Don't rush into expansion for the sake of it

Don’t rush into expansion for the sake of expansion was the message from Laurence Shalloo, Teagasc, at the IFA dairy conference on Tuesday.

He said: “We need to get away from the group-think and have a plan and not just increase cow numbers for the sake of increasing cow numbers.

“Volatility is here to stay and when milk price is high, all systems of production can be very forgiving, but when the price drops, increasing stocking rate over feed supply will not make more money for the farmer.”

He added: “The shackles are off, but for me it’s not a free-for-all – we need balance and there needs to be a budget and plan for the extremes.”

Laurence explained that if your farm can grow 15t of grass then you can stock at 2.8 to 3 LU per hectare, but if your farm is only growing 10t per hectare, then you might be better off at 1.9 to 2 LU per hectare.

He explained that PastureBase results show the average across the country grown for 2014 is 12.5t DM/ha, but it varies from 18t grown down to 7.3t.

He also said there are no regional issues and there are more important issues on-farm, such as soil fertility, etc. Laurence went on to say that a new model for someone in secondary school that wants to be a dairy farmer needs to be created.

He said: “We need to provide a model to maximise attractiveness to all involved.”

Be careful

Declan McEvoy, IFAC, also spoke at the conference. “Cashflow budgeting is movement of cash and it only becomes income when costs are accounted for.

“A farmer should also complete a snapshot balance sheet every now and again. Know why you want to do a cashflow – work through expected sales and costs and use last year’s figures as a guide. Estimate if figures are different and be realistic on the figure used.”

Declan warned that next year could be a perfect storm financially because many dairy farmers have paid down capital loan repayments from current accounts and used cash from current account for expansion in stock numbers or for capital investment, he said they could be caught short next year if milk price drops and tax bills still have to be paid.

Declan explained the various structures that dairy farmers are operating in and he went through why some farmers would choose one over the other.

In terms of a limited company, he said this channel opened up to dairy farmers in 2008 and is a step up in complexity from a sole trader, but if a farmer gets used to how it operates then it can be no big deal.

“There is a common misconception that the company must register for VAT, but this is not the case and a company does not have to register for VAT.”

In terms of share-farming, he said each partner brings his/her own farm to agreement and there is no template or model as to how this might work yet, but each farmer will be treated as a separate legal entity.

He said from a tax point of view, each partner will make their own tax returns so it should be complex from a tax point of view.

On the recent budget, he said income averaging moving from three to five years is a benefit as it smoothes the line better and is a longer time frame, which is positive.

The fact that capital allowances were unchanged is also a major positive.

Banking

Ulster Bank’s Anne Marie Butler said that dairy farmers need to match borrowing to what you want and not to take money out of current accounts for long-term investments.

“I’ll never ceased to be amazed at what farmers will buy out of the current account. An overdraft account is the most expensive source of credit and if you’re putting up a parlour, then look for a loan over 10 to 15 years.

“Dairy farmers tend to put themselves under pressure to pay back too quickly, so take the terms that are there and use them effectively.”

She asked farmers to talk to their banker if they were having trouble in terms of repayment capacity because all situations are different and could be looked at or revised.

Budget 2015

IFA’s chief economist Rowena Dwyer explained the various issues relating to dairy farming that changed in the recent budget. She reviewed the budget under different headings.

Income tax exemption for long-term land leasing: Increase of 50% in the amount of income exempt from tax for long-term leases. The introduction of a fourth income tax-free threshold of €40,000 for leases greater than 15 years. Extension to scheme to include incorporated farm companies as a lessee and removal of requirement for qualifying lessors to be aged over 40.

Income averaging: Extended from three years to five years and to farmers with additional self-employed income from on-farm diversification.

Capital acquisitions tax – agricultural relief: Retained at 90% for active farmers, and for individuals who are not active farmers but lease out land long-term.

CGT relief for farm restructuring: Measure extended to end 2016, with rules amended to enable whole farm replacement to be eligible for the relief

CGT retirement relief – disposals within family: Land leased for up to 25 years (up from current limit of 15 years) will qualify for CGT retirement relief upon disposal.

CGT retirement relief – disposals outside family: Land currently let under conacre can be disposed of by end 2016 to qualify for CGT retirement relief. Alternatively, land can be leased out long-term (minimum five years) to qualify for the relief.

Stamp duty on leases: Leases of greater than five years will now be exempt from stamp duty.

Stamp duty consanguinity relief: Relief which halves the rate of stamp duty for transfers between family members (from 2.1% currently). Proposed extension to end 2017 where transferor is less than 65 years of age and transferee is active farmer.

Question: Why do farmers have to pay for the bank’s solicitor fees when we are borrowing money? Why can’t banks not pay some of that?

Answer: Ann Marie Butler, Ulster Bank – “I’ve seen fees range from €900 to €5,000, but at this point in time the bank is not covering this charge. We usually get a quote from three or four and get the best deal for the customer.”

Q: We hear a lot from the two pillar banks – are Ulster Bank committed to staying in Ireland?

A: Ann Marie – “Yes, Ulster Bank are committed to Ireland and the CEO of RBS, our parent company, confirmed this recently. Our results are out again next week and our preview information suggests the bank is in a much better place. We had €1.2bn available for loans at the start of the year and half of this has been loaned out and 40% of that went to agri clients.”

Q: Can a farmer get a 15-year loan for the purchase of stock?

A: Ann Marie – “No, land purchase will get 15 years of a loan, but not stock, that’s five to seven years.”

Q: Tim O’Leary – Are farmers investing in the wrong equipment starting off?

A: Ann Marie – “Yes, I believe some are overenthusiastic and spending too much, especially on parlours.”

Q: Ken Jones – Will a lot of farmers stay where they are rather than expand?

A: Laurence Shalloo, Teagasc – “Yes, there is a point where profit stops the more animals you bring on to a block of land. Farmers must match feed demand with what is produced. When milk price is 34c to 35c/litre, all systems make profit. Ask yourself, as a farmer, are you prepared to give an owned outside block to neighbour?”

Q: Should we be moving to a more flexible stocking rate that can go up and down, depending on milk price?

A: Laurence – “No, focus on getting grass growing and match your stock numbers to growth. You can maybe cull cows not in-calf early in the autumn, but these are small issues in the overall scheme of things.”

Q: Can IFAC not do more on monthly cashflow planning as they have financial recorders on farm?

A: Philip O’Connor, IFAC – “We have a new program that is ready to launch, so information that the recorder collects can be emailed back to farmers within days of the event.”

Q: Harold Kingston – Why can’t big investments in stock be used as bank security?

A: Anne Marie – “I can’t see Ulster Bank providing chattel mortgages, because it is simply too complex for the bank to manage. Repayment capacity is the most important factor for the bank and while security is important, it is well down the list.

Q: Eddie Bannon – Can Ulster Bank see any reduction in rates, considering how low interest rates are now?

A: Ann Marie – “At the moment, the cost of funds is 0.83% and, typically, banks are charging a margin of between 4% and 5%, so the cost of the rate to the farmer is 4.83%. I don’t see this dropping. If you fixed rates this morning for three years, the rate is 1%, and for five years it’s 1.1%, which indicates in the short-term that base rates there won’t be changing. Rates will vary, depending on how much is going to be borrowed, length of time etc, and only fix interest rates to manage cashflow.”

Q: John Hehir - If banks can take 4% and take no legal fees, maybe farmers are better to buy shares in banks?

A: Declan McEvoy, IFAC – “Invest depending on your expertise – you need to know what you are buying into. There is no point in investing just for the sake of investing. Don’t forget past lessons.”