Cows & Money

Dodd & Co Dairy Bulletin

Welcome to our new dairy bulletin, looking at business and tax issues relevant to dairy farmers. I hope that you find the content useful, any comments welcome.

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What milk price should businesses expect?

In the same week that David Handley and Farmers For Action started protesting against falling milk prices in England, across the Irish Sea Dr. Noel Cawley, chairman of Teagasc (the Government funded Irish advisory service), stated that dairy farmers who couldn’t produce milk for between 25-30€ cents should get out.

Where you sit in this argument depends on a number of issues but it is startling to think that the message in Ireland, possibly our biggest and most dangerous competitor, is that you should only be milking cows if you can produce milk profitably at 19-24ppl!

One of the key points here is that the Teagasc-monitored farms can just about do this. With variable and fixed costs touching 21.5c and assuming tax and drawings of €50,000 or another 7c this would give total costs of 28.5c or 22ppl at current exchange rates. This doesn’t leave any funds for new investment, but does cover depreciation of buildings and plant.

Where does this leave producers in the UK? It is great when milk prices are above 30ppl, as people will realise from their tax bills due in January. But in a world where oversupply may happen, more by luck than judgement, as most people would say that current prices owe a lot to 18 months of settled weather worldwide, relying on consistent milk prices is not an option.

How far can milk prices fall? That like any other issue will generally mean at what point sufficient production has been lost. The key here is making sure your cost of production is competitive with other parts of the world. Ireland is easily in our sights and they are striving to achieve costs of production of 22ppl.

Dodd & Co have clients who are achieving this level of costs, both grazing units and housed units. It is possible but focus and attention to detail is key. Benchmarking with similar business is a useful step in this direction.

In order to focus this more closely click here to see a sensible chart of accounts to provide enough detail in management accounts to allow easy comparison with other datasets available.  If you are preparing your management accounts or VAT returns using a computer program or spreadsheet you might want to check you have the same level of detail in the list below, more won’t be a problem!

If you need any assistance with setting up systems please let us know.

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January 2015 tax payments

Many sole trader and partnership businesses are facing the double whammy of not only the tax on what turned out to be the best year in the last decade, but also making payments on account for 2014/15 based on the bumper year’s figures.

We already know that milk prices have fallen by an average of 6ppl since April, although much of this has only just happened. Given average profits last year were only 6ppl the payments on account will probably be far too high. Allowing for a possible drop of another couple of pence, (hopefully it won’t occur), and reduced feed costs of 2.5ppl, we expect profits to fall by an average of 60-70%.

Using these figures we will be working to reduce payments on account for individuals over the next few months. We will need to take into account any Capital Allowance changes to ensure we estimate the figure correctly.

The only downside to reducing payments on account is if they are reduced below the level of tax which ends up being due, then interest will be charged. For many this is an academic issue as borrowing from HMRC isn’t any more expensive than the bank.

We will be in touch with clients over the next few months but should you have any queries please speak to us.

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Capital Allowances

With all the news in recent weeks being about falling milk prices, it is easy to stop any planned capital expenditure. However bumpy the next few years turn out to be, most forecasters expect a good outlook for the dairy industry. Whether that is at 25ppl or 35ppl no one knows.

For those with low costs of production who intend being in the sector long term, does the current environment of cheap money and 100% capital allowances make investments in long term infrastructure appealing?

The cash cost may be great but, if it can lead to tax losses in 2014/15 which could be carried back against profits taxed at 40% in 2013/14, expenditure which can drive down cost of production in future may be worth considering.

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Tenants and Principal Private Residence Relief

Many tenants invest in a residential property outside of the farm in order to provide a house to retire to at the end of the tenancy. For those people living in job related accommodation it is possible to elect for one house, that you own and don’t live in, to be treated as your principal private residence. This takes the property out of the CGT regime and ensures it can be disposed of in future without a tax charge.

There are some requirements to be met if you wish to take advantage of the election although these aren’t too onerous.

It is possible however that this election may be lost in future as the Government are currently consulting on proposals to remove the opportunity to elect, to stop wealthy non-residents abusing it. This could have the result that tenants who own one house may lose the ability to make the election.

We would therefore advise that any tenants with owned residential property review their position in the coming months. If you would like to check what details we hold of any elections on properties you own let us know.

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The Prince’s Dairy Initiative

The Prince’s Dairy Initiative, now in its third year, is looking for small and medium dairy farmers across the UK to benefit from the tailored support and advice it offers with the aim of increasing the long-term sustainability of the British dairy sector.

The Initiative has launched in five new regions – Cumbria, Cornwall, North Yorkshire, Shropshire/East Wales and Staffordshire.  Twenty dairy farmers are sought in each area who could increase the efficiency of their business and gain valuable expertise from participating in this free scheme. Eligible farmers should have a dairy herd of under 200 cows, supply their milk on a standard contract and not already be active participants in discussion groups and workshops.

If you are interested in finding out more about joining the initiative please contact Maddy Fitzgerald: madeleine.fitzgerald@bitc.org.uk / 020 7566 8797. Please note the deadline for signing up is 21st October 2014.

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