Pat Deering (Carlow-Kilkenny, Fine Gael)
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I remind members and witnesses to turn off their mobile telephones as they interfere with the broadcasting system here. The Chairman is not available today and asked me to convey his apologies. I welcome from Ornua Mr. Joe Collins, managing director, dairy trading and ingredients, and Ms Anne Randles, company secretary and thank them for coming before the committee today to update it on the dairy sector. They appeared before the committee in February to give us a run-down on the industry at that stage.

I draw the attention of witnesses to the fact that they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable.

I invite Mr. Collins to make his opening statement.

Mr. Joe Collins:

I will deal first with volatility then with the market and market outlook. Volatility is the term given to the frequency and significant and unpredictable fluctuations in a product or commodity value. It is a normal feature of the market but it has increased in the dairy sector for various reasons. Typically, it is a question of mismanagement between supply and demand but there are other factors at play. Understanding it is important because if we understand we can de-risk it and try to out-perform it.

Dairy and food are unusual in that minor changes in supply and demand, scarcity or oversupply can lead to major changes in pricing. The reason for that is the lead and lag in dairy is typically one to three years, unlike other industries, such as the auto business where production can be turned off and on very quickly. The frequency and magnitude of volatility have changed over the past 25 years. For the first 17 years the rolling average showed very little movement, at plus or minus 10 cent per litre.

Since 2007, the frequency and magnitude have increased quite dramatically. Members can see this on the graph that it moved from +/-10 to +/-24, a 240% increase in that period. That is more than commodities like oil have changed in that period.

There are five or six reasons that volatility is increasing. One is that we have moved in dairy from a regulated market to a free market. There is very little product subsidisation and there are no refunds nowadays. Intervention is well below market levels and we are operating in a global market. The second factor is that weather shocks are having a bigger impact. Food, particularly dairy, is now being produced at very intensive levels in parts of the world and it is more prone to weather shocks. Interestingly, about 700 notable natural disasters were recorded in the year 2000, while in 2014, there were over 900, so there are more global weather events taking place, which may be part of global warming. Trade policy also has an impact, particularly on the demand side. We have seen what the Russian ban has done since it was introduced in August 2014. Bilateral agreements have also impacted on trade. In terms of stock, since the credit crisis back in 2007-2008, there is much less of both private and public stocks than heretofore. The result is that when the market is overheating, there is no buffer stock to release onto the market to cool it down and when a market is very weak, buyers seem to buy less stock to tighten up the market. That has had an impact, as has the availability and speed of data, in terms of how quickly one can get data through the Internet and how quickly it is analysed. That has added to the volatility, as have hedge funds, dairy auctions and futures trading. We know from the dairy auctions that take place, particularly the GDT, that when the market is tight, prices shoot up very high. It magnifies the peaks and the troughs. A further complication in an Irish context is the seasonality or the grass-based nature of our milk production. As members can see from the graph, we have a peak to trough ratio of about 7:1, whereas the rest of Europe is quite flat. If 75% of the milk is produced over a short period - maybe 50% of the year - and the market is very firm then and much of the milk is bought at that price, or indeed if the market is very weak then, it compounds the volatility, whereas the flat curve, which occurs in the rest of Europe, almost has a natural hedge built into it.

What has Ornua been doing to help insulate farmers against volatility? We have a six-point plan, which we have been working on since 2011. That is around growing the brand, particularly Kerrygold. Brand prices tend to operate in narrower tramlines than commodity prices. That has worked quite well. We have also spent a lot of time on and have invested in technology and innovation to develop value-added ingredients. If customers are buying a value-added ingredient, they tend not to be able to switch to alternatives, so there is some protection in that. The third factor is diversification, both geographically - Ornua sells products in 110 countries - and in sectors. We operate in retail, food services, ingredients and across a wide range of products. That is probably a bit unlike our peers, who may focus on one market and one product. We have also worked hard on strengthening the supply chain with key blue-chip customers in that we do long-term contracts, we look at ways of working together and we build in price points and tramlines, which help to take out some of the volatility. For the past four years, we have supported the processors with guaranteed fixed milk price schemes, where we effectively link customers with the farmer on fixed price contracts. Since 2012 we have put much focus on, and resources into, building up a trading team, which will take some knowledge and expertise from other sectors to help manage volatility in terms of using the financial markets to hedge and de-risk our physical positions.

Has this strategy worked? We would say it has. Members can see on the graph the purchase price index, which is the index of what we pay for a product by month. It is based on 2010, which was 100, and members can see that over the past year or so, the swing has been about 10 base points, or about a 10% swing. This would compare to the GDT, the New Zealand auction, which has swung to the tune of 66% in that period and Dutch quotes, which are more representative of European prices, have moved by about 50% in that period. The strategy we have in place has helped take out some of the volatility but obviously not all of it.

Moving on to the market and where we are now and where we think it might move to, a good place to start is by looking back. If members look at the table, they will see that in 2012, particularly the latter half, milk production globally was quite low. That stimulated high prices. The prices in turn stimulated very strong production from late 2013 to late 2014. In fact, globally milk was up about 5% in that period year-on-year, or roughly twice demand or consumption, which was about 2.5%. That is probably the start of the current problem. As we moved into 2015, supply quietened down, back towards about 1.25%, but unfortunately the legacy of the stock that was made in 2014, plus the compound growth factor, continues to overhang the market. Looking at the GDT prices, and we mentioned volatility before, members can see at the start of 2014 whole milk powder, for example, was up at $5,000 per tonne. It then dropped 70% in the period to August 2015. It has recovered slightly but is now in slight decline at the last few auctions. In terms of looking at the current situation, New Zealand milk has slowed but unfortunately probably not enough. Six weeks ago, there were reports that it could slow by 8% to 10% for the current season. More recently, they are saying it could be less than half that at 4% to 5%. That has certainly affected the market in the last two to three weeks.

European production has been very strong recently. As can be seen from the graph, particularly as we moved into August and September, there are very strong flows year-on-year. The background to that is probably twofold. The weather has been exceptionally mild across Europe, typically 6° Celsius to 7° Celsius higher in temperature and feed cost has been quite low. Obviously, with no quota, farmers have pushed on. The real point is that European milk production in 2014 was up by 4.5%. It is likely to be up by 1.5% this year. That is a compounded 6%, which is a lot of extra milk. The other thing we need to remember is that Europe is seven times the size of New Zealand when it comes to milk output, so what happens in Europe is key.

Moving from the supply side to the demand side, the Russian ban has had a major impact on EU exports, particularly cheese. We must remember Russia was importing approximately 30% of EU cheese and butter, or 240,000 tonnes per annum. This was quite substantial. In total it accounted for 15% of all EU exports.

The second big demand player is China. In 2014, it imported a very large volume of powder. This equated to an additional 2.2 billion litres over the amount in 2013. At that time, the world thought this 2.2 billion litres was genuine demand, but what subsequently transpired on looking behind the figures was that domestic supply in China was down approximately 1.5 billion litres, and therefore the genuine demand was only 700 million litres. This reduction in supply in China in 2014 related to foot and mouth disease, poor weather conditions and farm regulations. Since 2014, these have been corrected, domestic supply has recovered and imports in 2015 have reflected this. Not only has domestic supply recovered but demand has slipped a little as the economy in China has slowed. China is still trying to digest the high stocks imported in the second half of 2013 and 2014. It is trying to absorb these stocks. It is also trying to digest its recovery in domestic supply and cope with somewhat reduced demand. This has affected its ability to import.

There is some positive news. Despite Russia and China being out of the market, European exports have been quite good in 2015. The euro has, thankfully, been very weak which has helped competitiveness. Dairy prices have been low, which has made them very attractive and competitive. Many companies, including Ornua, had been building routes to markets outside of Europe in anticipation of quotas being abolished and we are now feeding these routes to market. An important point to make is that overall Europe exports approximately 10% of its milk, but nearer to 40% of Ireland's and Ornua's volumes are exported outside of Europe. There is a high dependency outside of Europe and these are the markets that will grow.

On the demand side in the two big blocks there is positive news in the United States and Europe. Economic conditions have improved somewhat, especially in the United States with quantitative easing and low oil prices helping disposable income. In addition, daily consumption, particularly butterfat consumption, is making a recovery which is very positive news. This has started with butter. Ten years ago butter was the villain in health but now it is seen as a virtue. This is moving from butter to other dairy products and from retail into food services and food ingredients. This is very positive news. Over the past year, butter consumption in Europe has increased by 3.7%, having increased only 0.8% in the past ten years. There is also a positive story for cheese in Europe and for butter in the United States.

To summarise the market outlook, further supply correction is required. We have legacy stocks and compounded growth, which are concerning. We probably need a weather shock or certainly less benign whether to control this supply. If we do not have this, it will be up to milk prices to correct it. At this stage, it looks as though even allowing for supply correction with a weather event, it will be the second half of the year before we see a decent pick up. The market is still digesting the high stocks. Without China and Russia, demand is probably nearer to 1.5%, and we probably need supply to fall below this level to absorb some of the legacy stocks. If there is a recovery, it will probably take a little longer to get through to farmers because we need to remember many of the processors and much of the supply chain have absorbed or subsidised milk prices and this has impacted on their balance sheets.

The long-term future is positive. There are more people in the world, they have more disposable income and they are more interested in dairy as a fat and protein deliverer. There is no doubt volatility is increasing and it is here to stay. It will impact on everybody in the supply chain, from farmers through to co-operatives through to marketeers. From a farmer's perspective, the best approach to manage this involves open market returns, that is, the monthly milk price, with perhaps a volume of milk on a guaranteed milk price scheme. Certainly in time there should be derivatives and financial markets to hedge some of the risk. Managing costs and efficient financial planning will be key. We will continue to focus on the issues we mentioned and improve matters with a view to increasing returns and managing volatility.

Thomas Pringle (Donegal South West, Independent)
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I thank the Ornua representatives for their presentation, which I found very interesting. As somebody who is not from a farming background, it is amazing to hear about hedge funds and future derivatives being mentioned when speaking about dairying and farming. In the run-up to quotas being abolished, the committee was sold a great story about how it would be a great bonus for farmers and that everything was going to be fantastic after March 2015, but all of a sudden towards the end of last year and January this year it was all doom and gloom, prices were going to collapse, everything was going to go haywire and farmers were in big bother. This signifies the volatility. The committee heard about how China was roaring ahead with importing dairy products, but Mr. Collins has told us this was just a blip. How could this not have been foreseen as being a blip rather than as something sustainable? Mr. Collins also mentioned an increase of 14% in butterfat in 2014. How likely is this to be a blip? What impact will it make on dairy farmers? Will Mr. Collins explain how farmers can hedge risk? How will this work? It sounds like getting involved in the markets, trading and insurance policies. What exactly will it involve?

Willie Penrose (Longford-Westmeath, Labour)
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Ornua came before the committee in March, and I must salute its representatives because in fairness they were accurate. Anybody who had listened to them would not have been surprised by what has emerged and I compliment them on this. They stated that for the three years prior to 2014 things were going great and the average was going from 20 cent to 40 cent, with an average of 37 cent or 38 cent in 2014. The Food Harvest 2020 projection was an increase of 50%, and this coincided with this market volatility, which is a function of supply and demand. We cannot reinvent this wheel nor can we stop the juggernaut. We must have a bit a sense here. Anyone who did basic economics for the junior certificate knows the problem. The question is how to deal with the problem. We heard about New Zealand and everything else.

All the signs were that this was going to happen. I remember speaking here and making an old-fashioned call for farmers to hasten slowly. One of the banks whose representatives are seated behind us made a good point, to get more out of what we had before we went fishing for new stuff. It was a simple but well-made point. For once, I might praise the banks for being observant, although they need not expect too much praise because they have done a bad job for the most part.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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They are behind Deputy Penrose.

Willie Penrose (Longford-Westmeath, Labour)
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I hope they are listening.

How did we get on the runaway train, considering the Chinese market involved an artificial increase? As Mr. Collins illustrated earlier, a lot of that, with the powders, was purely artificial. There was a bit of an increase but having got their own house and various internal factors in order again, they are now back. What is the prospect of that market ever becoming what it was? It was 2.2 billion litres in one year. Mr. Collins stripped it out. In fairness, the real increase was less than one third of that. Can we ever get back to that position or where does Mr. Collins see us going in that regard?

The Russian market is affected by a political decision. We cannot circumvent the politics. There was a political decision taken at EU level. The EU Commission made a decision that had a significant impact upon that attractive and developing market and left the balloon based upon an active intervention at political level. Has the EU done enough to mitigate the consequences of that decision or is there anything that can be done in that regard?

What is Mr. Collins's view for the medium-term outlook? When I was studying economics under Professor Sheehy, he always built in the one factor that only God could account for, that is, the weather. Of course, good weather means a longer growing season, a far greater level of production, better dry matter and better output in terms of protein and everything else. If one gels the scientific and all the other factors together, there is no surprise. For any farm organisation or any farmer who comes in to me and tells me that he is surprised and farmers did not know this was going to happen, it was as obvious as the nose on one's face that this was going to happen. I warned farmers not to be taken in and to build on, and try to increase from, what they had before thinking about investing, which could be millions of euro in terms of them and certainly hundreds of thousands in terms of the investment capacity, and all I was hearing was that Irish farmers were under borrowed or lowly borrowed by comparison with those in other countries. I thank God for that. I hope not too many of them got caught up in this.

What is Mr. Collins's view of the longer-term outlook? The population of the world and the capacity for affluence in developing economies are important factors. The population of the world is increasing and we project that by 2025 it will be 8.5 billion or thereabouts. That is no use unless they have purchasing power. Has Mr. Collins factored that in? Does he see that as probably the only saving grace, considering that consumers are switching back to dairy, and particularly consumer preference and, as Mr. Collins stated quite correctly, medical input? A few years ago, we were all brought up with country butter made by the local farmer. There was a lot of salt in it, obviously, as a preservative but it was the best. I have tasted nothing like it since. Then we shifted off and became conscious of cholesterol and everything else, and now we are shifting back. Everything is a function of medical assessment at a particular point in time. How can one tell somebody that ten or 12 years ago butter was bad for you? Years ago, we always had it with a bit of cabbage. That was a disaster but now we are switching back. There is now a plethora of consumer factors. Actually, I would love to be doing economics now. It would be very interesting as long as the examiners kept their questions practical and not theoretical.

Michael Comiskey (Fine Gael)
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I thank Mr. Collins for the interesting presentation. A lot of the points have been covered.

We all will be aware that 2015 has been a difficult year for farmers, especially those who made significant investments. They were all coming to us then during the serious crisis that they experienced - we agree it was a terrible problem for them - to see what we could do to help them out.

According to the graph, we see the amount of product that was going into the Russian market. I wonder what are the possibilities - it is out of Mr. Collins's hands - of us getting the Russian market reopened. We talked about the blip in China as well. That was only short term. Those are the elements that would really help us along and get markets, which is what we need to do.

On the intervention price, there was a lot of talk a few months ago about getting that price up to 27 cent or 28 cent to take some of the pressure off the farmers who were in serious bother. Could the fixed-price contracts Mr. Collins mentioned kick in again and help farmers who would be encountering difficulties?

Pat O'Neill (Fine Gael)
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Most of the points have been covered but I want to thank Mr. Collins for his presentation.

On a relevant point, Mr. Collins has shown in graphs the problems with the Russian and Chinese markets. How advanced are these nations in terms of increasing their own supply? If China started to get into milk production, especially into powder production, it would have a major effect on Ireland's sector and the European milk sector.

I note the fixed milk price scheme makes sense at present, especially when the price is depressed. At what price, if the markets recover, should farmers consider going into a fixed milk price scheme? On intervention, the IFA, the banks and others say that the cost of production is 26 cent or 27 cent. One must have something for the person who is producing it as well. When should farmers hedge their bets and go in and take the fixed milk price scheme if the markets recover?

I note Mr. Collins stated that the markets will not recover until H2 2016, which is a long time away. It will be interesting to hear the banks outline what measures can be taken to support the sector. We saw what happened in agriculture after we joined the EU when a lot of investment was made at high interest rates and, suddenly, there was a depression and a lot of farmers got into trouble. When, in Mr. Collins's view, will the markets recover enough that farmers can consider going into a fixed milk price scheme and to what extent will the emerging nations, such as Russia and China, try to increase their production to stop EU and New Zealand imports?

Mr. Joe Collins:

I will start with the first question, from Deputy Pringle. In fairness, if one goes back to the strong production in late 2013 and 2014, that was pre-quota. Obviously, the China and Russian situations are on the demand side. They would have happened anyway. The current situation is not the fault of the quotas being abolished. The delay in recovery could be associated with quotas being abolished but certainly the epicentre was well before that, both on the supply side and on the demand side with Russia and China.

In terms of the United States of America, one will note the increased interest in dairy. Interest in dairy has been growing steadily over the past three years. Some of it is to do with dairy now being seen as a healthy nutritional product, particularly butter, and some of it is to do with the fact that maybe American dairy products are not as tasty and flavoursome as European products or, indeed, Irish products. There is a growth in dairy but there is certainly a big growth in imported dairy into the United States because of the quality of Irish products.

With regard to Food Harvest 2020 and the 50% target, we are getting there a lot quicker than we thought. Farmers had certainly put plans in place and at this stage of the cycle volumes are a lot higher. Some of that is a function of the weather being very good this year which allowed things to push on when quotas were abolished. Some of it is a function of the pre-planning and cows going in on the ground.

The Chinese market will undoubtedly remain very important but it will not be like the boom we saw in 2014. It will still be a key market where disposable income and consumption are still growing. The relaxation of the one baby policy will help milk powder imports into that country. We know from other countries that China will move on from milk powder to importing other dairy products like cheese and butter, so while it will be an important market China will not have the huge boom in imports as in 2014. China's domestic supply has recovered back towards 2012 levels. The question must be asked if it will continue to grow. There will be some growth for China's domestic supply but it is an expensive place in which to make milk and it imports many of the raw materials which are needed to make milk for feed and so on. It will be expensive for China to do that and, while its domestic supply will grow, that growth may not be at the same rate at which it bounced back.

With regard to Russia, I do not wish to comment on the geo-political aspect. It has the capability to grow its milk production. It is government policy to try to reduce Russia's dependency on imports and grow a domestic output. Unlike China, Russia probably has more capability to do that and more of a history of making milk.

I will now turn to the issue of purchasing power. It is clear that over the last 18 months low oil prices have put certain emerging markets under pressure, particularly in the Middle East and north Africa region, whereas low oil prices benefit the developed world of Europe and the United States. If one breaks that down further one could probably say that low oil prices are good for cheese and butter consumption in general as these are consumed in the developed world and that low oil prices are probably not so good for milk powder consumption and market growth because the powder is mainly imported by Africa and the Middle East. An optimal oil price might be around $70 to $75 a barrel and while that price would not be too punitive on the developed world it would certainly help the developing world to import dairy products.

With regard to the guaranteed milk fixed price contracts, Ornua has been involved in these for the past four years and supporting the various co-ops and processors on the contracts. Ornua thinks it makes sense for a farmer to do a percentage of his or her milk on the fixed price contracts. Looking at the markets and at the competitive pressures, Ornua believes that a good price of somewhere between 29 cent and 31 cent per litre, including VAT, is probably going to be a fairly decent return over the next three years.

A question was asked about the recovery in 2016. We believe it will be in the second half of 2016 unless there is a fairly sharp supply correction. For a correction to be sharp one would probably need a weather event. There is talk of an El Niño developing in the Oceania region. We are not sure of its extent, how powerful it will be or if it will hit the key milk producing regions. If an El Niño developed it could shorten the recovery period. I invite my colleague Ms Anne Randles to comment.

Ms Anne Randles:

Senator Comiskey asked about the market in Russia, the political situation and what could be done about it. It was a very unfortunate and depressing initiative which happened just as markets were beginning to turn. It is an annual ban, it has gone from August 2014 to August 2015, and it has been rolled over for another year. It is very much a political decision and with politics, as with volatility, it changes very quickly. It is very difficult to know whether the ban will be lifted but I believe the EU should be prioritising that. With the other political events happening in the EU outside the agri-food sector, particularly in France, there is a need for our international partners to get together to protect the homeland, as they say. Bringing Russia back into that process may help to change the political dynamism there.

With regard to the development and growth of dairy product markets, it is fundamentally important that the EU prioritises its free trade agreements. That is where we need to see effort and not only in trying to remove the ban in Russia. The TTIP negotiations with the US are a huge priority for us and are fundamentally important for the future of dairy in Ireland to give us more opportunities to grow trade across the board, be it our branded consumer business like Kerrygold or on our food ingredient side.

China is fundamentally important. It is not a market that has gone away, it may have just tempered its growth projections. It is unfortunate that we are on the back foot, to some extent, in accessing the Chinese market because our major competitors there have free-trade agreements. We would very much like to see the EU prioritise a free-trade agreement with China, at least for diary or agri-food if a multi sector agreement was not possible. We would like to see a request for the EU to prioritise a free-trade agreement because we are very dependent on exports. We have been growing routes to markets but we are not always in a comparable situation competitively with the other exporters to those major markets. That needs to be a priority.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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There are two further points from the questions that Ms Randles may have missed, namely, the intervention price and long-term prospects. I understand Ms Randles may have briefly touched on them but perhaps she could expand.

Ms Anne Randles:

I apologise, I did have that noted. Ornua had sought an increase in the intervention price. The current intervention price is about 21 cent a litre, which is significantly below the cost of production in Ireland and in a number of other countries. However, there are some member states where 21 cent per litre is not quite so bad - the Baltic states and some of the eastern European countries. It is a problem for the Commission to know where to set the bar so that it becomes a safety net for everybody. Despite the misgivings of the Commission we believe there is a need for increasing the intervention price. Farmers are losing money with an intervention price of 21 cent per litre. Any operator selling product, and skimmed milk powder in particular, into invention is losing money. It is a punitive situation. We see this situation now since intervention was open. It was slow to take off and for operators to put their products into intervention because they lose money when they put product into intervention.

Our customers are looking very closely at the market and they see there is a floor of 21 cent per litre. They will hold off on their purchases as much as they can, as long as the floor is that low.

If there is a raising of the bar, it should not be to any significant degree, because intervention should not be the major market for dairy products. We should be striving to commercialise the product as much as we can, but in times of severe crisis, 21 cent per litre is really below any acceptable norm and it should be increased.

Pat O'Neill (Fine Gael)
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We mentioned the Russian market and the EU ban. From where is Russia sourcing products now?

Mr. Joe Collins:

Some product is getting to Russia through the back door in the form of milk and cream. They are leaving the domestic market quite short and dairy prices have shot up at the retail level in Russia. Many dairy substitutes are now being produced in Russia. These are analogue or vegetarian and protein-based cheeses.

Pat O'Neill (Fine Gael)
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There is product going in on the black market and through the back door. Are those the Baltic states?

Mr. Joe Collins:

We suspect cream and milk are going in that way, being processed into products and going to Russia.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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Are there any further questions?

Willie Penrose (Longford-Westmeath, Labour)
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I am happy with that. I am hopeful that the witnesses will be back in six months to give us better news.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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That concludes the deliberations. I thank Mr. Collins and Ms Randles for attending and making the presentation. I apologise for keeping them waiting outside for a while.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I remind members, witnesses and those in the gallery to completely switch off their mobile phones, rather than putting them in silent mode, as they affect the broadcasting system. I welcome the witnesses from Allied Irish Banks. They are Mr. Ken Burke, head of business banking; Ms Margaret Brennan, head of sectors; and Dr. Anne Finnegan, head of the agriculture sector. From Bank of Ireland, we have Mr. Mark Cunningham, managing director, and Mr. Sean Farrell, head of agriculture. From Ulster Bank we have Mr. Eddie Cullen, managing director of the commercial banking division, and Ms Ailish Byrne, senior agricultural manager. From the Banking and Payments Federation of Ireland we have Mr. Maurice Crowley, director of banking and payments. I thank the witnesses for coming before the committee today to update it on the financial issues affecting those operating within the dairy sector.

Before beginning, I must go through the pronouncement on privilege. I bring the attention of witnesses to the fact that they are protected by absolute privilege in respect of their evidence to the committee. However, if they are directed by the committee to cease giving evidence on a particular matter and they continue to so do, they are entitled thereafter only to a qualified privilege in respect of their evidence. They are directed that only evidence connected with the subject matter of these proceedings is to be given and they are asked to respect the parliamentary practice to the effect that, where possible, they should not criticise or make charges against any person, persons or entity by name or in such a way as to make him, her or it identifiable.

Members are reminded of the long-standing parliamentary practice to the effect that they should not comment on, criticise or make charges against a person outside the House or an official either by name or in such a way as to make him or her identifiable. Members are also reminded of privilege.

We will begin with the presentation from AIB.

Mr. Maurice Crowley:

We gave some thought to how we would organise ourselves before coming in. I do not plan to make an opening statement, and our idea was that, given that representatives of three banks are here today, a witness from each bank could make a short opening statement and be open to questions. I will try to assist the committee in the replies to questions. We asked the representatives of Bank of Ireland to make the first comments, with AIB and Ulster Bank following.

Mr. Mark Cunningham:

I am the director of business banking for Bank of Ireland and I am joined by my colleague, Mr. Sean Farrell, head of agriculture in the bank. I thank the committee for the opportunity to present before it today.

As we recently announced in terms of the business and agri market, the bank has seen a 13% increase in approvals to approximately €3.6 billion so far this year. Agriculture represents a very significant portion of that. Not alone does the agricultural book represent circa 10% of the overall exposures for the bank in the business and agri sector in Ireland, but this year alone, in terms of the volume of drawdowns, agriculture represents over 23% of the total. As a sector for the bank, it is extremely important. I will now hand over to Mr. Farrell, our head of agriculture, to make some brief opening comments.

Mr. Sean Farrell:

As Mr. Cunningham outlined, agriculture is a very important sector for Bank of Ireland, and this is particularly evident when we consider our rural-based branches located in the many towns that rely most on the agricultural economy. Within those branches, agriculture-related lending typically represents over 60% of all business lending transacted through those branches, so it is a very important sector within the branch network.

In the overall market and with the requests coming to us in the bank in mind, the typical areas for which customers seek financial support are land purchase, farm development and annual seasonal loan requirements. We have seen an increase in requests for farm buildings and development from the dairy sector in particular over the past 18 months, despite the downturn in milk prices. We anticipate that dairy markets will recover from current levels in 2016 and that will prompt additional investment at farm level as farmers capitalise on the post-quota opportunity to expand their businesses. Our position in the bank is that farm expansion of any enterprise, not just dairying, should be from an efficient base. However, given the profitability of the dairy sector relative to others, we anticipate proportionately greater growth in the area over the next number of years. Volatility is key to the committee's business today and, in that regard, our view is that the outlook for agricultural commodities is positive and we expect prices to increase over the next five to ten years. We do not anticipate the price increase will be linear, as there will be peaks and troughs. That is similar to what is currently being experienced within the dairy sector.

In the bank we take a medium-term view on farm incomes and we will play our role in helping our customers manage through the impact of sudden price shocks in the form of either falls in output prices or increases in input prices. To that end, within Bank of Ireland we have developed a suite of products that we have termed AgriFlex, which take volatility into consideration and allow our customers to revert to interest-only repayments on borrowings with the bank during times of reduced farm incomes.

Looking forward to the remainder of 2015 and into 2016 from a cashflow support perspective, to date there have been few additional requests to what we would normally receive from customers. The requests we have received to date have not typically been related to milk prices, but have arisen more because of superlevies or other issues.

We do anticipate, however, that there will be increased requests for cash flow support during the first half of 2016. Farmer overdraft utilisation levels remain very low. Our typical farming customer started this year in a stronger cash flow position than in 2014. They have overdraft balances of just 15% of their overall permission levels. The overall risk profile and credit quality of our agri-customer base has improved through the year.

In the same way as we supported farming customers during the fodder crisis in 2012 and the dairy market downturn in 2009, we will again support them, as necessary, where we are comfortable with the overall viability of the farm. AgriFlex is one of the ways we can offer that support. To bear this out in the next few weeks, we are planning to contact our farming customers in writing to invite them to come and meet their local bank adviser should they envisage any requirement for cash flow support in the coming months. In addition, our team of agri-managers who are based regionally throughout our branch network are engaging with farmers in groups and in conjunction with their advisers and accountants. Through a case study exercise, we are helping to educate farming customers on their repayment ability andthe importance of cash flow planning. We are also encouraging them to engage with their local banks at an early stage if they have a future borrowing or cash flow support requirement.

We will be very happy to answer questions on our support for the sector.

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 continued support for the dairy sector during this cyclical downturn period. I have been head of business banking with AIB for the past three years. With me are Dr. Anne Finnegan, head of agri-sector, and Ms Margaret Brennan, head of sectors. I refer members to AIB’s presentation which was submitted to the clerk in advance.

When we were before members in February, I outlined how important the farming sector was to AIB and the nature of the very long-term association AIB had maintained with the agrifood sector. I welcome the opportunity to update the committee on the performance of the sector and AIB’s specific programme of support for farming customers since that time. The demand for credit from farmers, in particular dairy farmers, has remained strong throughout much of 2015. However, in recent months we have seen some slackening in demand which we had expected as tax bills fall due, farmers postpone non-essential investment in preparation for a leaner income year in 2016 and they await grant approval under the targeted agricultural modernisation scheme, TAMS II.

We adopted a conservative outlook to 2015 dairy farm cash flow performance, using an annual average milk price of 26 cent per litre, inclusive of value added tax, VAT, for 2015 when budgeting for either new lending or working capital support. While the milk price has declined significantly from the high level reached in 2014, it is now likely that, based on Central Statistics Office, CSO, figures, the price will average over 29 cent per litre, inclusive of VAT, in 2015.

An up-to-date analysis of AIB’s dairy farmer customer base again indicates that the sector remains well positioned, with strong cash balances, available overdraft limits and overall strong historical credit performance relative to other AIB small and medium enterprise, SME, sectors. We welcome the decisions to phase superlevy bills over three years and to pay a significant advance on direct payments, both of which resulted from Government and Department of Agriculture, Food and the Marine intervention and will serve to alleviate cash flow pressure. We have been working to support those farmers with high tax bills to spread the cost over the year through the use of our PromptPay facility. We anticipate that, in the main, working capital pressure will not manifest on dairy farms until quarter 1 of 2016.

Our prudence in lending to this sector gives us a level of comfort that whatever income pressure materialises for our customers, in the main, it will be short term in nature. Our lending to dairy farmers is on the basis of a long-term, through the cycle budget price of 30 cent per litre, inclusive of VAT. Our focus in the agrifood and all SME sectors is on cash flow lending. We recognise that Irish dairy farmers are much less indebted than some of their European or southern hemisphere counterparts. We also recognise that there are structural differences in farming in these regions and that the nature of lending varies greatly, with a greater propensity for intergenerational debt and long-term interest-only facilities. We believe Ireland’s comparatively lower level of indebtedness in the sector does confer some advantage when prices are low. However, Irish farmers still experience financial pressure, perhaps just not as severely or as quickly as farmers elsewhere. For AIB, the low level of gearing in Ireland versus that in other countries does not necessarily determine the capacity of the sector to take on debt. Rather, we seek satisfaction on the strength of the underlying cash flow at individual farm level. As such, AIB's message for several years has been to encourage farmers to focus on being better before bigger, that investment in expansion should only be undertaken in a very planned manner when existing efficiencies have been maximised. As I mentioned when we were here before, AIB has been espousing this message in national roadshows in the past year which were attended by in excess of 3,500 farmers. Since we were last with the committee, we have been proactively engaging with farm stakeholder groups on this theme, including the following events: the Irish Grassland Association dairy summer tour which was attended by 500 dairy farmers; the Macra na Feirme Young Farmer Forum which was attended by 100 farmers; dairy discussion group meetings; participation in a national dairy forum chaired by the Minister for Agriculture, Food and the Marine; the Agricultural Science Association dairy study tour to Northern Ireland which was sponsored by AIB; the AIB-Teagasc Best Farm Business Plan awards for agricultural college students; participation in Irish Farmers Association, IFA, dairy expansion seminars; participation in Teagasc Get Financially Fit seminars.

In 2014 we doubled our team of specialist agri-advisers. These regionally based advisers undertake a detailed farm financial analysis of all substantial farm lending cases and examine the technical management and efficiency of the farm. The team is not necessarily motivated by sales or lending targets but rather by ensuring the lending proposal is underpinned by a sustainable cash flow which will cover farm costs, adequate living expenses and service capital and interest repayments. Their time is not spent in recruiting either new AIB farming customers or seeking new lending opportunities but rather in supporting the analysis of lending applications and supporting and training our front-line staff. We believe this component of our model is key to the long-term sustainability of our lending to the sector.

Last spring the general expectation was there would be market recovery in the first half of 2016; however, current market signals suggest the downturn could extend into the second half of 2016 and that recovery may not materialise until after the peak months of Irish production in 2016. We are in no doubt that many farmers will require short-term working capital support during this trough period. AIB is committed to playing its part in supporting farming customers through this market cycle. As we outlined when we were with the committee in February, we have significant experience of supporting the pig sector through various income cycles and the more recent cycles in the dairy sector in 2009 and 2012. In the past few months our relationship managers have been engaging with those farming customers who might need our support in the near term, encouraging them to make early contact with the bank. The type and magnitude of support needed will best be informed by the development of cash flow projections for 2016. We are encouraging all dairy farmers to undertake a cash flow plan for the year.

As detailed when we addressed the committee last February, our support package for dairy farmers during this income downturn includes the following: a review of current monthly repayment commitments; a short-term increase in working capital facilities; short-term loan facilities and, where appropriate, an interest-only period on existing borrowings, with no repricing of existing facilities. We are utilising our existing core lending products to support the sector at this time, including our farmer credit line which has a variable rate of 4.075%, which is the lowest cost of any working capital product in the farmer market and extremely competitive relative to the cost of merchant credit. We also have in place a €200 million AIB-Strategic Banking Corporation fund which includes term finance for continued farm investment at a variable interest rate of 4.5%. All of our customer facing and credit teams have been briefed on the current market situation and AIB's available support measures. At this juncture, we have not seen a material increase in the number of requests for support, but, as I have said, we anticipate increased engagement in quarter one of 2016.

We are very conscious of the significant medium to long-term opportunity for the dairy sector and the economy. We are also aware of the heightened short-term volatility that must be managed, particularly in the next six to 12 months. As the leading bank to the dairy sector, we recognise the key role that we play in supporting the sustainable development of the sector and supporting it through the full cycle.

In summary, on behalf of the bank, I, again, express our thanks to committee for inviting us. We very much appreciate the opportunity to discuss with members what is one of our most important small and medium enterprise sectors. We look forward to answering members' questions.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I thank Mr. Burke.

Mr. Eddie Cullen:

I am managing director of Ulster Bank's commercial banking division in the Republic of Ireland. I am joined by my colleague, Dr. Ailish Byrne, our senior agricultural adviser.

I welcome the opportunity to provide members of the joint committee with an update. I will focus briefly on the role Ulster Bank plays in the economy and specifically the importance of the agriculture sector to our business. Dr. Byrne will then cover the support we provide for the sector, focusing on the dairy sector.

Ulster Bank is the third largest bank in the Republic of Ireland and the only full service foreign owned bank operating in this market. Our market share in retail and commercial banking is approximately 14%, while our total lending to business at the end of quarter three of 2015 stood at approximately €6.5 billion. The improved economic and market sentiment and higher demand for credit that has emerged in recent years have continued strongly into 2015. As we noted in our recent quarterly financial update, we have seen an almost 60% increase in business lending volumes this year. We firmly believe that for the economy to continue to recover, it is essential that there be competition in the banking market. We are determined to provide that competition across all of the sectors in which we operate.

Agriculture and the wider food and drink sector are key components of our business and today account for approximately 20% of our total business lending, with the agriculture sector specifically accounting for 12%. Our banking relationships in these sectors start with the many farmers who bank with us, through to artisan food producers up to the largest multinational food manufacturing businesses. Our relationships with these customers stretch back decades in many cases.

Our strategic ambition is to be the number one bank for customer service and we wish to sensibly grow our market share. We are focused on making Ulster Bank a customer centric bank that is simpler, more agile and one that offers an appealing alternative to the dominant players in the market.

We are supporting Irish businesses not only with funding but also in looking at their wider financial and business planning needs. Examples include our online mentoring platform for small business that has more than 20,000 registered users - SmallBusinessCan.com and BusinessWomenCan. Our annual business achievers awards which take place next week acknowledge business success and reward companies that have displayed determination and innovation across the island. This year we have seen a very significant increase in entries in both the agriculture and food and drink categories. We have dedicated proposition and specific sector support teams for a range of business sectors, including agriculture and food and drink. Uniquely, as part of RBS, we are able to leverage the bank's international reach, while delivering a strong local presence. An up-to-date practical example of how we are trying to make a difference for our customers is our support for 25 of our small and medium enterprise food producing customers in assisting them to take space at the "I believe in Christmas" market at CHQ in the IFSC which starts this week. This will be a great opportunity for some of our customers to showcase their products.

We recognise the importance of agriculture to the economic and social fabric of the country. It has been and always will be a core part of our business. As such, it is important that as the economy recovers, the development and growth of the agriculture sector be focused, structured and strategic. We understand the sector and are committed to supporting both individuals and enterprises from farmyards to large corporates. We recognise that lending must be responsible and fully based on the ability of farmers to generate cash flow to repay debt. We take a long-term view of agricultural lending, recognising the inherent volatility in farming due to weather events and fluctuating commodity prices.

I will now hand over to Dr. Byrne who will provide some further detail on the range of supports we have in place for the sector.

Dr. Ailish Byrne:

I appreciate the opportunity to update once again the Chairman and members of the joint committee. The removal of milk quotas represented a major and long-term opportunity for efficiently managed, grass-based, family dairy farms. The increased output will be exported and demand will be driven by changing global demographics, reflecting increasing population, greater affluence and urbanisation in developing countries. However, we also accept that the abolition of milk quotas brings challenges, especially in terms of milk price volatility and the requirement for additional investment in farm infrastructure to facilitate expansion. Ulster Bank sponsored the Teagasc Moorepark open day in July which provided dairy farmers with an opportunity to view and discuss the latest developments in key dairying technologies to help them to tackle these challenges. These factors are firmly embedded into the Ulster Bank business and credit strategy for the dairy sector.

Ulster Bank continues to lend to the dairy sector for on-farm development and expansion, as well as providing support for our customers in this period of low milk prices. We have skilled managers who understand farming and offer a range of products to support our agri-customers, including a dairy expansion loan, a pasture loan and a young farmer package.

Our agri-training programme is accredited by Chartered Banker and 40 of our relationship managers have completed this course. As part of their training, this group participated in a farm safety training day at Teagasc during April. These specialists are supported by our central agri-team. Despite various financial pressure points in the past, including the dairy sector downturn in 2009, the fodder crises of 2012 and 2013 and various downturns in the pig sector, the Ulster Bank experience with the agri-sector has been positive.

The welcome measures introduced in budgets 2015 and 2016 encourage land mobility and better access to land for active farmers. The farm sector should embrace these measures. Our support for these measures was highlighted in the Ulster Bank and Teagasc publication, Stepping Stones to a Career in Dairy Farming, earlier this year. A copy of this publication was provided for the clerk to the committee for circulation to all members. The publication highlights the changing landscape facing Irish dairy producers as they seek to compete successfully on a global stage, while exploring the emerging career pathways available to them, for example, farm partnerships, share-farming and other collaborative farming arrangements.

We believe dairy farmers need to continue to develop a broader range of skills. Greater understanding of technical efficiency, people management and business skills are required to successfully develop farming operations in this increasingly uncertain environment. This morning I was at Ulster Bank's third young farmer seminar entitled, Embracing Change in Meath, which was attended by more than 60 young farmers. This seminar, with similar events last week in Cork and Sligo, focused on encouraging young farmers to focus on the skills necessary to develop and grow their businesses. Our expert panel of dairy and pig farmers who had expanded their businesses in the previous ten years provided key insights into market volatilities, challenges and risks young farmers might encounter as they expand their businesses.

The role of women in the family farm business is often under-estimated. This Thursday evening Ulster Bank will host a women in agriculture event in Mullingar which, among other things, will promote wellbeing and mental health issues for farm families, particularly in times of income pressure.

Through our close relationship with all stakeholoders in the dairy industry, we realised last year that dairy farmers might face some financial challenges in 2015 due to a low milk price, a superlevy fine and, possibly, a larger than normal tax bill. This coincided with a time when many dairy farmers were expanding their activities. We developed the Ulster Bank dairy farmer toolkit as part of our proactive support for dairy farming customers. The toolkit provides solutions for farmers, with options such as increased working capital facilities, an interest-only option or a combination of both, depending on individual circumstances.

We encourage all our farmers to analyse their cost of production per litre of milk and to prepare a cash flow budget. We actively make care calls to our dairy farming customers to outline the support we can provide if they are in difficulties. We are currently encouraging our dairy farming customers to apply for additional support now in anticipation of a below-cost production price for milk next spring. As part of our efforts to ensure that farmers are kept informed on relevant issues, yesterday we had an article in The Examinerencouraging farmers to prepare cashflow budgets and seek assistance from their bank now in anticipation of a low milk price next spring.

We welcome the establishment of the dairy forum by the Minister for Agriculture, Food and the Marine. It has the responsibility to provide recommendations to farmers on how best to deal with future price volatility and as active participants we are helping to drive this agenda.

I reiterate that Ulster Bank is very active in and committed to the agrifood and farming sectors. Our aim is to partner our farming businesses and to play our part in addressing the difficulties arising from volatility in the dairy market. We have developed a flexible approach for our customers in difficulty with our dairy farmer toolkit and look forward to further engagement, particularly through the dairy forum, with other stakeholders to consider the range of options to address the fundamental difficulties facing the sector.

I thank the Chairman and the members for affording Ulster Bank the opportunity to address the committee. Mr. Eddie Cullen and I are happy to address any questions members may have.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I thank Dr. Byrne. I call Deputy Penrose.

Willie Penrose (Longford-Westmeath, Labour)
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I thank the various banks and the Banking and Payments Federation of Ireland for their presentations. Having listened carefully to the three presentations I am surprised that the garden is in full bloom and there is no sign of a wilt in the roses. As one who keeps in close contact with those on the ground, the presentations were at variance with my experience of what farmers are encountering. How are the witnesses dealing with young farmers who are becoming part of the new expansionary wave and availing of those tax incentives for farm transfers from fathers, uncles or aunts to young farmers? Are they being given two or three years of interest-free loans, interest only loans or any special rates? They are coming into a challenging global environment. Price volatility will continue to be a normal cyclical phenomenon. The days of demand and supply and the days of linear increases are virtually a thing of the past. How do the witnesses deal with those issues where there are significant trough and valley periods? For existing farmers are the witnesses prepared to extend facilities without penalties to ensure they are not being penalised?

At what rate do the banks borrow money? It is important to know the mark-up on the money they are getting, particularly in the context of people in a significant adverse environment in terms of market opportunities. A couple of the banks have different rates, one has 28 cent and one has 26 cent in terms of budgeting. How critical are the rates? The average was 38 cent in 2014 at peak and it dropped to an average of 25 cent. If the witnesses are budgeting for 28 cent and only get 25 cent, how do they handle that situation? Rates of 4% to 4.5% were mentioned. I acknowledge that in terms of merchant credit that is very competitive and is a very attractive price. I salute AIB on its message to encourage farmers to focus on being "Better Before Bigger". That was very prescient. AIB mentioned that on the last occasion and it stuck in my mind. If the dairy industry wants to expand it is important that it gets the best returns by way of increased output and efficiencies before embarking upon the path of expansion. I think that is what that means if I understood it correctly.

Ulster Bank mentioned pasture loans. Are those available across all the sectors? Have any of the banks had to reschedule loans so far? It is good that the banks are meeting the people. That is pre-emptive and I salute them for that. When they do a good job they are entitled to be saluted. We are also entitled to raise questions. Has the rescheduling of loans been part of their suite of solutions? I hope there is no problem and that the 4.5% interest rate does not become 4.55%. Those things are very important because 0.5% could be the straw that will pull one down. Bank of Ireland has developed a suite of products called AgriFlex. Perhaps the witnesses would explain if that accommodates loan holidays and such like, which is very important.

I have great faith in Ornua because it set out the position very clearly for us seven or eight months ago and did so again today. The witness stated that it could be the third quarter of 2016 before the sector starts to come back. Let us send out a clear message before anybody is misled. It could be the third quarter before the smallest shoots begin to appear. I know Senator Pat O'Neill is a dairy farmer so there is no use in getting excited.

Our focus has to be on the comparative advantages in terms of grass based production. This is a perfect storm in many ways. We had the global challenge, the contraction of the milk price and volatility which will continue to be part of the equation. We had the super levy fines and the taxation issue in October or November which led to ROS. Have the witnesses - this question is for each delegation - devised any package to accommodate the farming public and the self-employed in terms of how to deal with those situations? Again, I would be interested to hear the interest rate that would be applied to that type of accommodation, which is essential to ensure farmers continue in business.

I am interested to hear what the delegations have done for the young farmers who are coming directly on stream. We are promoting the acceleration of transfer of ownership to young farmers. Only about 7% of farmers are under the age of 35 years. What can the banks do to accelerate that process, allied to the taxation and other measures outlined in the budget?

Michael Comiskey (Fine Gael)
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I thank the witnesses for the presentations which were positive. Ornua has dealt with the dairy industry. Dairy farmers have had their own difficulties. It is important that the bank does not apply too much pressure until the market starts to recover and give the people who have made huge investments a chance to come back into the system again. Questions we are often asked is whether money is being made available for land purchase and if banks are prepared to lend over a longer term. That younger farmers have got involved in young farmer schemes, leasing land and doing deals with older farmers is welcome. I would welcome the view of the witnesses on that issue.

It is very important that we help young farmers.

Deputy Penrose sparked a thought in my head. Can the banks draw down money from the European Investment Bank and lend it to farmers at a lower rate? That is important. Generally, a good many points have been covered and it is very positive.

Many older farmers would speak to us from time to time about the difficulties they have when dealing with banks, particularly given the increased use of machines to lodge cash and so forth. It is vitally important that personal contact is maintained, particularly in smaller rural towns where some older farmers may not be used to dealing with machines.

Pat O'Neill (Fine Gael)
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I point out to Deputy Penrose that Deputy Deering was the only farmer who was making money. I am not a dairy farmer.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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"Was."

Pat O'Neill (Fine Gael)
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Deputy Penrose covered all the points that needed to be made to the banks. I thank them for their presentations. I welcome the fact that all three banks said they were in constant contact with their customers. This may be the first year of repayments, because the dairy expansion has only started and it is easy for the banks to be nice to people in the first year as they restructure. How long are the banks prepared to put up with this downturn before the alarm bells start suddenly ringing and the telephone calls are not as friendly? In their long-term view, how long have they envisaged this downturn to last? I predict it will be the end of 2016 before the milk markets improve. As we heard from Ornua, we need an increase in oil prices and a weather event. We need those things to alleviate the problems with the milk market at present.

Both of my colleagues here raised the fact that Commissioner Hogan announced in July 2015 and November 2015 that the European Investment Bank, through the Directorate-General for Agriculture and Rural Development, was to make cheap money available to farmers at a rate of 3%, with term loans up to 15%, but that one of our major banks would have to come on board. Where is this at present? Are the banks in negotiation with the European Investment Bank to bring it down? This is relevant to Deputy Penrose's question about the rates the banks are charging. If the European Investment Bank, through the Directorate-General, is prepared to offer money to farmers at 3%, does it not make a lot more sense to the banks as a sector, if they can get the money cheaper, to pass it on and try to continue to grow the industry? Where are we in respect of the European Investment Bank moneys? It is easy to be nice to people in the first year and for the calls to be friendly, but how long do the banks envisage this downturn will continue?

Pat Deering (Carlow-Kilkenny, Fine Gael)
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Before I go back to the witnesses, I have one brief question regarding new entrants and those who may have come into the dairy sector from a different sector in recent years, be it tillage or the beef sector. Do the banks have a breakdown of those numbers? What have been their credit requirements? Have they been for extra stock or infrastructure? Do the witnesses have those figures?

I now call on Mr. Crowley, who is the facilitator.

Mr. Maurice Crowley:

We will try to facilitate. Two things struck me really. A couple of questions could be grouped together and answered in one go. Perhaps the most efficient way of doing this is for one bank to lead off on each question and for other banks to add to the answer if they want.

One of the first issues referred to was price volatility, and there were a few questions on it. One was how was price volatility is dealt with by the banks. As the banks spoke and went through the presentations, they seemed to be at slightly different average prices for budgeting purposes. This links in a way to a question towards the end about the banks' continued support while prices remain weak and how long the support will continue, in the nice way described.

To change the order slightly, perhaps AIB might start off on the area of pricing and continuing support for the sector as prices remain low.

Mr. Ken Burke:

In our submission, we spoke of AIB's experience in managing other parts of the agri sector through the downturn. We have significant market share and exposure to the pig sector. It is a factor of the pig business that there are good years and bad. We help pig farmers plan for the bad years. They have sinking funds and mechanisms to put cash away to cover themselves during those periods. As far back as 2013, we were signalling the volatility that we felt was going to hit the dairy sector and that volatility was going to be the new norm. On whether this is time-bound or relative to our support for the sector, it is not. We see it as a new norm and one with which farmers will have to get comfortable. They will have to find ways of managing their businesses, including hedging of commodities and financial products and managing and measuring their own capital investments through the cycle. We see that this will certainly be a H1 event next year and we are forecasting that in H2 there might be some easing of the situation. If that were not to happen, it is not something that would faze us. We speak in our submission of a through-the-cycles price of 30 cents per litre. We are happy with the business we have written and the capacity of that business to weather any particular continuation of this.

I will give the committee some figures that might help. I apologise that the figures are not on the screen, but I know members have the figures in front of them. A graph shows dairy farmers' current account balances. The first thing I would say is that overdraft utilisation is at a low level. The key point I want to bring out is that for every euro that is drawn on dairy farmers' overdrafts in AIB, there is a multiple of four times cover in terms of cash held and surplus cash in other current accounts or deposit accounts. This gives us real comfort. Average overdraft utilisation was at 24% during October 2015 and credit balances were up 32% year on year. This gives us good comfort in terms of management of working capital.

If one looks at the outstanding loan balances in the agriculture market reported into the Central Bank, this peaked in quarter 1 of 2009 at €5.5 billion. In quarter 2 of 2015, the Central Bank was reporting that it was down to €3.3 billion, which is 38% below its peak. When we take those two figures together, we are not being in any way complacent around this, but we are saying there is a level of headroom in terms of managing those cashflows before one gets really acute pressure or pinch points.

The vast majority of our farmers are on fixed repayments. They may be on a variable interest rate but their payments are fixed for the duration of the loan. This gives them comfort in terms of managing their cashflow. We are proactively engaging and anticipating rather than waiting for a pressure point that might come in quarter 1 of next year. We are asking our farmer customers to complete a cashflow forecast for 2016 and to anticipate where the pressure point will come and how we need to deal with it. I will deal with one other point. A principle of AIB's practice in giving that support is that we do not re-price facilities. If we are giving a period of interest-only payments or a payment holiday, we are not re-pricing those facilities. They are offered at the existing price.

"Better before bigger" was mentioned. That is our premise. The last time we were here we mentioned the income differential of €60,000 per annum between the average top-performing dairy farmer and the bottom 10%, which is significant. That has been our starting point.

I am not sure if the committee would like me to deal with the issue now, but in terms of our support, pricing and interest rates, there has been talk about the European Investment Bank. AIB had three separate rounds of EIB funding. We replaced the last round of EIB funding. Our intent was to provide the lowest possible credit we could to our farmer customers by accessing European markets. We had that third round of EIB funding. When the Government sponsored and supported the Strategic Bank Corporation of Ireland, we retired that third round of funding and partnered with the SBCI to bring a €200 million fund to market. Agri is taking a significant slice of that funding.

Willie Penrose (Longford-Westmeath, Labour)
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What is the rate?

Mr. Ken Burke:

It is a 4.5% variable rate.

Willie Penrose (Longford-Westmeath, Labour)
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What markup is that?

Mr. Ken Burke:

I will give the Deputy that in reverse.

Willie Penrose (Longford-Westmeath, Labour)
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That is critical.

Mr. Ken Burke:

We have given that at a 2% discount on our standard variable business loan rate. We estimated the SBCI benefit at 1% and we matched that and, in notional terms, decided that we would give another 1% discount. So it is an all-in rate of 4.5%. That rate is for longer-term investment capital for farms. Blended alongside that, we have the lowest working capital funding in the market, at just over 4%. We have the right armoury and suite of financial products to give real low-cost funding and we are seeing farmers proactively engage with us to refinance their merchant credit. The working capital facility is not just open to AIB customers. Customers of other banks can avail of that farmer credit line facility and blend it with their other bank facilities.

Mr. Maurice Crowley:

If the committee is amenable, I will now hand over to Mr. Cullen.

Mr. Eddie Cullen:

Taking it from back to front, I said in my opening statement that we take a long-term view. We have had long-term relationships with our farmer customers and that is where we stand in terms of price volatility. The question was posed as to how far out we would go in that regard. I listened with interest to the presentation by the representatives of Ornua, and I agree with their analysis. We do not anticipate that prices will recover in 2016. Our modelling goes out to 2017. We are ready and working with the farmers. I will hand over to Ms Byrne in a moment, who will provide details on our toolkit. At this point, a very small number of farmers, numbering fewer than five, have contacted us with a view to accessing our toolkit. We expect that will change as we move into 2016 and get into spring production. Right now, in 2015, farmers' cashflow is not too bad. We all understand the reasons for that, but we are ready, willing and able to support farmers in the spring of 2016 when things change. We expect that could be a medium-term phenomenon, but we believe the long-term prospects for dairy remain good, as Ornua argued earlier. The global demand dynamics are still positive for the industry. As a bank that has been involved in agriculture for many decades, whether it is dairy, pig, poultry or tillage farming, we know that this is a cyclical industry. Banks have to be ready to stand by and support their farmer customers in periods such as this. That support is not short term; it is long-term support.

We are not currently part of the SBCI, and I do not want to say too much about it because discussions are ongoing. I expect that Ulster Bank will be making some announcements in that regard in the shorter term, but I do not want to front-run those announcements here today. I will now ask Ms Byrne to comment on the toolkit and the specific working capital supports available.

Dr. Ailish Byrne:

We introduced our dairy farmer toolkit at the beginning of this year in anticipation of a low milk price during 2015. The toolkit gives farmers an interest-only option or an increase to their working capital facilities or both, depending on where they are in the investment cycle on their individual businesses. We take a long-term approach to the milk price issue and assess long-term investments at a milk price of 28 cent per litre plus VAT and constituent bonuses. That is to reassess long-term loans today, given that the milk price in 2014 was hitting 40 cent per litre. That has always been our approach to our medium- to long-term outlook. For 2016, we are asking farmers to prepare cashflow budgets on a base price of 22 cent per litre, plus VAT and constituent bonuses. We are using a low milk price, but we do not have a crystal ball. We do not know that milk prices will fall to that level, but we would hope that this was the bottom of the cycle. We are asking farmers to prepare for a worst-case scenario and to look for support at that level for a full 12 months. We will put the facilities in place to support the business at that milk price for the year, once they can demonstrate long-term viability and sustainability at a milk price of 28 cent per litre. That is our approach in terms of our dairy farmer toolkit.

We are actively trying to interact with our farmers at the moment. We are asking them to contact us now, particularly if they are spring milk producers and have cows dried off, because they should have time now to prepare cashflow budgets and to know their costs of production, rather than waiting until next spring, when they find themselves under pressure with cows calving and so forth. They will not have time then to sit down and do this type of financial analysis. That is the key message to our farmer customers. The key points are the 28 cent per litre base price for the long-term outlook and 22 cent for next year.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I now invite the Bank of Ireland representatives to respond.

Mr. Mark Cunningham:

I am happy to echo the responses we have heard so far. In response to Senator O'Neill's point, we are certainly in this game for the long haul. We are not suggesting that everything will be fine in the first year and that things will change in the second year. We anticipate that the situation will be better in year two but, as many others have said, the increased volume of production during the course of 2015 has compensated significantly for the reduction in price. As a result, the cashflow pressures are not as intense or severe as we might have anticipated at the start of the year. I note that Deputy Penrose has just left, but on the issue of rescheduling, we have not had to reschedule any loans at this juncture. I will ask Mr. Farrell to talk about the AgriFlex product in terms of how it comes into operation and what it can accommodate. I will also ask him to speak about the switchers and the number of beef farmers who have switched to dairy.

On the question of money being available for land purchase, we are currently approving funding for approximately 500 acres per week. That tends to be on a 15-year basis. The land purchase market is quite active at present but the level of gearing on that land purchase tends to be very low. We are looking at somewhere in the order of 30% on average across the book in terms of the level of debt that farmers are taking on. While there may be concerns that in certain sectors farmers are becoming over-leveraged and over-borrowed, in these instances the actual level of debt being taken out on land purchase is quite light.

Mr. Sean Farrell:

AgriFlex is our response to the problem of price volatility. We do not believe there is a single catch-all solution to it. In 2014 we designed the product, which allows both existing and prospective customers to switch to an interest-only schedule for an initial period of six months. That schedule can be extended beyond the six-month period for a further six months. The product allows customers to switch some or all of their borrowings onto interest-only, as and when they require it. We are asking our customers to provide us with a cashflow expectation in advance of requesting AgriFlex.

Similar to what other banks have said here today, we have not seen any significant uptake in terms of demand for cash flow. As we said, our overdraft utilisation levels are low so we do not anticipate that there will be a significant uptake in the short term. We are making contact with customers in advance of next year and are ready to support our customers as required by them.

Mr. Mark Cunningham:

Perhaps Mr. Farrell will address the issue of switchers.

Mr. Sean Farrell:

The Senator asked about our experience of switchers from other enterprises into the dairy sector. The experience to date has been very good for a number of reasons. I do not have specific statistics but those who have switched, in particular those switching from sucklers to dairy, have had natural advantages that resulted in strong dairy businesses. In the first instance, typically they have brought significant equity from their existing stocks into their dairy businesses. They have also been early adapters. By their very nature, they have already been, in general, good stock people and good at grassland management, which are two of the key elements to be a successful dairy farmer. They have also had the natural advantage of an appropriate grazing block or other infrastructure. They have had to invest in the infrastructure and perhaps amend existing accommodation, for instance, to provide a milking parlour. In general, however, the level of investment is nothing akin to what it would be if it was a greenfield development. Our experience to date, albeit in a medium to high milk price environment, since they have entered, has been good. Grassland management is one of the areas they have had to address and they have done so very well. Given the relative profitability of one sector versus the other, there will be more switchers. Efficient expansion is recommended and it will obviously not be for everyone. To date, those who invested in dairy farming and the financial planning required to succeed have been successful.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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If coming from the beef sector or the suckler sector, farmers will have significant collateral to bring with them. Farmers coming from the tillage sector are in a totally different situation. They have no stock and they have a totally different attitude. They are moving from a seasonal situation to a 24/7 situation. What is the experience of the banks in that regard? The question applies to all the banks.

Mr. Sean Farrell:

On moving from tillage, one particular customer who I think is representative of the tillage sector comes to mind. The customer is now in a collaborative farming arrangement with an existing dairy farmer and is putting what was a former tillage block to use in grassland production. He is learning from the existing dairy farmer in terms of how he can grow his dairy business. The skill set is quite different but that is the way that particular individual approached it. We were also comfortable with supporting the farmer, who was technically an excellent tillage farmer, as many of them tend to be but he needed to learn the skills from an existing proponent in dairying.

Dr. Anne Finnegan:

As the Vice Chairman quite rightly states, the challenges are completely different when coming from the tillage sector to dairying. The fundamental thing AIB looks for in a new entrant from the tillage sector is his or her experience in dairying. If he or she does not have any experience, there is capacity to hire it in and to manage the dairy operation successfully. That is the very first thing we look at before we look at anything else. The barriers to entry in terms of investment are much more significant for a tillage farmer and that is a real consideration as well.

In many respects, one is looking at probably a higher level of equity coming in with a tillage conversion into dairying as opposed to a suckler or beef conversion, where there will be equity in the stock. In reality, in terms of new entrants to dairy production and people who would have received quota under the Department of Agriculture, Food and the Marine schemes, conversions from the beef and tillage sectors have been at the lower end of the numbers. The most significant proportion of new entrants, if one wants to call them that, have come from the dairy sector. They have had some level of dairy experience within the home or extended family farm, which has really seen them through. Our experience of that has been quite positive.

To pick up on Deputy Penrose's question on dealing with young farmers coming into the industry and how we are supporting them, first and foremost, we have had a strong focus on the young farmer market for well over a decade. Deputy Penrose cited the statistic that less than 7% of the farming population is a young farmer. On trying to encourage and foster young farmers, we work very closely with Teagasc in its agriculture colleges on its level 6 and green certificate programmes. We have a financial planning programme in place with Teagasc as part of its curriculum and every year, we run a best farm plan of the year award. This has been really good for the bank in building financial acumen in future farmers and an understanding on the part of those farmers of what it is a bank will look for from them when they come to see us with their business plans and what a good plan looks like. For the first time, this year the College of Agriculture, Food and Rural Enterprise at Greenmount in Northern Ireland was part of the initiative as well. It is a cross-Border initiative which is working very well.

When we are interacting on the ground through our branches and business centres and through direct banking with young farmers, as a prerequisite, any young farmer or new entrant to dairying will meet an agri-adviser. For capacity reasons, that is not the case for all lending cases across the board in the bank. We prioritise new entrants to the sector when arranging these meetings with the agri-advisers. Specifically, we want to get an understanding of their experience and financial acumen. How do we deal with them? We give them interest-only periods, in recognition of the challenges in the start-up phase. Typically, initially it starts with a one year interest-only period which is reviewed when necessary.

It is important to bear in mind that while this is our first episode of volatility post-quota, realistically we have to bear 2009 and 2013 in mind as well in terms of the form that dairy farmers and the entire industry have in dealing with volatility. Our view would be that dairy farmers and the industry itself are better positioned now. We have a greater understanding of the impact of the cycle, be it the cycle related to price or a cycle related to weather, and dealing with it. In terms of budgeting through the cycle and taking account of the volatility, we are comfortable with taking a long-term through-the-cycle budget milk price. However, this is only one half of margin on a farm. The other half is the cost base, which is very important for us as well. While we keep the milk price under review, it is important that we carry out rigorous financial assessments of proposals in front of us and that we get an understanding of the cost base on the farm because this really makes a difference. When one looks at the Teagasc profit monitors, the variance between different farms is quite frightening. Mr. Burke alluded to this already.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I apologise for cutting across Dr. Finnegan but 20 years ago, the price per litre of milk was 28 cent. Some 20 years later, the cost has increased by 50%. This is where the problem lies.

Mr. Eddie Cullen:

Dr. Byrne mentioned in her presentation that we have been working with Teagasc in our "Stepping stones to a career-----

Willie Penrose (Longford-Westmeath, Labour)
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There is one for everyone in the audience.

Mr. Eddie Cullen:

Absolutely, yes. We have distributed it in advance.

In addition, to the specific question, we give two-year interest-free periods with our young farmer loans. There was a specific question on our pasture loans. Are they available across all sectors? The answer to that question is, "Yes." Dr. Byrne may wish to pick up on some of the detail behind the pasture loan and the switching point.

Dr. Ailish Byrne:

Going back to the young farmers seminars, I was at our third one this morning in Meath. We run them in conjunction with Broadmore Research and Consulting, which is doing focus group sessions with young farmers to understand the key challenges they face in getting set up in business. As a bank, we are going to try to embed some of those learnings into the offering we have for young farmers. We will also make the report available widely, including to Macra na Feirme and Teagasc, so that we can understand the key challenges, not just financial challenges facing young farmers. These challenges include relationships with older farmers and other family members as well, which is a key issue for young farmers.

Our central agriteam give a number of guest lectures in UCD and the Teagasc colleges.

Previously, we were sponsors of the Macra na Feirme national conference.

We give unsecured amounts for young trained farmers to get them started. Many young farmers come home to farm the family farm business. Sometimes they feel they are simply working there and cannot build up any business acumen themselves. We can give a small number of unsecured facilities to young farmers. Sometimes they take on or lease a block of land or carry out contract rearing of heifers for their fathers or other people. This allows them to build up a reputation with the bank and they can then rely on that when they look to expand the business in future.

We introduced the pasture loan last year because we recognised that grass-based systems are the most competitive in the world. It is available not only to the dairy sector but to all sectors involved in growing grass. It is loan over a five-year period for farmers to increase the fertility of their land. People can invest in phosphorous, potassium, lime, infrastructure, roadways and so on.

Senator Comiskey referred to land purchase. We will do up to 20 years on land purchase, including interest-only loans for two years. Again, this is a recognition that people may need to reseed land or fence it but the cash does not generate from that land for a period of up to 24 months.

Reference was made to switching. The majority of switchers we see are beef or suckler farmers switching to dairying. Typically, they sell the suckler herd and replace it with dairy cows. This would have been a plan for them for several years and they would have started to put the infrastructure and grass in place on their farms. Their big investment is in the milking parlour. That is the main equipment they do not have on the farm.

We have seen numerous people taking over leased lands or going into share-farming arrangements and other collaborative arrangements. We welcome these as ways of getting younger more active farmers involved in the sector.

Pat O'Neill (Fine Gael)
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Dr. Byrne referred to how the bank was asking farmers to produce at 22 cent, the worst case cashflow scenario. However, she referred to 28 cent per litre as well. I missed what that was for. Can Dr. Byrne clarify it?

Dr. Ailish Byrne:

We look at a long-term outlook at 28 cent per litre.

Pat O'Neill (Fine Gael)
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The bank is selling the money on a long-term basis. Is that correct?

Dr. Ailish Byrne:

The milk price may be low today but let us suppose 20 acres comes up next door. That could form part of a farmer's grazing platform and he may want to buy them. We put that loan over a 20 year period and reassess the repayment capacity over a 20 year term on the basis of a milk price of 28 cent.

Willie Penrose (Longford-Westmeath, Labour)
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Is that discounted?

Dr. Ailish Byrne:

We take 28 cent per litre as our long-term view. We are looking at 22 cent-----

Willie Penrose (Longford-Westmeath, Labour)
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In looking at the long term, surely the bank would have to discount it. The price of 28 cent per litre today will be different in ten years' time.

Dr. Ailish Byrne:

No one knows where it is going in the medium term, so we keep it constantly under review. For example, we do 22 cent per litre for next year when it seems milk prices will be far lower than that. We provide additional support for people or see whether they need a capital repayment holiday or an interest-only option based on 22 cent per litre.

Pat O'Neill (Fine Gael)
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We referred to the volatility in 2009, when we saw the price of milk decrease to 18 cent per litre. I am from Kilkenny, so I know the situation with the greenfield site that AIB, Glanbia and Teagasc were involved with. The site was set up and they were going to try to produce milk at 14 cent per litre to prove to farmers that it could be done. Then they could pay 18 cent per litre for it. I welcome that the banks now realise the cost of production is between 24 cent and 26 cent per litre depending on how efficient farmers are. Basically, that is the position.

I referred to European Investment Bank money earlier and I understand AIB has taken out some of it. Have any other banks taken up the EIB money? Is AIB the only bank to have used the European Investment Bank facility?

Is the European Investment Bank money limited to dairy farmers or is it available to all farmers? If it is available to all farmers, is it available to agribusinesses too? Can agribusinesses take some of that cheap money?

I seek a comment from the three banks on another point. We are now living in the age of technology. Senator Comiskey referred to older members. If we come back here in three years' time, will there be such a thing as a cheque book? How are we going to deal with that situation? Farmers pay many of their bills by cheque. For example, contractors call to the door. I am unsure whether contractors are going to have a machine to take a credit card and so on. Will there be cheque books in three years' time?

Pat Deering (Carlow-Kilkenny, Fine Gael)
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Mr. Crowley, can you address that question?

Mr. Maurice Crowley:

I will only answer the cheque book question. The volume of cheques being processed in the country is falling by 10% per annum at the moment. Obviously, some of that was the impact of the recession of recent years but in general, the volume is falling. Do I expect to be out of the business of cheques in five years' time or a decade from now? I doubt it. The volume will be lower but we will still be processing cheques. Banks are putting in cheque processing equipment at the front of branches to try to make the process more efficient. There will still be cheques.

We are keen to see a further movement towards electronic payments but people will decide that based on the cost, efficiency, payment terms, etc. That will determine how slowly or quickly we move to electronic payments. Cheques will not be gone. I will pass the question on EIB money over to the representatives of Bank of Ireland and Ulster Bank.

Mr. Mark Cunningham:

I think there is a degree of confusion and perhaps a degree of pre-announcement with regard to EIB money. No pure EIB money is yet available. The Government has set up the Strategic Banking Corporation of Ireland, SBCI. There is a combination of EIB and KfW money available through the SBCI. That is available through Bank of Ireland and, as Mr. Burke has said, through AIB. Mr. Cullen has not pre-announced it but it may well be available shortly.

There is some restriction with the SBCI money. A state aid test has to be gone through to ensure no additional state aid has been made available prior to that money being drawn down. In certain sectors, the funding is not available for farmers and agribusiness. The EIB development money, which has been mooted and discussed, perhaps acts to counter-balance that.

Mr. Crowley has addressed the question of cheque books. I think we are going to see cheques as an ever-declining feature of the landscape. Usage in Ireland is far higher than anywhere else in Europe. The expectation from the Government and the banking industry is that cheques and cash will be reduced as much as possible.

Mr. Eddie Cullen:

Farmers tend to use cheques more than cash. By the same token, we note our farmer customers have been rapid and early adopters to technology. In many ways, they have taken up digital and Internet platforms more quickly than other parts of the community. That probably reflects the fact that farmers are mobile and out and about using mobile technology. It has been a far more convenient way for them to transact business. This is a challenge all banks face. We are committed to maintain the physical infrastructure to allow customers bring in cheques or deal in cash while moving to new technology platforms as well.

I do not have anything to add to Mr. Cunningham's comments on the Europe Investment Bank. We are in discussions with the Strategic Banking Corporation of Ireland and the European Investment Bank and we await announcements on that front in the coming months.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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Is AIB happy enough?

Mr. Ken Burke:

Yes. We have covered the ground on that point.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I wish to address one final point in general before we finish. As part of our work, we have investigated volatility in the dairy industry. We looked at the New Zealand experience and the Northern Ireland experience, which has not been good in recent years. Have the banks examined this sector from a financial point of view?

Mr. Ken Burke:

Yes, we have. A number of our agricultural advisers have travelled to New Zealand. We have looked at the inter-generational debt experience and some of the high leverage that exists, particularly in that geography. When we appeared before the committee in February, we spoke about the national road shows we were doing with farmers. Dr. Finnegan has the statistics before her. We were drawing the analogy between the Northern Ireland experience and the Irish experience in terms of the relative efficiencies of the models. Dr. Finnegan may have some headline figures.

Dr. Anne Finnegan:

The Northern Ireland experience is of a sector that has been quota-free since 1995 but it has increased by a little under 40%. Total cow numbers have been static but they have increased at farm level. We have seen consolidation in the sector in Northern Ireland. Let us compare the Teagasc figures today.

The net margin in the North is no greater than it is in the Republic. Indeed, it is somewhat less.

Regarding New Zealand, we touched on that point when we discussed gearing levels in our opening statement. We often discuss how much of an advantage the low debt level is for farmers in Ireland. It is a factor of the structural make-up of farming and the manner in which farms transfer between family members. In mainland Europe and New Zealand, farms are more frequently purchased than transferred through inheritance. It gives us some advantage because we do not feel the pain as quickly or as severely in the bad years as other areas do. However, we still feel financial pressure. It should not give us any comfort that we have the capacity to take on more debt simply because farmers in Denmark or New Zealand are carrying more debt per hectare. Our production systems, entry into farming and the associated costs are different.

Mr. Burke mentioned witnessing phenomena like intergenerational loans, long-term interest-only loans, etc. One of our colleagues was in New Zealand in 2009. At that point, 25% of farmers could not make interest payments. They were left with a decision on whether to pay the interest or put bread on the table. None of us wants to see that type of scenario in Ireland.

Mr. Sean Farrell:

Without repeating all of Dr. Finnegan's points, there is a fundamental difference between the way that we and some of those other jurisdictions assess lending. It concerns the absolute focus on repayment ability of capital and interest over an agreed period. While we are all in a position to provide interest-only repayment schedules as appropriate through the cycle, we do not lend on the strength of the assessment, but on the strength of our ability to repay. Having visited New Zealand and examined its banks' models relative to its farming systems, mimicking them in Ireland would not be appropriate. We plan to continue modelling our repayment schedules on longer-term repayments of capital and interest.

Dr. Ailish Byrne:

I will provide direct experience of Northern Ireland through my discussions with my counterpart. The bank also makes the dairy farmer toolkit available to its customers. There has been a high usage of it there compared with in the Republic. That is reflective of the North's higher debt levels per farm, higher cost system and, perhaps, supply patterns, in that it has a much flatter supply curve. It is good that we learn lessons from Northern Ireland and not go down that route.

One can learn some good lessons from New Zealand in terms of grassland management, financial management techniques and the approach to the business of farming. However, we must also learn lessons from its farmers' debt levels and what those have done to their businesses.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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I will allow Senator O'Neill to contribute briefly, as we want to conclude.

Pat O'Neill (Fine Gael)
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I want the three banks to each give a figure. In the current climate, what do they believe is the maximum feasible amount that a person should borrow per cow or hectare?

Pat Deering (Carlow-Kilkenny, Fine Gael)
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Who wants to answer first?

Pat O'Neill (Fine Gael)
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Just one figure each. I do not need a speech.

Mr. Sean Farrell:

Members will have to excuse me because I-----

Pat Deering (Carlow-Kilkenny, Fine Gael)
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We will start with the back row.

Dr. Anne Finnegan:

I am happy to go first on behalf of AIB but I will disappoint the Senator and say that this is something on which we do not put a figure. We discussed the variation-----

Pat O'Neill (Fine Gael)
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Yes.

Dr. Anne Finnegan:

-----in efficiencies and costs at farm level. It is dangerous for us to put a figure on the borrowings per cow that are sustainable because sustainability differs widely between farmers. We would not stray-----

Pat O'Neill (Fine Gael)
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What of the bank's average farmer?

Dr. Anne Finnegan:

What is the average farmer?

Pat O'Neill (Fine Gael)
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The people in the middle.

Dr. Anne Finnegan:

They vary greatly.

Pat O'Neill (Fine Gael)
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That is a politician's answer.

Dr. Anne Finnegan:

No. If we were to put a figure out there, it could be damaging. We want to consider each farm's unique circumstances and lend on that basis, not on an ideal of what debt an acre or dairy cow should carry. That is prudent.

Mr. Sean Farrell:

I will place a caveat on my response as well. Leaving efficiencies aside, there can be numerous income sources other than from one particular enterprise on each farm. There are also different cost bases that are not impacted on by efficiencies. For example, rented land plays a significant role and basic payments vary considerably from one farm to the next. We take all of these factors into consideration in addition to the efficiencies. Each cow and production level is different. As a general rule of thumb, though, once one exceeds a debt level of on average €4,000 per cow or 80 cent per litre of production, our experience is that efficiency levels must be high for that to be a sustainable level of debt.

Pat O'Neill (Fine Gael)
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I thank Mr. Farrell.

Dr. Ailish Byrne:

As to what we look for, we have learned lessons from the pig sector and how it manages volatility. If its farmers look for credit from Ulster Bank, they will always ask how much that is in cent per kilogramme of deadweight. Dairy farmers could start asking us how much the money we loaned them would cost them in cent per litre of milk. That is a key figure that we factor in rather than debt per cow, per acre or per hectare. It depends on the life cycle of that individual, his or her level of drawings from the family farm business and whether the family has other income sources.

Pat Deering (Carlow-Kilkenny, Fine Gael)
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That concludes our business. I thank the witnesses for attending. Like our meeting in the spring, this has been a useful exercise. As a result, we will compile a report. As the witnesses probably know, we brought all of the sectors involved in the dairy industry before us in recent weeks. We will compile our report in the coming weeks. It would be useful if recommendations came from it, as the entire industry might benefit.

As there is no further business, the meeting stands adjourned.