Farm money advice: Search continues for dairy stability
Dairy farmers in Ireland may need multiple risk management tools to address income volatility, according to an evaluation published this week.
The reasons for volatility can be many and varied, from imposition of tariffs to environmental factors such as weather or disease or simply as a result of oversupply.
The report (prepared by economists from Teagasc, Cork Institute of Technology, and University College Cork, for the Dairy Research Trust) assesses currently available risk management tools for managing income volatility, including forward contracting agreements and taxation-based income averaging.
The researchers examined use of milk forward contracting agreements in 2016, and found that farmers using milk forward contracts were typically younger, operated larger herds, and had a lower share of CAP support in their family farm income, compared to dairy farmers that did not have forward contracts for their milk.
Other possible risk management tools include revenue insurance and gross margin insurance schemes, and the taxation-related deposit scheme known as the “5-5-5 income stability tool”, which has been proposed by Irish dairy industry stakeholders.
The original 5-5-5 proposal suggested that a farmer in five-year income averaging could park 5% of their turnover in a rainy-day deposit fund for up to five years, for drawing down in a year of hardship. As covered here last week, that 5-5-5 proposal by ICOS has been rehashed into a broader proposal catering for equally deserving farmers not in income averaging, and for non-dairy farmers who are just as exposed to volatility.
The impact of the original 5-5-5 was minimal.
Stripping out and parking 5% of turnover would have very little effect on a farmer’s average tax bill, and therefore there was little incentive to farmers to engage in self-protection.
And this new report this week highlights that about 55% of all specialist dairy farms in Ireland would be automatically excluded from participation, due to the presence of non-farm employment income.
Other findings in this week’s report suggest that income averaging does not perform well in circumstances where there are consecutive years of low income.
The report also contains analysis of a US insurance-based scheme, where farmers pay insurance premiums in order to guarantee gross profits each year.
But it has been relatively unsuccessful to date, due to low levels of farmer participation.
The researchers concluded that, in a grass-based dairy system like Ireland’s, creating this type of insurance product would be challenging, as the estimation of a dairy farm’s gross margin is less straightforward in Ireland than in the predominantly feed-based system in the United States.
In an Irish context, the report also notes that this gross margin insurance could be costly, and tiered levels of cover with different associated premia would be required.
Public support, to at least cover part of the farmer’s premium payment, would also be necessary, in order to persuade private insurers to offer such insurance products.
This week, the Swiss went to the polls, and rejected a proposal to increase state aid to Swiss farmers, whose numbers have halved since 1985, in a country where three farming businesses close every day.
Equally, in Ireland, seeking public support and public funding for a farm insurance scheme may not garner support.
Overall, this week’s report on tools to manage dairy volatility warned that without a higher rate of take-up of risk management tools, Irish dairy farmers will face even greater challenges in managing farm income variability. There could be negative consequences for development of the wider agri-food sector, due to curtailment of investment at farm and processor level.
It is the most productive farmers who are most exposed to volatility, because the proportion of their income relative to their single farm payment is significantly more than those who are ticking along.
Therefore, income management tools must be a priority, to aid those progressive farmers.
The Agri-Taxation Review concluded in 2014 is currently being reappraised, and it is expected that some further tax measures will be announced in this year’s budget.
The tax system can never address all issues for farmers — such as the lack of credible income volatility tools; underutilisation of land; the lack of progress in transitioning farms to young farmers; the unaffordability of farm land for genuine farmers; and the inability of farmers to expand their grazing platforms.
These are the on-going problems which farmers face.
But the tax system is a tool which the government can deploy to, at least, assist the achievement of desired socio-economic outcomes.
The question is whether this government thinks these issues are of sufficient importance to take action.
- Chartered tax adviser Kieran Coughlan, Belgooly, Co Cork.
- (086) 8678296
- www.coughlanaccounting.com
