Letter from Europe: Shell-shocked banks discover farmers are good credit risks

Thursday, April 2, 2009

Financiers are seeing farmers in a new light after the serial crashes of city businesses. As a result, credit might be easier to come-by this year for European dairy farms planning expansion

by NORMAN DUNN

Was there any good news amongst the doom and gloom of the global financial crisis this last winter? It seems there was – and it was directed right at farmers.

The glad tidings were not the ones about higher grain and oilseed prices expected in the fall of 2009. We all remembered 2007, when wheat prices also soared after harvest. Most farmers here in Europe had pre-sold anyway at less than half the price and were bitter about missing the boat. At the same time, feed companies started immediately passing the cost down the line to stock producers, so Christmas 2007 wasn't very merry for them either.

Now history is repeating itself. Analyst Jochen Hitzfeld from finance house UniCredit in Munich, Germany, said as early as this January that sowing plans for eastern Europe and Russia were being cut back severely because there was much less credit available for seed and fertilizer, not to mention farm machinery maintenance. In fact, Hitzfeld was one of many predicting reductions of more than 10 per cent in grain production throughout the northern hemisphere this year. The resultant drop in harvests meant, he promised, more income for the farmers who hung on there and just got on with the sowing.

But slower credit approval seems to apply only to the huge cropping conglomerates further east. The good news for the west of Europe came from another banking expert at a German Agricultural Society (DLG) conference this year. Rüdiger Fuhrmann explained that farmers had earned themselves a better image as they emerged as quiet and safe credit havens, compared with the whiz-kid city entrepreneurs borrowing billions and losing them all. What's left, according to Dr. Fuhrmann from the NordLB bank in Germany, is the sudden realization that farmers are reliable!

His bank is not the only one now saying that the financial crisis will probably not affect farmers wanting credit. Agriculture has earned its reputation due to relatively low failure rates. And, of course, individual farming businesses are still fairly small scale compared with industry or most service concerns. This means that risk is spread more safely over a large number of medium-sized borrowers.

More friendly bankers are probably the main reason why a survey amongst European dairy farmers indicates a huge will to invest in new barns, equipment and machinery. And this is despite milk prices for producers almost everywhere in Europe being at least C$0.05 per litre below breakeven (farmers reckon they need at least C$0.50 per litre and, this spring,  most were lucky if they were getting C$0.45).

Overproduction is one main factor for this state of affairs, even although the market is partly protected by Europe's milk quota system with each country having a national limit to production. This protection won't last long, however. By 2015, the European Union wants to end milk production quotas and let the market alone decide price.

While most reckon that this will bring one of the biggest changes in dairy farm structure since the coming of reliable milking machines, there's no arguing that plenty want to press on after 2015 and face the challenge of smaller returns per litre with reduced labour costs through scaling-up.

In France, for instance, the European Dairy Farmer Scientific Team for Analysis and Research (EDF-STAR) finds that farmers are investing heavily now in new buildings and equipment with capacities for much bigger milk herds. The French barns will be half-empty until 2015, because the present rules for quota transfer in that country make it very difficult to expand milk production. Milk quota is usually firmly bound with the land in France, so a farmer wanting to increase output has to buy another farm to get the extra litres. 

Other countries, such as Britain, have free trade in quotas and those wanting to stay in the business of dairying after 2015 are already stocking up, with average herd size already around 120 cows. Much the same applies to the Netherlands and Sweden, according to the EDF-STAR survey results.

But the very low prices, in European terms, that farmers are getting for their milk means that many reckon they're already operating under post-quota conditions. The feeling is that, if they survive this year, things can't really get much worse, especially with the new-found goodwill of the banking fraternity. BF

Norman Dunn writes about European agriculture from Germany.