Cows & Money – January 2015

Dodd & Co Dairy Bulletin

How things have changed since the first edition of Cows & Money! In October milk prices were falling but were still around 25-30ppl. Businesses were bracing themselves for further falls. Over the course of six weeks from the end of November to the announcement by First Milk that they needed to defer payment for milk the outlook has worsened considerably.

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Prices now range from sub 20ppl to more than 30ppl. Those lucky few on supermarket ‘Cost of Production’ (COP) contracts are sitting pretty whilst everyone else is bracing themselves for a tough year.

Having recently been at the Semex conference and having spoken to clients who attended the Positive Farmers conference it would seem that many businesses are still positive; perhaps expecting further cuts to milk prices and taking steps to minimise the impact on cashflow over the next twelve months. In this edition we look at what can be done to improve cashflow.

We also look back to 2007 and 2008 when milk prices were last at the 20ppl level and look at what has changed to farm costs in the intervening period.

We look at Dodd & Co’s cost of production figures for 2013/14 and our estimate of 2015/16 figures based on what we currently know.

As you’d expect of accountants we also examine some of the opportunities that this might present from a tax planning opportunity.

If you have any queries about any of the issues raised please contact us.

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Cashflow Management

Improving cashflow is often easier said than done. The first thing is to work out what you expect the cashflow to be. The key period is likely to be the next four months. Large tax bills due this week and then high winter feed costs and fertiliser bills will bring a lot of expenditure into the next few months. This is likely to be at a time when seasonality changes to milk cheques will have quite a large impact on income.

So what can be done? Look at your cashflow and work out where it gets tight. Is there any non essential expenditure which can be cancelled or deferred? Are there any assets which are surplus, underused machinery for example which could be sold? If so is there any tax liability associated with their sale?

Budget 2014

Individuals pay tax on account, i.e. they pay half of their estimated liability at 31 January and half at 31 July each year. At Dodd & Co we don’t expect 2014/15 profits to be significantly lower than 2013/14 for most clients. Perhaps down by about 30% for most and by 70% for First Milk suppliers, although grazing systems won’t see as big a fall. This will mean that payments on account can be reduced now. If accounts are prepared early the actual tax bill might mean that little or no tax is paid in July. David Cameron has told HMRC to be sympathetic to dairy farmers with tax to pay and consider time to pay arrangements.

If you wish to take advantage of either reduced payments on account or time to pay arrangements it must be organised this week.

But what about other costs which may get missed? Should monthly pension payments be stopped? After all you can make contributions to a pension scheme at any time up to 5 April 2016, and relief is only available if you have taxable income to offset against it. Perhaps deferring contributions until this time next year when you have a better understanding of profit would be wise.

When bills have to be paid is merchant credit available, and if so is it cheaper than banks? We have already heard of merchants tightening up their credit in order to protect their positions. If payments can’t be deferred or financed using trade credit it is important to speak to your bank immediately. We expect average production costs, including tax and drawings to be in the region of 27ppl for 2015/16. With many milk prices below this many businesses will be running cash deficits.

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This figure doesn’t include capital repayments, but does include depreciation, so long term capital payments might be best put on hold. Can your bank move loans to interest only? If so is there any cost or future implications?

Preparing cashflows and profit forecasts is key to discussing any borrowing requirements with your bank. Many people can do these themselves, but we often check cashflows for clients, as well as preparing budgets and forecasts if you need any help. Funding is available from DairyCo at present for help from a number of consultants, of which Dodd & Co are one. To find out more please click here.

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Cost of Production

We are often asked what is a competitive cost of production? The table below shows how things have changed in the last ten years using Dodd & Co’s annual dairy data.

It is interesting to see how costs have changed over the last decade – whilst fixed costs have grown by a little over 3% per year, variable costs have more than doubled.

It can be seen below however that whilst many variable costs have increased at a relatively slow rate, feed costs have more than doubled (our figures include all purchased feed, and straw etc for bedding). Vet & AI costs and dairy expenses are also higher than would be expected.

It can be seen that drawings and tax have remained static on a pence per litre basis but as production has expanded total drawings have increased.

Cows & Money Chart

Cost of production is the difference between milk sales and any surplus/deficit for the year.

Looking forward it is expected that feed costs will soften a little and some other, more discretionary, areas of spending such as farm repairs will be cut back. That said assuming all other costs remain in line Dodd & Co expect average costs to produce a litre of milk to be just over 27ppl in 2015/16. With milk prices generally below this, with the exception of supermarket contracts, we expect many people to be cash negative in the next twelve months.

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Tax Opportunities

We have mentioned above the prospect of using farmers averaging to minimise tax bills but are there other things that may be possible over the next twelve months?

We are already seeing cow prices falling and expect them to fall further through the next few months. In the past we have sold cows into companies when market prices are high, so low prices might provide an opportunity to remove cows from companies without a tax charge. In a year when profits are under significant pressure this provides an opportunity for restructuring businesses and looking at succession planning.

Taxing Times

Whilst not ideal, businesses generating tax losses may want to consider how best to utilise them. They can be used against income or Capital Gains. You can only use current year trading losses against capital gains in the same tax year. These can be useful if looking at gifting assets which don’t qualify for holdover or entrepreneurs relief, such as houses to non farming children. But care will be needed particularly for 31 March year ends as accurate management accounts will be needed.

It is likely that most businesses will not have losses in 2014/15 but the following year could see substantial losses without increases in some milk prices.

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Progressive Dairy Operators Conference

Dodd & Co are supporting the Progressive Dairy Operators conference held in Cheshire on the 23/24th March. We have three tickets for the event which we are making available to clients – if you would like to attend please email Rob Hitch by 2nd February. In the likely event that more than three people want the tickets we will have a random draw of those that reply.

To find out more about the conference please click here.

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