ILTE ‘aid’ for farms: a new financial crisis in three years’ time?

Judging by the latest figures, the ILTE scheme for preferential revolving loans to the agricultural sector, which was launched in the spring, is proving popular with farmers – 346 contracts have already been signed, totalling approximately €35.5 million. However, discussions regarding the structure of the scheme itself continue. Criticism has been levelled at the maximum loan term of three years and the choice of the quick repayment ratio to assess the financial situation of farms.

Ignas Jankauskas, head of MB “Skaičiai žemdirbiams”, states that it is precisely these conditions that may prove problematic for some farms experiencing financial difficulties. The Ministry of Agriculture (ŽŪM) and ILTE defend the decision, but the conditions have already been adjusted, and preparations are underway to grant a further exemption to some farms.

The scheme is being utilised

Preferential loans began to be granted on 4 May. The initial scheme stipulates that loans will be granted for a maximum of 36 months, with funding intended for both those unable to obtain loans on the market and farms affected by natural disasters or market fluctuations.

I. Jankauskas, head of MB “Skaičiai žemdirbiams”, is sceptical about the scheme’s implementation. According to him, the selected criteria limit access to funding, and the funds are being utilised more slowly than under previous crisis measures. However, data provided by the Ministry of Agriculture and the Institute of Agricultural Economics and Rural Development (ILTE) show that the scheme is gaining momentum.

By 3 August, 244 loan agreements had been signed for €24.6 million, whilst the latest figures show that 346 agreements have now been signed for approximately €35.5 million. ILTE states that the flow of applications remains stable.

“The cycle will soon turn and the money will be drawn out of the farms”

In I. Jankauskas’s view, a three-year term is too short for farms seeking loans specifically because of financial difficulties. He recalls the financial measures applied during previous periods of market disruption caused by the COVID-19 pandemic and the war in Ukraine. According to him, the loan term was initially set at three years then too, but was later extended.

“Both we and the farming community said – we don’t need three years, but at least five to six years for this to be an effective support measure. ILTE didn’t listen to this, and so these are three-year loans ", notes I. Jankauskas.

In his view, if the period of financial difficulties drags on, farmers may have to seek new financing simply to be able to repay the subsidised loan. “The cycle will soon turn, and money will be drained from the farms,” he says.

Ministry of Agriculture: a five- or six-year term would pose a different risk

The Ministry of Agriculture argues that the 36-month limit was not chosen at random.

“The 36-month loan term was set taking into account the fact that preferential loans are granted under the de minimis (de minimis) aid rules, and the maximum amount of aid that can be granted depends directly on the loan term – a longer loan term reduces the amount of aid that can be granted  ", explains the ministry. Another argument is that these loans are not subject to any security requirements.

“Over a period of 5–6 years, a business’s financial situation or market conditions may change significantly, and it may be difficult for the business to repay the loans, whilst the Ministry seeks to ensure the repayment flow of the loans granted and the continuity of the scheme“, – states the Ministry of Agriculture.

ILTE puts forward a similar argument. According to the National Development Bank, this is a working capital facility rather than an investment financing facility.

“The 36-month term was chosen in line with financial market practice for such loans and their purpose – to help farms meet short-term liquidity and working capital needs”  – states ILTE. According to the organisation, five- or six-year financing generally borders on investment lending, where a specific investment, its payback period and the long-term ability to meet obligations are assessed.

Although the Ministry of Agriculture is defending the general 36-month limit, one exception is already being prepared.

“Taking into account the situation of fruit tree growers whose orchards have been damaged by frost and the specific nature of this sector, the Ministry plans to amend the terms of the scheme and extend the maximum loan term to 48 months for the purchase of fruit trees“,– reports the Ministry of Agriculture.

In practice, therefore, it is recognised that the recovery period for certain agricultural activities may be longer than three years.

Another point of contention is how to determine, in general, that a farm is short of funds

I. Jankauskas is equally critical of the quick, or critical, coverage ratio. It is calculated by subtracting stocks from current assets and dividing the resulting figure by current liabilities. In his view, this is problematic in agriculture because a large proportion of current assets consists precisely of inventories.

“For farmers, the majority of current assets consist of stock; farmers do not have any receivables, yet this ratio is calculated precisely from receivables, plus cash, divided by liabilities. As a result, the ratio comes out very low“, explains I. Jankauskas. In his view, the total coverage ratio would be more appropriate.

The Ministry’s argument is entirely the opposite – the quick ratio was allegedly chosen precisely because of the specific nature of agriculture.

„“The critical liquidity ratio is typically used to assess an entity’s financial stability during a crisis or following a loss of income, when the realisation of inventories becomes more difficult or these inventories are illiquid,” – notes the Ministry of Agriculture.

According to the Ministry, the ratio allows the most liquid assets of a business – cash, receivables and other readily realisable assets – to be compared with its short-term liabilities.

“If the critical liquidity ratio is less than 1, the business is certainly facing a funding shortfall and needs a loan. This ratio was chosen in view of the specific nature of the agricultural sector“, – the Ministry states.

ILTE, for its part, notes that this criterion is enshrined in the funding conditions for the measure, which were drawn up in accordance with the requirements set by the Ministry of Agriculture.

“The indicator helps to assess whether a farm may lack working capital when stocks cannot be easily realised,” states ILTE.

Plans are afoot to increase the budget once again

Currently, €50 million has been allocated to the scheme, whilst the value of signed contracts already stands at around €35.5 million.

In the summer, ILTE publicly announced that it had received more than 500 applications in the first two months and that it planned to increase funding for the scheme.

The Ministry of Agriculture is now announcing that it plans to increase the budget once again – from 50 to 65 million euros. There are also plans to expand the list of eligible expenditure, to include agricultural services and to enable farms affected by natural disasters to receive funding even in cases where a state of emergency has not been officially declared.

Data provided by ILTE shows that farmers are making use of these loans. However, questions and doubts remain regarding the three-year term and the chosen financial indicators – will they ensure that the liquidity support provided today does not itself become an additional financial burden in a few years’ time?