Cows & Money: November 2015

Dodd & Co Dairy Bulletin: Autumn Statement Special

Welcome to this latest edition of Cows & Money. We all know that current times are tough for even the best dairy farmers with many receiving milk prices below 20ppl, and we are aware that production costs are significantly higher than this in most cases.

 

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In this edition we look at the Agrihive project I am involved with and the latest data from our 2014/15 accounts, along with a couple of points from todays Autumn Statement by the Chancellor. I hope you find it interesting.

Rob Hitch

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Autumn Statement Update

In what might be regarded as a particularly dull Autumn Statement, George Osborne didn’t make too many changes.

The Chancellor confirmed that farmers would have the choice of the existing farmers averaging method or to average over 5 years from 2016, (2016/17 tax return). No details have yet been provided on exactly how this will work.Autumn Tree

The biggest U turn was abandoning the changes to Tax Credits, which will be a help to many farming families this year; this begs the question about how quickly a lower Universal Credit will be introduced?

The biggest revenue raisers were an apprenticeship levy of 0.5% which will raise £2.7 billion from 2017/18. This will only be levied on employers with wage bills over £3 million however so will not affect farmers! The other revenue raising measure was a higher rate of SDLT on second homes and buy to let properties. We don’t yet know if there will be any exemptions for farmworkers dwellings, so potentially buying farms with more than one residential property may become more expensive.

Whilst not raising much revenue there were a number of anti avoidance provisions brought in, one affecting the treatment of intangibles in partnerships with corporate members, looking to put a stop to tax relief on the write down of intangibles held by these partnerships. We have used this quite a lot with milk quota, so fortunately any claims have been made before the new legislation!

It was interesting to note that the Chancellor said he was supporting farming by protecting funding for National Parks and Forests, we are not sure how many farmers would agree with that sentiment?

To read our full analysis of the Autumn Statement announcements please click here.

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AgriHive UK Dairy Summit 

Dodd & Co Farming Partner, Rob Hitch, was recently involved with organising the AgriHive UK Dairy Summit. The aim being to start some fresh thinking on the majority of UK dairy farms.

The idea was the brainchild of Australian Nuffield Scholar James Walker who used the format to look at how to cope with drought in the Australian outback. You can find out about this on the Agrihive website.

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The process is based around what AgriHive thought represented a fairly typical family dairy farm, selling milk to a commodity market. The story of these businesses over the last six or seven years has been up and down, with good profits some years and losses in others, such as 2012/13 due to weather and 2015/16 due to low milk prices. The net result for many businesses has been no growth in equity other than inflationary gains in owned land.

We have set a series of questions for people to consider based on the case study farm and want the replies to come from as far and wide as possible. With a top prize of a trip to the Australian Outback it’s certainly worth looking at! (See competition details below.)

This backdrop set the scene for the summit which heard from Chris Walkland on dairy markets, and his outlook for prices. He summed up the splitting of the liquid premium to specific producers creating Princes and Paupers. Unfortunately the AgriHive family farm example is a pauper.

Following this Allan Wilkinson, of HSBC, outlined changes to the industry over the last thirty years and gave his summary of the world dairy farmers, outside of supermarket contracts, now faced. Concentrate on running businesses well and understanding all of your costs was the message.

William Neville, Savills, then delivered a blunt message for farmers, don’t rely on the NFU and Farmers for Action to save you.  He talked about costs of production, the fact that many don’t understand them, or use misleading figures. He said farmers had to become much better businessmen on the whole.

agrhive picOur very own Rob Hitch then introduced the case study alongside Neil Wilson, HSBC, explaining the family situation that needed to be addressed alongside drawing up a plan for a sustainable business. They raised a number of issues that they proposed might be reducing the dynamism in the dairy sector, subsidy, tax, and capital values. Are these perceived benefits holding back the industry’s thinking?

Is the industry in danger of not thinking in a joined up approach? Politicians and industry leaders talk about more commodity processing capacity but don’t tell farmers that to compete we will need to produce milk for €35c or 25ppl. Everybody in the supply chain needs to understand the market. We won’t convince processors to invest in the UK if European milk is 20% cheaper!

AgriHive then launched the competition to the industry and wider business community to suggest how they might address some of the issues raised. This formed the basis of a panel session in the afternoon. You can access the competition here (details below) or you can watch the speakers from summit on the Agrihive youtube site.

An afternoon of sometimes opinionated views culminated with Bryan Watters giving a paper on leadership. An often thought provoking session linking his work in the military with milk!

The main conclusions were that we needed better succession planning, more concentration on merit in choosing successors, rather than age and sex. Better understanding of business and individuals cost of production, and more benchmarking to facilitate improvement.

Milk prices in the UK will be volatile, driven by both European and World milk price fluctuations and perhaps more importantly, currency fluctuations. There is no doubt that UK dairy farms can compete with their European neighbours but if we wish to protect what we have, or even grow, then we need to set our stall out to produce milk at €35c. We need to shout this from the rooftops so that processors hear that message, rather than the €42c (30ppl) often discussed.

Dotted Line2Dodd & Co Dairy Profits Report

We are currently finalising the next edition of the annual ‘Dairy Farmers Profits’ reports for 2014/15, with figures reflecting trading conditions up to March 2015. The figures are from fifty-four specialist dairy farms based in Lancashire, Cumbria and Dumfries & Galloway. Farms with a significant level of other income such as contracting, or those with large sheep and beef enterprises, have been excluded from this report giving us accurate like for like comparisons of the performance of the dairy units.

Commenting on the figures Andrew Sims, farming manager with Dodd & Co said, “The circumstances in which this report has been written are quiet unusual. The year ends to March 2015 really contain a year of significant shift in the industry. Broadly speaking the first 6 months of the accounts contains high milk prices and strong profits, with a then sudden and severe fall in milk prices.”

15431411_lAs a result the results of the survey show a relatively strong trading result with the average accounting profit being almost 5 pence per litre (ppl) before drawings and tax.

When put in context however the report bluntly shows the challenges that are being faced in the industry today. The report looks at what is considered to be the total cost of production which we view as being the milk price received in the business, less the surplus after drawings and tax, effectively allowing for unpaid family labour that is otherwise not reflected in the figures. In our sample the total cost of production for the average farm is nearly 28ppl for the year to 2015 – significantly higher than most are now receiving for their milk.

The full report will be finalised shortly. If you would like to receive a copy of the report please email info@doddaccountants.co.uk and we will make sure to send a copy to you.

Dotted LineCOMPETITION

The Kidworth Dairy Farm is designed to reflect an average business affected by price volatility and the decline in effects of operating a traditional farm business. It is created to be a focal point to initiate change and improvement for the dairy industry.

The competition invites farmers and anyone with any idea to enter by taking a look at the case study and filling out a short survey. In doing this; business owners can reflect on their business performance and analyse their own situation and importantly others can see the issues facing the beloved UK dairy farmer. It has been constructed not to be overly complicated but an easy to follow professional guide to making improvements to all dairy businesses.

Kidworth Dairy Farm is at a crossroads. Long term survival is in doubt. This family farming business has been ticking away for generations but the increasing trading volatility and uncertainty are rapidly putting the Kidworths farm viability in doubt. If we cannot help them create a new beginning, what does their long term future look like? Read more about the case study here.

As mentioned above the top prize is a fantastic trip to the Australian Outback – so don’t miss out on your chance to win! To enter the competition, all you need to do is send the word ‘Outback’ to kidworthcomp@agrihive.com and provide a few ideas to the UK Dairy Industry – anyone can enter and your entry is welcomed but anonymous to respect your creativity!

Speak Your Mind

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