Make your mind up time
It’s hard to see how quota will retain such a high value from 2015 onwards, and on that basis, selling now and cashing in on high quota prices makes perfect sense.
IF you’re reading this after calving a cow or two, followed by a morning’s milking, you may be wondering, “How long more am I going to do this and how do I make the most of my quota?”
Or, “How do I get my hands on more quota to make the effort worthwhile?”
“Should I stay or should I go now, if I go there will be trouble, if I stay there will be double...........”
The Clash (1982)
Other than transferring to a successor or relative, the options available for movement of quota are:
* Sell your quota through the milk-quota exchange.
* Enter a milk-production partnership.
* Lease land and quota.
If you have no successor to your business, selling quota may be best. Make sure you do your figures correctly (see accompanying table), and make sure you compare it to the other options. Alternatively, if you wish to retain control of your quota, either because you feel it may have a future long-term value or because you have a potential successor in line, then a milk production partnership or leasing land and quota may be more suitable.
Milk Quota Exchange
The accompanying table outlines the position of a Dairygold Co-op supplier who has sold quota on the last milk-quota exchange.
If this supplier had a 50,000 gallon quota, it resulted in a net sale value of just under €58,000. This is a sizeable sum which could go a long way if invested in the current economic climate, or used to assist your retirement.
In the calculation, it’s assumed that the seller purchased no quota, and that it’s all subject to capital gains tax. But if you qualify for retirement relief, then the sale of quota may be CGT-exempt.
Also, if you sell any quota bought from 2000 onwards, on which you claimed capital allowances, you may be subject to an income tax liability, so it’s important you contact your accountant or tax advisor to assess where you stand before you sell.
It’s hard to see how quota will retain such a value from 2015 onwards, and, on that basis, selling now and cashing in on high quota prices makes perfect sense. Just bear in mind that the next exchange is at the end of 2012, and it’s quite possible that changes in quota policy, a fall in milk prices, and/or a fall in milk output could mean a reduced price on the exchange.
It would seem, at this stage, your decision to either buy or sell quota on the exchange will also have to take into account what your particular co-op is planning to do post-2015. For example:
* Some co-ops have indicated that they plan to introduce a share scheme to replace quota, which would suggest that quota may have a nil value post 2015.
* Others (notably Kerry) have already confirmed that your 2015 production rights will be based on your quota on March 31, 2015, plus 20% — thereby making a quota purchase on the exchange more justifiable.
* On a different note, Dairygold and Glanbia, in particular, have introduced seasonality price schedules to incentivise a more even milk output profile, thereby attempting to reduce their future capital outlay on processing facilities. Dairygold have committed to process all milk from their suppliers in the post-quota era, but are suggesting farmer investment in additional processing capacity. In such situations, quotas may retain a value post 2015, even if it’s difficult to quantify at this juncture.
Therefore, the more you find out about your co-op’s future intentions, the more informed you will be when making your decision.
Milk Production Partnership (MPP)
These have been in place for a number of years now and have helped some farmers to reduce their workload whilst still remaining active as farmers, and allowed others to expand and become more efficient.
Family partnerships have been very successful in that the younger generation are given an interest in the business, whilst the older generation remain in control of the assets. Combined with this, there are also benefits in terms of accessing new entrant milk quota and improved stock relief, etc.
However, like any partnership, for non-related farmers, a huge degree of trust is required, and realistically, you should probably know your potential partner before you commit.
Like any relationship, it can be complicated, and it is imperative that you cover as many elements of it as possible in advance, to minimise potential confusion and disagreement during its tenure. If you enter into a MPP, your return is treated as a “division of income”. This means you are dependent on the other partner to ensure you receive the level of return you expect from the partnership.
Partnerships are for at least five years, and there is now a maximum permitted distance of 100km between partner’s holdings.
This was introduced to halt what some saw as the excessive movement of quota (generally southwards). Obviously, if quotas are removed in three years’ time, then one has to review that element of the partnership.
It’s probably also fair to say that partnerships are not as legally strong as lease arrangements, and if they break down for whatever reason, it may be harder to recoup whatever “division of income” is owing to you.
Lease Land and Quota
Yes, believe it or not, leases of land and quota are back, but with all such things, life is never that simple. In the 2008 milk quota regulations, there was a clause stating: “A person may only lease land and milk quota to a company in which milk producers hold a majority shareholding”.
Up to recently, milk policy stated that the clause was not written with third-party leases in mind, and it was designed for farmers to effectively lease their land and quota into their own company. There has now been a change of stance from the Department, and they have agreed to permit leases between non-related parties. You can lease within co-ops or between co-ops, and currently, there is no distance limit. However, be sure that co-ops will do their utmost to protect their milk pools, so this may not remain the case if there is excessive quota movement.
Note that the term “milk producers” is extremely important, in that the company producing the quota must have more than one producer who is a shareholder. The definitions on this are not completely clear-cut, but the obvious route would be to make your spouse a shareholder, and to ensure that their names are listed on the milk account, so that they can be classed as milk producers. If you cannot include your spouse, then chances are you will have to make the lessor a shareholder in your company. Even if it’s only one share, this can have many implications.
If the lessor is a shareholder, it also makes them “connected” with the lessee, effectively meaning that you cannot claim the tax benefits of long term leases (five years or more).
Unlike an MPP, leases have to be for a minimum of only 12 months, but can be flexible thereafter. Once 12 months have been completed, as per old leasing rules, one can then purchase the quota if both parties agree to such an arrangement. One obvious solution is that parties could agree a long-term lease, but with the quota element to be reviewed in March 2015, depending on where things stand at that point.
You can also link the price paid for the land or quota (or both) to milk price for a particular year. An easy example is where the price for land remains fixed, but if you have an agreed quota price of 5c/litre based on a milk price of 30 cents, then for every 3 cents that milk price rises or falls, the lease price for the quota drops by 1 cent.
For example, if milk price falls to 27c, the lease price of quota falls to 4c. The land that attaches to the quota is land used for milk production in the last year that 90% of quota was filled on the lessor’s holding. The clear definition is, “land used for pasture for cows producing milk and replacement heifers and land used for forage production for feeding such animals”.
Obviously, there is an upside to this — that if the lessor wishes to retain the portion of their holding that wasn’t used for milk production, they can do so. In a MPP, effectively all your farm has to be included, bar minor exceptions.
From the lessor’s point of view, such arrangements are far clearer, in that you can fix an exact return for your inputs to the company.
If you’re considering leasing to another farmer under a company arrangement, I would suggest you get a personal guarantee that the lease terms are honoured by the director(s) of the company leasing from you.
Secondly, you need to try and include a clause allowing you to retain the benefit from any possible CAP changes from 2014 onwards, so that you minimise any losses under any new CAP system.
Don’t forget that if you’re in REPS, if you lease out some or all of your holding, you will be breaking your REPS contract, with the possible consequences of returning payments received for lands leased out along with interest.
