A Step By Step Guide To Setting Up A New Dairy Farm

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chapterSection 2239A Step by Step Guideto Setting up aNew Dairy Farmby Padraig FrenchIntroductionEstablishing a new dairy farm is a very significant financial and timecommitment which requires detailed planning and management. Priorto undertaking such a project you should be very clear on your goalsfor the farm and why you are undertaking the project. Because of thelarge capital investment required it is essential that very detailed plansare developed, analysed and stress tested.1What are the steps involved in setting up a new dairy farm?45

chapterA Step by Step Guide to Settingup a New Dairy Farm91What are the steps involved in settingup a new dairy farm?Step 1Develop a physical plan for the farm to include milkingand grazing infrastructure, animal housing and slurrystorage.(a) Decide on the number of cows that will be milkedbased on the size of the farm and the grass growthpotential of the farm (see chapter 5)(b) Design a milking facility (see chapter 22), winterhousing facility (see chapter 24) and grazinginfrastructure (see chapter 21) appropriate tothe number of cows planned and the farm size.(c) Decide on an operational plan for the farm, whowill do the work? Who will manage the farm?46Step 2Develop a capital budget for the farm to quantify thetotal cost of converting to an operational dairy farm.(a) Estimate the cost of each item in the development plan,speak to other farmers who have undertaken similar scaleconversions and get quotations from builders/suppliers.See table 1 as an example from the Greenfield Dairyfarm in Kilkenny.(b) Develop a stock budget based on the total number ofstock including replacements to be bought, include alsocost of disease testing, transport, vaccinations and anyother cost associated with keeping the animals until thefarm becomes operational.(c) Who will project manage the conversion of the farm?Will there be a cost or opportunity cost associated withthe project management?

chapter239Step 3(d) Allow a contingency of at least 15% on the capitalbudget for unforeseen costs.(e) Decide how the development costs will be funded;how much equity is available from sale of existingstock/assets; how much will have to be borrowed?Ensure there is adequate working capital available tostart up the operation of the farmDevelop an operational budget for the farm to quantifythe total costs and total income generated annually.(a) Use table 2 as a guide or the Teagasc 6 yearbudgeting tool to forecast cash inputs and outputs andprofitability.(b) Net profit plus opportunity cost of unpaid labour or landminus debt repayments divided by the total capitalinvestment will give the return on capital.(c) A target return on capital by year 5 should be 10%assuming an average milk price(d) When the budget is complete the plan should bestress tested at low milk price to ensure that thebusiness is viable in years of low milk price particularlyin the early years after conversion.Table 1 Capital budget for the Greenfield farmItemDescriptionProjectedStock265 lactating cows 013000344,50070 heifers @ 012000110,500Reseeding of farm117 ha, one pass till, sow, roll grass seed fertiliser035,000Fencing20,000 m @ 00.9/m017,500Water supply40 water troughs 7 km water pipe laid water store026,500 Boring the wellInfrastructureStand off pad, Earthen bank tank0176,400Roadways, Site work, Gate, Tank fencing, Bark Mulch,Head feed, Calf shed, Gates, YardingMilking parlour30 unit herring bone shed dairy collecting yard/0196,140and office, wiring, plumbing, heatingSilage SlabSilage bases016,300Feed binElectricity supply3 phase transformer connection fee09,742MachineryJeeps and tractor020,000LabourLabour from Start to December03,500PlanningDrawings site assessment mapping planning application council development fee019,000OfficeComputer, farm package, phone connection, broadband etc05,000CompanySet up plus legalContingency10 % allowance to allow for unexpected costs that may arise ,70508,669VAT paid086,000Total01,316,408VAT back077,400Net capital01,100,00001,239,00847

chapter9Budgeting profit andcash in a new dairy farmTable 2Milk price ( /kgMS)43.94.5Calculations201720182019Farm Size (ha)Cow numbersMilk sold /cow (kgMS)Milk Solids kg/HaT Milk solidsSales1Mil k 2Calves 3Cull cows A SUM(1 to 3)TotalInventory /4Gross OutputB (SUM(A&4)VARIABLE COSTSContracting5Silage 6Slurry spreading 7Hegecutting 8Reseed 9Soiled water spreading A110Contractor Other 11AI Straws 12Technician Service13Tail paint/ heat detection 14Tags 15Dead A Collection Dairy16Supplies 17Milking Machine costs 18Milk Rec Feed19Dairy cow 20Silage plastic 21Minerals 22Straw 23N. P. K 24Lime 25Calf feed 26Heifer rearing 27Other concentrate 2829Milk penalties 30Routine ( TB & Call Outs)31Vacines 32Hoof care C Sum(5 to 32)Total Variable costsCost / kg MSCost/cowCostGross MarginD (B minus C)Fixed CostsAdministration33Accountancy 34Consultancy 35Office Banks36Fees 40Interest old loan 41Interest new loan Energy42Electricity 43Tractor fuel Insurance4445Hired labour 46Repairs and maintenance 47Machinery lease 48Car/jeep expenses 49Repairs & Maintenance 50Buildings 51Machinery 52Land E Sum(33 to 52)Total Fixed CostsTotal Costs53F Sum (C & E)Net Profit54G (B minus F)Family Drawings55Taxation56Capital introduced57New Loan Capital old loan58Capital new loan59Farm Development60Single farm payment6162H SUM(A, 57, 61)Capital InCash Out63I SUM(F, 55,56,58,59,60) Less(50&51)CashflowJ (H minus I)48

chapter2394.520204.520214.52022The business plan should be strss tested with low milk price to determine if the business can withstand very low milk price yearsBe conservative on stocking rate in initial years unless sure of the growth capacity of the farmFirst lactation animals will have much lower milk yields, so if starting with heifers this should be factored in. When new herds areassembled, it will take a number of years for the herd to reach optimum productivityStocking rate * MS/cowMilk solids /ha * total haMilk price * total milk solidsBudget higher calf mortality in the initial yearsCulling will be higher in in initial years as the herd settles downThis can be calculated from the cow requirements above, the grass silage yield and the rate/ha for cutting.The initial reseeding of the farm should be budgetted in the capital budgetApproximately 5.5 straws needed per replacement heifer calving down.Tag price BVD testing 5/cow)Allow for higher cow and calf mortality in the initial yearsCow numbers * target conc. / cow * conc. Price/tonneInclude silage bale and pit plasticDry cow, lactating cow & youngstock minerals(Maintenance P k) N (see chapter 20)Maintenance requirement (see chapter 20)TB testing and call out charges antibiotics49

chapter9A Step by Step Guide to Settingup a New Dairy FarmStep 4Develop a timescale plan for the conversion of thefarm.(a) Meet the bank with the plan to secure any fundingrequirements – allow six months.(b) Apply for planning for any development needed– allow six months.(c) When applying for grant aid for development thetime schedules need to be factored into the plan.(d) Aim to construct grazing infrastructure and farmyardfacilities during the summer months when groundconditions are usually more suitable allow six monthsfor construction.(e) Ideally the milking facilities should be installed beforethe winter to avoid peak work flow for suppliers.(f) Plan the arrival/first calving of stock to matchthe timeframe of the farm development50Step 5Managing the conversion phase.(a) Regularly monitor the costs relative to budget –adjustments may need to be made to plans to ensurethe project stays within budget. Target scarce fundsto essential investment, extras can be added laterwhen funds permit.(b) There will usually be numerous contractors requiredfor the development of a new dairy and eachcontractor should be provided with a plan of whatis required and should provide a written quotationbefore commencement of any work. Any deviationfrom the quotation should be agreed in advance,including the cost implications.(c) If you have inadequate experience or expertise inthe supervision of construction of farm infrastructurethen seek help and, for large projects, a projectmanager could be a worthwhile investment.(d) Ensure that any stock on the farm are adequatelymanaged during the conversion phase and areon-target to meet their production requirement.

chapterSection 22310Farm Milk Price VolatilityVolatilityin Irelandby Trevor Donnellan, Kevin Hanrahan, Michael Keane,by Trevor Donnellan, Kevin Hanrahan, Michael Keane,LaurenceShalloo, FintanFintan Phelan,Phelan, FionaFiona ThorneThorneLaurence Shalloo,IntroductionOver the past few yearsyears thethe exposureexposure ofof IrishIrish farmersfarmers toto priceprice riskriskhas increased and is likely to increase further in the future.future.1 Why is milk price volatility increasing?2 How can farmers try to manage price volatility?volatility?512. Milk Price Volatility 1.indd 128/10/2011 15:23:42

chapterFarm Milk Price Volatilityin Ireland101As a result, for a given level of demand, small changes insupply can result in large short-term price changes. Thus,substantial price volatility can be expected to be a majorcharacteristic of agricultural commodity markets due to thefundamental behaviour of buyers, coupled with productionuncertainty.Why is milk price volatility increasing?The demand for agricultural commodities does not changevery much as food prices change. Food is a basicrequirement for living and if supplies are short, consumerswill pay higher prices if necessary. On the other hand whenfood prices fall the additional demand is likely to be limited.Once their food requirements have been met, consumerstend to spend savings from their food budget onnon-food items.Experience of milk price volatility in IrelandPrior to 2007, there was virtually no extreme price volatilityfor farm-gate milk price in Ireland (Figure 1). The pricevolatility in recent times is associated with several factors.The most important drivers of the increased volatility are therecent unanticipated shocks to supply, combined with lowstock levels and inflexible demand. This has been furtheraccentuated in the EU by major policy change (theLuxembourg Agreement) which increased the exposureof EU producers to market prices, and the global recessionthat has affected the demand for agricultural commodities.Another possible factor, which has received considerableattention in recent debates, is the increase in volatility incommodity markets due to market speculation via hedgefunds and index traders.The supply of agricultural commodities is also relativelyunresponsive in the short-term. Producers would like toproduce more when prices rise. However, it takes time forproduction decisions to result in increased output. So, inthe short-term, the supply of agricultural output tends to befixed, which means that prices must adjust further to bringconsumption in line with production over the short-term.Global stock levels of many commodities have been lower inrecent years than the historical norm. This is due to changesin policy internationally which have caused governmentsto be less willing to engage in stockholding (e.g. the EUintervention mechanism) and also due to a slow-down inproduction growth which has limited the surplus of productionavailable to build up stocks.Figure 1: Irish Manufacturing Milk Prices (including VAT) (Cent) by Product and Month50Cent per Litre4540353025(Irish farm gate milk price)52.Jan - 15Jan - 14Jan - 13Jan - 12Jan - 11Jan - 10Jan - 09Jan - 08Jan - 07Jan - 06Jan - 0520

chapter102 How can farmers try to manage pricevolatility?Consequences of price volatilityThe principles of economics suggest a set of mostly negativeconsequences of extreme price volatility for producers.Most notably, extremely low prices can threaten the solvencyof the farm, and lead to damage to productive capacity.Very high prices, however, can also be problematic, in thatconsumers forego a product e.g. butter whose price hasrisen in favour of a cheaper alternative e.g. margarine. Oncethe consumer makes the switch it may be difficult to reverse.What options are available to deal withor reduce price volatility?There are a broad range of instruments, both in the publicand private sector, which may be utilised to manageprice and income volatility. With regard to the private sector,the available suite of instruments includes over the countercontracts (OTC), forward contracting, futures contracts andinsurance contracts.Examples of these private market measures include theGlanbia milk pricing scheme announced in late 2010.The Glanbia milk scheme locks a percentage of a farmer’squota at a fixed base milk price for three years. This schemeis modelled on a similar scheme in the grain sector, whichallows tillage farmers to sell grain one year in advance.Coping with volatilityFrom the time of the introduction of quotas until thedecoupling of dairy support mechanisms under the mid-termreview, milk price remained relatively consistent allowingvirtually all producers to make a reasonable margin frommilk production. However, since 2006, with the decouplingof dairy support prices, we have moved into an era of muchgreater fluctuation in milk price. If the world market over thepast 10 years is used as a guide, milk price could fluctuatefrom 20 to 40 c/l over the coming years.The business strategy adopted to maintain a viable businessin a volatile price scenario is substantially different to thatused in a consistent milk price scenario. In a volatile scenariothe objective is to be economically sustainable at the lowestmilk price and to therefore forego some increased productionthat would be attainable in a higher and more stable milkprice scenario. This is largely achieved through the adoptionof a low cost system of milk production that can stillreturn a margin at a low milk price albeit just ensuringsurvival.This model for milk production will ensuresubstantial profits are returned when the milk price returnsare positive and it will ensure that dairy farmers survive lowmilk prices. Dairy farming with volatile milk prices cannotsustain the luxury of large capital investment in depreciatingassets.Also, farmers should bear in mind input price volatility andthe potential to forward purchase inputs.53

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chapterSection 22311Taxationin Farmingby John NorrisIntroductionFarmers need to understand the various taxes and how they apply to thefarm business. Important tax reliefs are available to all taxpayers. In addition,farmers can qualify for a range of tax reliefs/incentives which apply to thefarming business to encourage development/expansion. Tax reliefs and ratescan change from year to year and changes are announced in the Octoberbudget each year.1 What are the principal taxes which apply to farmers?2 How is farming income calculated for tax purposes?3 What are the important tax deadlines for farmers?4 What are the essential components of each tax type which apply to farmers?5 What tax reliefs are available on farm expenditure and investment?6 What off-farm investments can provide tax relief to farmers?7 What are the components of a tax minimisation plan for farmers?8 What are the risks if your taxes are not kept up to date?55

chapterTaxationin Farming111What are the principal taxes which applyto farmers?The principal taxes include the following: Income tax PRSI universal social charge (USC)apply to income. Value-added tax (VAT) applies to the purchaseof goods and services. Excise duty applies to fuels, alcohol andtobacco products. Corporation tax applies to company profits. Various capital taxes (e.g. Stamp Duty, Capital Gains Tax,and Capital Acquisitions Tax) can apply when property/assets are transferred (e.g. by sale/gift/inheritance/exchange).2 How is farming income calculated for taxpurposes? Your accountant will calculate your income for tax purposesbased on rules laid down by Revenue. Most farmers are sole traders and their farming income isclassified as Schedule D-Case 1 (profits from a trade– i.e. farming). All receipts from sales (livestock/crops), the Basic PaymentScheme, Areas of Natural Constraint/ANC payments,AEOS/GLAS schemes are added together. Livestock/other stock changes must also be taken intoaccount. An increase in closing stock over opening stockincreases profit for tax and a decrease in closing stockreduces profits. All the normal variable and fixed costs of farmingare allowed as an expense and also the cost of anylivestock purchased. Normally two-thirds of car, electricity and phone costs areallowed. One-third are for private use and are not allowed.56 The accountant must also add back depreciation beforehe allows for capital allowances. Any profit or loss fromthe sale of machinery/motor vehicles is also taken intoaccount. Any other sources of income must also be added to theadjusted farm income.Tax-free income sources are now very limited: Forestry premiums and timber sales are free of income taxbut are subject to PRSI and the universal social charge. Income from the long-term leasing out of land for fiveyears or longer subject to certain conditions is also freeof income tax but subject to the USC (universal socialcharge) and PRSI. Government grants received to help with capitalinvestment/improvements to the farm (e.g. buildingsand facilities) are capital in nature and are tax-free.They are not classified as income.The farm accounts All the above calculations by the accountant are donefor a 12-month accounting period. e.g. 1 January to 31December or various other 12-month periods.3 What are the important tax deadlinesfor farmers?On or before 31 October 2016 (for example)(a) Submit final tax return for 2015(b) Pay final balance of tax for 2015(c) Pay preliminary tax for 2016 (various rules)(d) Pay capital gains tax on any asset disposals;01/01/2016 to 31/11/2016 by 15/12/201601/12/2016 to 31/12/2016 by 31 January 2017.Taxpayers who file and pay using the ROS (Revenue-on-line)system are allowed an extra 15 days, up to mid November2016 to make their returns.

chapter23114 What are the essential components of eachtax type applying to farmers?Table. 2: Budget 2016 Main Tax CreditsNOTESNoteson different categories of tax1. Income tax (2016) A taxpayer must pay income tax on their total incomecalculated according to the Revenue rules. This includesfarming income, PAYE income, rental/investment income,share dividends, pensions and various others. Depending on which category you fit into, your lowest bandof income is taxed at the low standard tax rate of 20%and any income above this is taxed at the high tax rate of40% (we can call this the “pain zone”) – See table below. 1,000PAYE credit(Employee Tax Credit)Earned income credit ?550.ExamplesTable. 1: Tax bands and tax rates (2016) In 2016, a married couple’s gross income tax bill isreduced by the tax credit of ?3,300. A farmer’s spouse with a job taxed under PAYE will also 33,80040%qualify for the PAYE credit which will reduce the tax bill by?1,650. Medical insurance premiums qualify for a 20% tax credit 37,80040%applied at source by the companies. A 20% tax relief alsoapplies to most health expenses incurred by individualsand their families. Mortage interest tax relief is complex after many recent 42,800 42,80040%40%changes - get advice. Self employed taxpayers, for example farmers, do notqualify for the PAYE (Employee Tax Credit) but will nowqualify for the new Earned Income Credit of ?550 in 2016. 24,800 67,600 A range of personal tax credits are available (see Table 2)which will reduce the gross tax bill as calculated based onTable 1.When making your own personalcalculation it is advisable tocontact Teagasc or a tax advisor.57

chapter11Taxationin FarmingThe t

and office, wiring, plumbing, heating Silage Slab Silage bases 016,300 Feed bin 04,000 Electricity supply 3 phase transformer connection fee 09,742 08,584 Machinery Jeeps and tractor 020,000 016,230 Labour Labour from Start to December 03,500 Planning Drawings site assessment mapping

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