There is a story often repeated about an elderly farmer who owned a large field on the outskirts of a small town in rural Ireland. During the Celtic Tiger boom years he received many offers for the field from developers, eventually accepting a price €100,000/acre for the land in 2006. Needless to say, the proposed development never went ahead and the land lay idle for several years until it went through the NAMA process. Officials from the organisation approached the farmer to see if he would be interested in buying the land back.

“Sure, I’ve not a penny left,” it’s told he answered. “I’d never seen money like that before and I was told the best thing to do with it was to buy bank shares, as they’d give me a dividend for life. I may as well have set fire to the money in the field.”

For context, Irish bank shares lost between 98% and 100% of their value in the years following the end of the housing boom in 2007.

While that story may be apocryphal, it still provides a very clear example of how bad planning, bad advice and bad luck can all lead to disastrous outcomes from a financial perspective.

Before any investment decision is made, the first thing to be clear about is why the investment is being made at all.

Fundamentally, investments for farmers break down into four categories: on-farm capital spending, including buildings, machinery and equipment; investments in financial products for growth of wealth and diversification of earnings; savings for shorter-term needs or a rainy-day fund; and finally there are pensions, which we deal with on page 54.

On-farm investment

This is the most common type of investment farmers will engage in. It is also the only type of investment for farmers where it is reasonable to borrow to invest. For spending on things like tractors, machinery and land improvement, a farmer will generally have a fairly good idea of what return there will be on the investment and over what period that return will be achieved.

It is important, nevertheless, to write down what the costs will be and what the return will be, so a clear picture of the reasoning behind spending is developed. For items of machinery, it is also worth looking at what the alternative costs would be in using a contractor to do the work rather than, for example, tying up money in a new tractor.

When it comes to larger investments on farm, such as the installation of new sheds or a milking parlour, or even the purchase of land, then the same rules apply on calculating the potential returns. However, in such cases, the returns can be calculated over a much longer timeline. Buying an acre of land for €15,000 makes little economic sense unless the return is measured over decades.

In situations where bank funding is sought as part of the investment, the borrowing process will normally involve a full assessment of how the loan would be repaid.

When there is no bank loan involved, the farmers themselves should have to discipline to understand how much money it makes sense to invest, to ensure the long-term financial sustainability of the farm.

Figure 1 shows recent developments in farm incomes from Teagasc. Not that any farmers need to be told, but incomes in the sector are extremely volatile.

It is, therefore, critical to ensure that investment decisions are made with a reasonable view on what future income might be, and not based on one or two strong years.

Financial investments

The opportunity for financial investment arises when farmers have spare cash left over at the end of a year, when all bills and taxes have been paid.

The right kind of financial investment can provide returns for future years from a source which has nothing to do with what the farmer does in their day-to-day business, so can be effective as a source of diversified income, as well as saving.

When looking at a financial investment, it is important to be diversified in order to minimise risks.

Some farmers may have built up considerable wealth through their shares in co-ops, but by leaving those shares sit in a drawer somewhere, they are often unknowingly exposed to significant financial risk.

Figure 2 shows the total return (stock price movement plus dividends) over the past five years of shares in Kerry Group, Glanbia, FBD Insurance and the broader ISEQ Index of Irish shares.

We can see that the performance has been very mixed, and depending on which company farmers owned they would either have made nothing or tripled their money since 2020.

The best route to diversification is to own a range of shares, bonds and other financial instruments.

Farmers should not try to figure this out for themselves; rather they should talk to a qualified, regulated financial adviser about what kind of growth they are looking for (whether they are seeking annual dividend and interest payments or capital appreciation) and how much risk they are willing to tolerate.

Generally, over the long-term financial assets tend to rise in value, but having all your eggs in one basket or one company will significantly multiply the amount of risk being taken.

Shorter-term savings

For some reason Irish people leave huge amounts of money sitting in current accounts that pay little to no interest. Around 90% of money on deposit in Ireland is sitting in current accounts earning nothing, compared to other European countries, where around half of money is in interest-bearing deposit accounts.

All the main banks here, and newcomer digital banks, offer interest-bearing deposit accounts where rates between 2% and 3% can be earned. While that might not seem like a huge return, it is basically free money if the alternative is leaving it on in a current account.

International banks have taken notice of the amount of money sitting in Irish current accounts, with some new entrants set to join over the coming months. However, despite the presence of online banks in the country for several years now, only around 2% of Irish deposits are held outside of the three main domestically owned banks.

When looking for a savings product, it is important to shop around and understand how easy your cash will be to access. Accounts with better interest rates may need a notice period, usually one month, before cash can be withdrawn.

Under EU law, there is a deposit guarantee scheme for all savers in regulated institutions, which is for up to €100,000 per person, per institution.

This means that €200,000 of savings in two accounts at one bank are only guaranteed for €100,000.

But €200,000 of saving split evenly between two banks will be guaranteed for €200,000.