There a number of financial implications for all farmers due to the impending shortage of feed this winter. I have asked the IFAC experts to answer key questions that farmers are asking as they grapple with how to financially manage the current crisis.
Already, some farmers have extended credit terms, cancelled unnecessary spending or restructured existing finance arrangements.
The main co-ops have come out in support of farmers and many have already announced changes, with Dairygold the latest co-op to announce a €10 per tonne rebate on feed.
Managing cashflow to deal with costs
Cash is tight due to higher costs, but tax still has to be paid in 2018, writes Noreen Lacey and Philip O’Connor from IFAC.
Cash is to a business as air is to the human body. Consider the consequences of the body being starved of air; it would cease to function. So while your livestock need feed to survive the drought and next winter, you and your business need cash to survive. Considering the year we are after having – The Beast from the East, Hurricane Ophelia and then the longest drought since the mid-70s – cashflow on working farms is coming under pressure.
As highlighted in this magazine, these shortages can be made up in many ways. However, all of these methods can result in added costs to the farm, for example extra concentrates has a direct cash cost, while culling early has a loss in potential milk sales, etc. These decisions need to be made to ensure your animals’ welfare, along with aiding the farm to be in a stronger position heading into next year.
So where does this leave farmers from a cashflow management point of view in 2018? The honest answer is every farmer will be different.
Typically, farmers rely on cash banked over the spring, summer and autumn to carry them through the winter period. However, in 2018, the high-cost spring and drought are putting pressure on cashflow. Some farmers will have sufficient cash reserves from 2017 to carry these costs, others won’t. Some will be able to access credit very quickly, others may not.
The best advice we in IFAC can give is that each farmer needs to assess their own actual cashflow situation. How will you be able to finance these potential extra costs this winter, along with the costs you have already incurred?
Farmers will need to prioritise expenditure in order to fund the purchase of fodder and day-to-day farm expenses, as well as family living expenses, capital loan repayments and taxes. Key questions in this regard are:
What cash is available in your current account, overdraft and savings? What extra costs have you incurred to date?What credit terms are available to you – banks and suppliers?What are my farm costs between now and spring 2019, including family living expenses, capital loan repayments and taxes?If this analysis shows cash shortfalls, address these issues now rather than waiting or hoping they won’t happen. Now is also the time to assess your cashflow needs for the rest of the year.
The following are IFAC’s top tips in addressing cashflow issues
Review your cashflow needs between now and spring 2019 – will you have a problem? Review all capital expenditure – is it necessary at this time?Identify costs that can be reduced without adversely effecting performance of farm.Use your existing professionals’ expertise – accountant, agri adviser.Speak to your suppliers on extended credit facilities – don’t assume they will automatically grant them.Try not to compromise your living expenses (assuming reasonable) – the farm is there to provide for YOU, not everyone else (banks, creditors, etc).When and how should a farmer approach a bank for financial help?
1. Early engagement
Proactively approaching your bank to put financial solutions in place is far better than defaulting on a financial commitment.
2. Timely financial records
Farmers should endeavour to have the following information readily available when meeting with the bank.
i. Up-to-date financial records, for example financial accounts, current bank balances, etc.
ii. Good management data, for example stock number, yields, etc, which will give both farmer and banker a clear overview of the future performance and operational trends of your business.
iii. Creditors/debtors: identify the level of merchant credit/creditors that are currently outstanding and how old the debt is, for example current debt or greater than three months.
iv. Analyse cashflow: while many farmers may not like the idea of completing a detailed cashflow statement, a handwritten page which lists out the amount of extra feed bought this year compared with previous years or the impact that reduced yields (milk /crops) will have on cashflow is a good starting point.
3. Consider various banking options
i. Interest-only options: most banks will readily facilitate an interest-only request over a six- to 12-month period, provided that you can demonstrate that this is required due to exceptional weather conditions or market volatility – not poor financial management.
ii. Payment holidays: this may be sought where cashflow is currently under severe pressure, but a future repayment source has been clearly identified, for example lump sum receipt, milk payments resuming in February or March, etc. A principal and interest moratorium maybe be approved for a short period of time (three to six months).
iii. Extend term of loan: review your current loan schedules and determine if you are paying down loans too quickly and putting your cashflow under increased pressure. Don’t forget capital repayments come out of cashflow!
iv. Credit line/stocking loan: this can be used to meet your short-term funding needs and is usually renewed on an annual basis, subject to the terms and conditions of the individual financial institution. Working capital facilities usually have a cheaper interest rate than overdraft rates.
v. Increase in overdraft facility: this can be either a temporary increase in the limit which can revert to original limit after agreed period or a longer-term permanent increase. As a rule of thumb, overdraft limits should equate to at least 10% of turnover.
vi. Retrospective refinance: where farm development or capital investment work was carried out earlier on the farm from cashflow, it may be worth considering the option of terming out this cost over a longer period to replace the cash. Remember – cash is king!
Should you drop your pension payments?
IFAC’s Martin Glennon suggests what to consider. “In the current crisis, should you decide to sacrifice your pension contribution, the obvious knock-on effect is the reduction in your pension funds at retirement. Some farmers may think that they will make up this investment at a later date. But will they receive the same tax relief?
“At the moment, tax relief on pension contributions is given at a farmer’s marginal (highest) rate of tax. Many dairy farmers are dealing with a larger than average tax bill due to strong milk prices in 2017 and contributing to their pension plan is a good way to reduce this tax bill. Deferring their pension contribution means the relief is gone for that year and getting the same benefit in the future is in doubt.
“The Roadmap for Pension Reform 2018-2023, published earlier this year, made reference to ‘review the cost of funded supplementary pensions to the Exchequer’ which included ‘an evaluation of equity in the distribution of tax expenditure on pensions’ and ‘progress measures to improve the harmonisation…including taxation treatment’.
“When questioned at the launch if this would result in a reduction in tax relief on pension contributions, the Taoiseach Leo Varadkar and Finance Minister Paschal Donohoe did not rule out the possibility of bringing in a new (reduced) single rate for all. This year’s pension contribution might be the last one that gets 40% relief.
“Some pension plans have bonuses attached based on the client maintaining their annual contribution or contributing for a minimum number of years. Should their pension investment be sacrificed, this could lead to a loss of potential bonuses.”
How can you pay tax with less cash in the bank account, asks IFAC tax expert Declan McEvoy
On most farms, retained profits which would normally have been used for investment or paying bills has been used to meet day-to-day expenses on extra feed. Coming up fast is the deadline for tax returns, which must be made by 31 October for those filing and not paying online and by 14 November for those who pay and file online.
Large balance
The difficulty that is going to arise is that with 2017 being one of the best years ever, particularly in dairying, there will be a large balance of tax due for 2017 together with a preliminary tax for 2018.
Traditionally, preliminary tax for 2018 would have been based on 100% of 2017 liability ignoring EIIS/Film relief, etc. Other options exist on paying preliminary tax that are not normally used and should be explored:
Pay 90% of your estimated final liability for 2018 or if paying by direct debit look at paying 105% of your liability for 2016. In addition, if one is on income averaging, one should look at stepping out of income averaging for 2018 and pay whatever the cost of same over the next couple of years.All these measures will help to alleviate cashflow on the farm, but, most importantly, maintain one’s full tax compliance record. One must remember that failure to pay the correct balance and/or the correct preliminary tax will lead to an interest rate charge of 8% as against 4% to 5% with the banks.
In order to accurately predict tax liability, ensure:
2017 completed in a timely manner.2018 projections are made.If one is looking at potential cashflow issues, one should approach the bank for working capital in order to smooth the situation.
What are the co-ops saying?
Glanbia
€20m is available in an extended credit scheme, offering interest-free deferred payment terms to suppliers with a milk supply agreement (MSA) for the purchase of dairy feed and fertiliser from Glanbia Ireland up to mid-September. Purchases made under the scheme will be paid for by deduction from the supplier’s milk account in six equal installments in July, August and September of 2019 and 2020. Interest-free support funds are also available from the Glanbia Advance Payment (GAP) 2018 Milk Scheme. A GAP Advance of 1c/l is available to co-op members on April and May 2018 milk supply volumes.
Dairygold
A €10/t rebate is available on all purchases of compound ruminant feeds from 23 July to 30 September. The rebate will be credited to their accounts in the month following their purchases, e.g. purchases made this week will be credited at the end of August. Purchases in August credited at the end of September, etc. Open to all farmers.
Members can also use interest-free credit on purchases of feed and fertiliser to the end of September. The co-op is linking grain growers with livestock farmers for catch crop training and is running workshops throughout August on grass, forage budgets and feed plans for the upcoming autumn and winter.
Lakeland
Lakeland has a helpline open to all milk suppliers and customers providing technical and nutritional advice (042-9747205). Lakeland has also just completed a series of feed and forage workshops.
Aurivo
Aurivo Co-op has encouraged its members to make use of advisory staff and said that it has reduced the input costs of a range of feed and fertilisers.
Kerry
Kerry Agribusiness measures focus on the following key areas and are available to Kerry Agribusiness milk suppliers and existing customers.
Kerry Agribusiness has announced a €15/t rebate on August purchases of 18:6:12, CAN and 27:2.5:5 fertilisers.Bulk grass extender coarse feed available from 1 August.One-to-one fodder/feed advisory clinics in collaboration with Teagasc across the Kerry Agribusiness store network.
There a number of financial implications for all farmers due to the impending shortage of feed this winter. I have asked the IFAC experts to answer key questions that farmers are asking as they grapple with how to financially manage the current crisis.
Already, some farmers have extended credit terms, cancelled unnecessary spending or restructured existing finance arrangements.
The main co-ops have come out in support of farmers and many have already announced changes, with Dairygold the latest co-op to announce a €10 per tonne rebate on feed.
Managing cashflow to deal with costs
Cash is tight due to higher costs, but tax still has to be paid in 2018, writes Noreen Lacey and Philip O’Connor from IFAC.
Cash is to a business as air is to the human body. Consider the consequences of the body being starved of air; it would cease to function. So while your livestock need feed to survive the drought and next winter, you and your business need cash to survive. Considering the year we are after having – The Beast from the East, Hurricane Ophelia and then the longest drought since the mid-70s – cashflow on working farms is coming under pressure.
As highlighted in this magazine, these shortages can be made up in many ways. However, all of these methods can result in added costs to the farm, for example extra concentrates has a direct cash cost, while culling early has a loss in potential milk sales, etc. These decisions need to be made to ensure your animals’ welfare, along with aiding the farm to be in a stronger position heading into next year.
So where does this leave farmers from a cashflow management point of view in 2018? The honest answer is every farmer will be different.
Typically, farmers rely on cash banked over the spring, summer and autumn to carry them through the winter period. However, in 2018, the high-cost spring and drought are putting pressure on cashflow. Some farmers will have sufficient cash reserves from 2017 to carry these costs, others won’t. Some will be able to access credit very quickly, others may not.
The best advice we in IFAC can give is that each farmer needs to assess their own actual cashflow situation. How will you be able to finance these potential extra costs this winter, along with the costs you have already incurred?
Farmers will need to prioritise expenditure in order to fund the purchase of fodder and day-to-day farm expenses, as well as family living expenses, capital loan repayments and taxes. Key questions in this regard are:
What cash is available in your current account, overdraft and savings? What extra costs have you incurred to date?What credit terms are available to you – banks and suppliers?What are my farm costs between now and spring 2019, including family living expenses, capital loan repayments and taxes?If this analysis shows cash shortfalls, address these issues now rather than waiting or hoping they won’t happen. Now is also the time to assess your cashflow needs for the rest of the year.
The following are IFAC’s top tips in addressing cashflow issues
Review your cashflow needs between now and spring 2019 – will you have a problem? Review all capital expenditure – is it necessary at this time?Identify costs that can be reduced without adversely effecting performance of farm.Use your existing professionals’ expertise – accountant, agri adviser.Speak to your suppliers on extended credit facilities – don’t assume they will automatically grant them.Try not to compromise your living expenses (assuming reasonable) – the farm is there to provide for YOU, not everyone else (banks, creditors, etc).When and how should a farmer approach a bank for financial help?
1. Early engagement
Proactively approaching your bank to put financial solutions in place is far better than defaulting on a financial commitment.
2. Timely financial records
Farmers should endeavour to have the following information readily available when meeting with the bank.
i. Up-to-date financial records, for example financial accounts, current bank balances, etc.
ii. Good management data, for example stock number, yields, etc, which will give both farmer and banker a clear overview of the future performance and operational trends of your business.
iii. Creditors/debtors: identify the level of merchant credit/creditors that are currently outstanding and how old the debt is, for example current debt or greater than three months.
iv. Analyse cashflow: while many farmers may not like the idea of completing a detailed cashflow statement, a handwritten page which lists out the amount of extra feed bought this year compared with previous years or the impact that reduced yields (milk /crops) will have on cashflow is a good starting point.
3. Consider various banking options
i. Interest-only options: most banks will readily facilitate an interest-only request over a six- to 12-month period, provided that you can demonstrate that this is required due to exceptional weather conditions or market volatility – not poor financial management.
ii. Payment holidays: this may be sought where cashflow is currently under severe pressure, but a future repayment source has been clearly identified, for example lump sum receipt, milk payments resuming in February or March, etc. A principal and interest moratorium maybe be approved for a short period of time (three to six months).
iii. Extend term of loan: review your current loan schedules and determine if you are paying down loans too quickly and putting your cashflow under increased pressure. Don’t forget capital repayments come out of cashflow!
iv. Credit line/stocking loan: this can be used to meet your short-term funding needs and is usually renewed on an annual basis, subject to the terms and conditions of the individual financial institution. Working capital facilities usually have a cheaper interest rate than overdraft rates.
v. Increase in overdraft facility: this can be either a temporary increase in the limit which can revert to original limit after agreed period or a longer-term permanent increase. As a rule of thumb, overdraft limits should equate to at least 10% of turnover.
vi. Retrospective refinance: where farm development or capital investment work was carried out earlier on the farm from cashflow, it may be worth considering the option of terming out this cost over a longer period to replace the cash. Remember – cash is king!
Should you drop your pension payments?
IFAC’s Martin Glennon suggests what to consider. “In the current crisis, should you decide to sacrifice your pension contribution, the obvious knock-on effect is the reduction in your pension funds at retirement. Some farmers may think that they will make up this investment at a later date. But will they receive the same tax relief?
“At the moment, tax relief on pension contributions is given at a farmer’s marginal (highest) rate of tax. Many dairy farmers are dealing with a larger than average tax bill due to strong milk prices in 2017 and contributing to their pension plan is a good way to reduce this tax bill. Deferring their pension contribution means the relief is gone for that year and getting the same benefit in the future is in doubt.
“The Roadmap for Pension Reform 2018-2023, published earlier this year, made reference to ‘review the cost of funded supplementary pensions to the Exchequer’ which included ‘an evaluation of equity in the distribution of tax expenditure on pensions’ and ‘progress measures to improve the harmonisation…including taxation treatment’.
“When questioned at the launch if this would result in a reduction in tax relief on pension contributions, the Taoiseach Leo Varadkar and Finance Minister Paschal Donohoe did not rule out the possibility of bringing in a new (reduced) single rate for all. This year’s pension contribution might be the last one that gets 40% relief.
“Some pension plans have bonuses attached based on the client maintaining their annual contribution or contributing for a minimum number of years. Should their pension investment be sacrificed, this could lead to a loss of potential bonuses.”
How can you pay tax with less cash in the bank account, asks IFAC tax expert Declan McEvoy
On most farms, retained profits which would normally have been used for investment or paying bills has been used to meet day-to-day expenses on extra feed. Coming up fast is the deadline for tax returns, which must be made by 31 October for those filing and not paying online and by 14 November for those who pay and file online.
Large balance
The difficulty that is going to arise is that with 2017 being one of the best years ever, particularly in dairying, there will be a large balance of tax due for 2017 together with a preliminary tax for 2018.
Traditionally, preliminary tax for 2018 would have been based on 100% of 2017 liability ignoring EIIS/Film relief, etc. Other options exist on paying preliminary tax that are not normally used and should be explored:
Pay 90% of your estimated final liability for 2018 or if paying by direct debit look at paying 105% of your liability for 2016. In addition, if one is on income averaging, one should look at stepping out of income averaging for 2018 and pay whatever the cost of same over the next couple of years.All these measures will help to alleviate cashflow on the farm, but, most importantly, maintain one’s full tax compliance record. One must remember that failure to pay the correct balance and/or the correct preliminary tax will lead to an interest rate charge of 8% as against 4% to 5% with the banks.
In order to accurately predict tax liability, ensure:
2017 completed in a timely manner.2018 projections are made.If one is looking at potential cashflow issues, one should approach the bank for working capital in order to smooth the situation.
What are the co-ops saying?
Glanbia
€20m is available in an extended credit scheme, offering interest-free deferred payment terms to suppliers with a milk supply agreement (MSA) for the purchase of dairy feed and fertiliser from Glanbia Ireland up to mid-September. Purchases made under the scheme will be paid for by deduction from the supplier’s milk account in six equal installments in July, August and September of 2019 and 2020. Interest-free support funds are also available from the Glanbia Advance Payment (GAP) 2018 Milk Scheme. A GAP Advance of 1c/l is available to co-op members on April and May 2018 milk supply volumes.
Dairygold
A €10/t rebate is available on all purchases of compound ruminant feeds from 23 July to 30 September. The rebate will be credited to their accounts in the month following their purchases, e.g. purchases made this week will be credited at the end of August. Purchases in August credited at the end of September, etc. Open to all farmers.
Members can also use interest-free credit on purchases of feed and fertiliser to the end of September. The co-op is linking grain growers with livestock farmers for catch crop training and is running workshops throughout August on grass, forage budgets and feed plans for the upcoming autumn and winter.
Lakeland
Lakeland has a helpline open to all milk suppliers and customers providing technical and nutritional advice (042-9747205). Lakeland has also just completed a series of feed and forage workshops.
Aurivo
Aurivo Co-op has encouraged its members to make use of advisory staff and said that it has reduced the input costs of a range of feed and fertilisers.
Kerry
Kerry Agribusiness measures focus on the following key areas and are available to Kerry Agribusiness milk suppliers and existing customers.
Kerry Agribusiness has announced a €15/t rebate on August purchases of 18:6:12, CAN and 27:2.5:5 fertilisers.Bulk grass extender coarse feed available from 1 August.One-to-one fodder/feed advisory clinics in collaboration with Teagasc across the Kerry Agribusiness store network. 
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