By Catherine Lascurettes -Â It may be hard for farmers to look beyond the unprecedented fodder and cash-flow crisis, but the abolition of quotas in 2015 will open opportunities for them to grow their business for the first time in 30 years.
This coincides with major world population growth, which augurs well for dairy demand, with two billion more inhabitants by 2050 and fast-rising, affluent middle-classes in emerging countries.
The investment required on farm and at processing level to deliver the 50% extra milk projected under Food Harvest 2020 is happening in a difficult financial environment. Margins at every level of the chain are affected by milk price volatility, and increases in production and processing costs.
Farmers will have to invest €1.5bn on farm to deliver the extra milk. The banks are keen to partake in the estimated €400m investment required in the processing sector, but expect co-ops to call on farmers to participate financially.
Also, many of the co-ops have requested farmers to increase their co-op shareholding. While increased control is desirable, having to purchase extra shares is adding yet more cost, which could affect farmers’ own expansion plans.
We estimate that 10,000 jobs, directly and indirectly, could be created in construction, on farms and ancillary services, and in primary and secondary processing of the extra milk and cattle. It will create significant local economic spin-off in additional spend and consumption of goods and farm services.
Our dairy expansion potential can deliver additional annual export revenue building up to €1.3bn. It would generate an extra €300m annual extra tax revenue and savings for the State, continuing well beyond 2020. Innovative fiscal solutions
What we are seeking from Government, in collaboration with co-ops, is a way to ease the cost burden on farmers of the contribution they have to make to the processing investment through favourable taxation.
We have proposed that around 30% of the funds required — approximately €118m — could be found through a tax-relieved loan scheme, at a modest cost in foregone tax revenue totalling €48m. This scheme would be open to farmers and non-farmers. Investment would be sought over eight years to coincide with the timeframe for Food Harvest 2020.
We will see higher tax returns from increased farm incomes, dairy processing profits and extra jobs. Combined, all of these elements could yield almost €300m in the time period up to 2020.
A second element of our fiscal proposals relates to the obligations on most dairy farmers to purchase additional co-op shares. This is not an investment with an expectation of return, but a mandatory cost that farmers will incur to secure the right to produce.
Based on the precedent of the tax treatment of milk quota purchases as capital assets post-2000, IFA’s view is that Revenue could allow farmers to offset the cost against tax over a seven-year period. Should the farmer later sell his shares, the proceeds would be subject to capital gains tax.
IFA will be lobbying Government on both these fiscal proposals in our next pre-budget campaign. Prudence essential for on-farm expansion
Irish dairy farmers have every reason to be enthusiastic about the opportunities ahead. However, it is essential that expansion plans be prudent to avoid overstretching.
All dairy farmers may not either want to, or be in a position to expand in the short term, because they already have significant indebtedness. However, those who do want to expand need to factor in significant milk price and production costs volatility, and plan their investment so that it is sustainable.
* Catherine Lascurettes is on the IFA dairy executive
Source: Irish Examiner