Mr. Ken Burke:

I thank the Chairman and members of the joint committee for giving AIB the time to provide the Oireachtas and the public with an update on the bank’s strong, through-the-cycle support for the dairy sector, including finance for development and expansion and supporting farm cash flow through income downturns. I am head of business banking with AIB and with me today are Dr. Anne Finnegan, head of our agri-sector division and Mr. Tadhg Buckley, senior agri-adviser with responsibility for south Munster. I refer members to AIB's presentation which we submitted to the clerk to the committee in advance.

AIB has a long association with the agrifood sector. The bank is the main lender to farmers and accounts for 40% of total Irish farm lending. Our market strength in the sector is the result of a strong relationship with farmers extending back many decades and cemented with the establishment of AIB's agri-adviser team in the early 1970s. We have kept our agri-adviser team in place since that time and throughout a period when so many regarded agriculture as a sunset industry. As a core part of our SME business strategy, today we have an agri-sector team comprising 16 dedicated agricultural science graduates, all regionally based. The team provides significant training for our front-line staff ensuring they are equipped to support farmers throughout the cycle. It has worked closely with all customer-facing staff to support farmers through various cycles and crises, including the dairy sector downturn in 2009, the weather and fodder crises of 2012 and 2013 and various downturns in the pig sector.

In recent years we have seen strong growth in farm investment, driven primarily by the dairy sector, in land, farm buildings, machinery, equipment and stock. Our recent agri-financial services survey, completed in January this year by Ipsos MRBI, indicates that half of dairy farmers have plans to invest in the coming three years. Our analysis of the market predictions from all of the main forecasting agencies indicates that the medium-term outlook for global dairy remains positive. On this basis, AIB maintains a strong, positive long-term outlook for the dairy sector, in which we are very comfortable to support investment. Our experience of the sector has been positive, with dairying experiencing substantially lower levels of credit difficulties than other SME sectors.

While the outlook is for generally strong dairy prices, volatility will remain a key feature of the sector, aligned with changes in input prices, output prices and weather or a combination of any of these three factors. Our dairy sector outlook report shows 30% of dairy farmers perceived milk price volatility as a key challenge in the next five years. We have written extensively in our quarterly farming newsletter, Agri Matters, about managing farm cashflow through the cycle and planning for income volatility. We have also contributed to many external publications on the same theme.

In the past three months we have held seven large regional farmer meetings to discuss the prospects for the farming sector. Approximately 2,400 farmers have turned out at these events. There is a full list of the meetings in the presentation, including some which are taking place this week and next week. AIB has always advocated that the opportunity to expand dairy output should be considered by farmers only after they have achieved an efficient cost base. Our core message at the meetings was and is "better before bigger". While we know that all farmers are vulnerable to income volatility, an efficient and lower cost base producer is better positioned to withstand a period of reduced income. This is illustrated on slide No. 6 of our presentation. At AIB we consider volatility to be the new norm. For farmers, managing farm cashflow is now key and requires a planned approach to allow the business withstand both the peaks and troughs of the cycle.

When it comes to lending, we must, from day one, factor in the reality that not every year will be a great one. The average milk price for 2014 is estimated at 38 cent per litre, the second highest annual milk price ever paid to farmers. The average 2015 milk price is forecast to be 26 to 28 cent per litre. AIB takes a through-the-cycle view of milk prices, factoring in periods of low and high milk price. We recognise that, in reality, some years a farm will generate a cash surplus and in others a cash deficit that must be managed. Milk price is only one component of income; we also take account of cost of production which varies significantly among farmers.

It is useful to look at farming sectors that have been dealing with volatility for many years. AIB has a lot of experience of banking the pig farming sector which has long been exposed to the vagaries of the world market, receives no market support and experiences a high level of income volatility which has been exacerbated in recent years by feed price fluctuations. Pig farmers have responded to this volatility by improving production efficiencies on an ongoing basis; managing their cost base, particularly feed costs; undertaking strong financial management, including cashflow budgeting; and building a buffer cash fund in good years to support the business in lean years. In our presentation members will see that there is scope to improve efficiency in all livestock sectors. AIB plays a key role in supporting pig farms through tough periods, knowing that the cycle will turn. We take a strategic view of long-term challenges in the sector and continue to do the same in the dairy sector.

The current downturn in global milk prices comes after five years of strong milk prices by historical standards and may give rise to cashflow pressure for some dairy farmers in the months ahead. Analysis of AIB’s dairy farmer customer base indicates that the sector is well positioned, with strong cash balances, available overdraft limits and an overall strong credit performance relative to other SME sectors. This is in marked difference to 2009.

As in 2009 and 2012-13, AIB will this year work with affected dairy farmers to support them through the current income downturn. In 2009, when milk prices averaged 23 cent per litre, we worked with farmers on an individual basis to find an appropriate solution to their cashflow problems. We are well on our way, through a programme of proactive engagement with the sector, to encourage dairy farmers to make early contact with their bank. We are asking affected customers to estimate, as best they can, the likely deficit in their 2015 annual cashflow. Experience has shown us that there is no one universal solution at a time like this. Instead, there are a number of support measures available which we can tailor, depending on the individual circumstances.

Our support package for dairy farmers can include the following: a review of monthly repayment commitments; short-term increases to working capital facilities; short-term loan facilities; and an interest-only period for existing borrowings. We will utilise our existing core lending products to support the sector at this time, including our farmer credit line which has the lowest cost of any working capital product in the farmer market, at 4.2% variable. This is extremely competitive relative to the cost of merchant credit. We are very conscious of the significant opportunity expansion of milk output offers to farmers, the dairy industry and the economy, but we are also aware of the heightened short-term volatility that must be managed. As the leading bank to the dairy sector, we recognise the key role we play not only in supporting the development of the sector but also supporting it through the fullness of the cycle.

In summary, on behalf of AIB, I express thanks to the committee for inviting us. We very much appreciate the opportunity to discuss what is one of our most important SME sectors. We look forward to receiving questions from committee members.