Irish chicken meat production reached record levels in 2017, with 95.5m birds slaughtered in export-approved plants. This was an increase of 3.9% compared to 2016, with most of the increase evident in broiler and duck production.
To the end of September 2018, Irish poultry production has continued to rise, increasing by 1.8m birds, or 2.6% compared to the previous year.
The value of Irish poultry exports in 2017 increased by 3% to an estimated €278m according to the CSO, with the UK accounting for some 80% of this figure in value terms.
Other EU markets now account for almost 10% of Irish exports, with France leading the way.
Growth has also been evident in trade with Scandinavia and Spain. Exports to third country markets now amount to 10% of export totals, with South Africa showing the biggest growth.
In the border regions of Cavan and Monaghan the sector is going through a strong growth phase, with almost 75 new planning applications applied for in Cavan/Monaghan alone.
The split between poultry meat and egg producers is roughly 60:40.
In our experience in ifac, many of our clients start the poultry farm as an additional income to the traditional farm.
These started as small enterprises but have expanded to be substantial businesses in their own right over the last number of years.
Structure
Many of our clients start the poultry farm as an additional income to the traditional farm – beef and/or dairy.
Traditionally they were small-scale house with circa 20,000 to 30,000 birds.
Profits and debts were relatively small and, as margins got tighter, efficiencies and scale had to increase and now the average house is approaching 50,000 birds, with many farmers having more than one house.
As a result, this affected two very important financial aspects on the farm – profits /cashflow and tax. Profits went up, tax went up, but cashflow went down as capital repayments had to be serviced.
While capital allowances sheltered the tax for the first seven years, the underlying tax bill was significant. Due to the high level of investment, loans are often spread over 10 years for cashflow reasons.
Poultry is not unique in this regard as many businesses that expand or invest find themselves in the conundrum of increasing tax bills due to profits but a decreasing cash pool as large debts have to be serviced.
The solution for this problem was to incorporate the poultry business (start trading as a company) once the underlying tax bill became significant.
This allowed the farmer to retain a large portion of the profits in the business to service the debt.
The farmer then only needs to withdraw and pay income taxes on their living expenses. However, going this route isn’t for everyone. A key number of areas need to be considered:
Do you plan to expand your business?What level of tax did you pay in last three years?Have you invested in the farm – are capital allowances decreasing?Are you paying family wages which will decline in coming years?What are your living expenses?Have you thought about succession?Are you paying into a pension purely to save tax?Does the business need further investment?These are very important considerations that all farmers need to look at before going this route.
What follows is an example of an existing client with ifac that built a poultry unit in 2018.
This example shows the high cost of entry and the issue around trying to pay high tax along with servicing capital repayments.
The most important consideration for a bank when assessing a funding application is repayment capacity, which is the ability of the farm to generate sufficient funds to service interest and proposed loan repayments. Therefore, having the right structure in place to maximise repayment capacity is crucial for this sector.
Joe and Mary Bloggs are suckler/beef farmers on about 95 acres. Both have off-farm P60 income and Joe is an employee on a large-scale poultry farm. Joe has extensive experience in running a poultry unit and plans to set up his own broiler unit on his own farm as he has secured a contract with the Carton Bros.
The new house will have capacity for 52,000 broilers and the estimated cost to construct the unit will be €684,000. Joe has €80,000 of his own funds to invest and the expected VAT rebate will be circa €65,000. Net borrowings will be €539,000.
As both Joe and Mary have off-farm income along with their existing beef farm it was decided to remain as a sole trader in the short term as the capital allowances will shelter the taxes. However, as the example will show, once these allowances are used up, the tax situation will change dramatically. It will be at this point that the decision to incorporate the new poultry enterprise will take place. This will allow them to pay the loans at the most efficient rate. As the figures show, while Joe and Mary are showing healthy profits for the unit at €62,000, when tax and capital loan repayments are accounted for, they could potentially be in a cash negative situation in year eight (based on Joe and Mary being taxed at high tax band) when the capital allowances drop out and the full profits are exposed to income tax levels. The loans in year seven will still have three years to run and circa 1.24c a bird will be needed to service these.
While poultry is for the most part a profitable enterprise, as shown above, the cash-flows on farms servicing debt is very tight. Therefore, maintaining margins and good sound financial planning is vital to the long-term viability of the enterprise.
Irish chicken meat production reached record levels in 2017, with 95.5m birds slaughtered in export-approved plants. This was an increase of 3.9% compared to 2016, with most of the increase evident in broiler and duck production.
To the end of September 2018, Irish poultry production has continued to rise, increasing by 1.8m birds, or 2.6% compared to the previous year.
The value of Irish poultry exports in 2017 increased by 3% to an estimated €278m according to the CSO, with the UK accounting for some 80% of this figure in value terms.
Other EU markets now account for almost 10% of Irish exports, with France leading the way.
Growth has also been evident in trade with Scandinavia and Spain. Exports to third country markets now amount to 10% of export totals, with South Africa showing the biggest growth.
In the border regions of Cavan and Monaghan the sector is going through a strong growth phase, with almost 75 new planning applications applied for in Cavan/Monaghan alone.
The split between poultry meat and egg producers is roughly 60:40.
In our experience in ifac, many of our clients start the poultry farm as an additional income to the traditional farm.
These started as small enterprises but have expanded to be substantial businesses in their own right over the last number of years.
Structure
Many of our clients start the poultry farm as an additional income to the traditional farm – beef and/or dairy.
Traditionally they were small-scale house with circa 20,000 to 30,000 birds.
Profits and debts were relatively small and, as margins got tighter, efficiencies and scale had to increase and now the average house is approaching 50,000 birds, with many farmers having more than one house.
As a result, this affected two very important financial aspects on the farm – profits /cashflow and tax. Profits went up, tax went up, but cashflow went down as capital repayments had to be serviced.
While capital allowances sheltered the tax for the first seven years, the underlying tax bill was significant. Due to the high level of investment, loans are often spread over 10 years for cashflow reasons.
Poultry is not unique in this regard as many businesses that expand or invest find themselves in the conundrum of increasing tax bills due to profits but a decreasing cash pool as large debts have to be serviced.
The solution for this problem was to incorporate the poultry business (start trading as a company) once the underlying tax bill became significant.
This allowed the farmer to retain a large portion of the profits in the business to service the debt.
The farmer then only needs to withdraw and pay income taxes on their living expenses. However, going this route isn’t for everyone. A key number of areas need to be considered:
Do you plan to expand your business?What level of tax did you pay in last three years?Have you invested in the farm – are capital allowances decreasing?Are you paying family wages which will decline in coming years?What are your living expenses?Have you thought about succession?Are you paying into a pension purely to save tax?Does the business need further investment?These are very important considerations that all farmers need to look at before going this route.
What follows is an example of an existing client with ifac that built a poultry unit in 2018.
This example shows the high cost of entry and the issue around trying to pay high tax along with servicing capital repayments.
The most important consideration for a bank when assessing a funding application is repayment capacity, which is the ability of the farm to generate sufficient funds to service interest and proposed loan repayments. Therefore, having the right structure in place to maximise repayment capacity is crucial for this sector.
Joe and Mary Bloggs are suckler/beef farmers on about 95 acres. Both have off-farm P60 income and Joe is an employee on a large-scale poultry farm. Joe has extensive experience in running a poultry unit and plans to set up his own broiler unit on his own farm as he has secured a contract with the Carton Bros.
The new house will have capacity for 52,000 broilers and the estimated cost to construct the unit will be €684,000. Joe has €80,000 of his own funds to invest and the expected VAT rebate will be circa €65,000. Net borrowings will be €539,000.
As both Joe and Mary have off-farm income along with their existing beef farm it was decided to remain as a sole trader in the short term as the capital allowances will shelter the taxes. However, as the example will show, once these allowances are used up, the tax situation will change dramatically. It will be at this point that the decision to incorporate the new poultry enterprise will take place. This will allow them to pay the loans at the most efficient rate. As the figures show, while Joe and Mary are showing healthy profits for the unit at €62,000, when tax and capital loan repayments are accounted for, they could potentially be in a cash negative situation in year eight (based on Joe and Mary being taxed at high tax band) when the capital allowances drop out and the full profits are exposed to income tax levels. The loans in year seven will still have three years to run and circa 1.24c a bird will be needed to service these.
While poultry is for the most part a profitable enterprise, as shown above, the cash-flows on farms servicing debt is very tight. Therefore, maintaining margins and good sound financial planning is vital to the long-term viability of the enterprise.
This is a subscriber-only article
SHARING OPTIONS: