understand that we need to produce what the market demands, but there has to a realistic share of the profit filtering back to the primary producer and that may need more integration of the whole supply chain.
While it has been successfully done in the poultry sector, the diversity within the grassland-based sector would preclude large-scale integration. But there is certainly room for adoption of some of the principles.
In a lot of circumstances the land assets are not in the hands of people who can take the industry forward and the cost of taking ownership of the land is realistically outside the scope of a business which is investing heavily in on-farm assets such as milking parlours, housing and equipment.
We need a mindset change, where we can be comfortable that access and management of the land is sufficient without ownership.
I would like to see more longer term leasing of land, as I think the conacre system has served its purpose, but it is now time to evolve so that young, progressive and technically skilled farmers can secure land needed to develop their businesses.
Tax legislation and concern about potential future tax legislation creates a mindset which prevents some landowners from leasing land to other farmers who can utilise the land better. If tax powers are being devolved, then I think there is scope to review the whole area, especially as we witness some of the scenarios being played out currently where landowners are looking at all sorts of innovative ways to retain active farmer status.
If there are early lessons to be learned from the current situation, then it is that better use of hedging needs to be on the agenda in terms of farmer and processor contracts to allow more effective forward planning.