Sharp price movements require appropriate financing

The sharp price fluctuations for milk and other agricultural products mean that the development and funding of agricultural businesses require attention. Rabobank is accordingly looking at new forms of finance.

"We need to create financing structures that reflect the new reality. The markets and the development of prices are no longer linear," said Rabobank Executive Board Member Berry Marttin at a meeting with Dutch agricultural journalists, early April 2016.

The price of milk has fallen by 35 percent

Among other things, Marttin was referring to the situation in the dairy industry. Prices have slumped around the world due to less demand and high milk supply. In April 2016, dairy farmers in the Netherlands received around 27 euros per 100 kilos of milk (excluding supplements), which is roughly 5 euros (or 15 percent) less than a year ago. The April 2016 price is actually 15 euros (35 percent) lower than the peak reached in 2014 Rabobank does not expect the price to recover before the end of 2016. With over 12 billion euros of finance provided, the dairy farming sector in the Netherlands is by far the biggest agricultural sector funded by Rabobank. Worldwide, Rabobank has provided a total of almost 100 billion euros in loans to the agricultural and food sector.

Variable repayments

To respond to these price fluctuations, Rabobank has started a flexible financing product for dairy farmers with a dairy processor and a financier in Ireland. Marttin: "When milk prices are stronger, farmers will repay more. When the price is low, they will repay less. This kind of solution takes a long time to implement, but we are already seeing much interest from the rest of Europe and from the Netherlands as well." This implementation concerns the sector as a whole as well as the effects for individual customers. Low prices usually lead to less supply of milk and therefore to a recovery in the market, but will this market mechanism also work if large numbers of dairy farmers experience less financial pain as a result of having to make lower repayments? In Ireland, farmers are therefore assessed individually to see if they can be offered this flexible financing product.

Helping businesses get back on their feet

Meanwhile, dairy farmers and Rabobank are already using existing products to respond to the low prices, which are leading to pressure in the current accounts of many dairy farmers. "The approach in Ireland involves components that we are already using in the Netherlands to help good businesses get back on their feet. Most dairy businesses are well capitalised. If a farmer early sees that he will have liquidity problems, he can find a solution with the bank. In many cases repayments can be suspended, since there is sufficient collateral to cover this," added Ruud Huirne, Director of Food & Agri Netherlands at Rabobank.
Another financing trend is that dairy farmers are investing less capital in land and machinery. Rabobank notes that dairy farmers are preferring to lease land and machinery rather than making purchases. Huirne: "Business owners are questioning whether they should invest their capital in land, since selling prices and also costs of feed are becoming increasingly volatile."

Consumption is rising

While prices of products such as milk and pork have fallen sharply, the outlook is positive in the longer term. Rabobank analysts expect meat consumption to increase strongly around the world in the coming years. The same applies to milk. Marttin says that worldwide dairy consumption is rising every year. The current poor state of the dairy market is due to increased supply in combination with lower demand from Russia (the EU trade boycott), China (high stocks and a slowing economy) and the oil-exporting countries, which have less money to spend due to low oil prices.

Competitive position

Whether prices are currently high or low, agricultural and horticultural businesses have to continually work on improving their international competitiveness. "Standing still is the same as going backwards," said Huirne. The dairy farming sector has made progress in recent years, but is now standing still. Dutch pig farmers and greenhouse horticulturists have work to do. Huirne: "It’s a question of adding value. More money from the market needs to come into the production chain, otherwise the poor state of affairs will spread. Revitalisation is also needed: clearing away businesses that have no prospect of expansion to make way for those with upside potential. Innovation is a permanent requirement to reduce costs and improve sustainability performance."

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