Northern Ireland farming’s exposure to price volatility is relentless and no more so than now when we are experience a very turbulent period in the dairy sector.
The UFU have been lobbying extensively over the last three months and we will look at one of our proposals in greater detail;
Background to Dairy Farm Cash Flow
Exporting 85% of the milk we produce means that Northern Ireland Dairying has first-hand and regular experience of commodity price volatility. Local farm-gate milk prices have dropped from 34ppl earlier last year to 25ppl over a very short period of time.
The already strained cash-flow is exacerbated by a high income tax bill which arrives at the time when milk prices have dropped.
During falling prices, cash flow pressures come under strain. Cash flow pressure would be eased where the farmer able to put money aside during a good year to relieve pressure when farmgate prices fall back.
Yet the problem is there is no incentive to do this. Often instead, the advice is to spend money during a good year on not-needed capital purchases to ease the tax bill the next year and this money could be put to better use if there was an incentive to put it to one side “for a rainy day”.
Dealing with Price
The UFU have proposed a number of management tools in the past to deal with dairy price volatility and these remain credible options in the longer term; fixed price contracts (a small percentage fixed and linked to a hedging mechanism); capital holidays for long term business loans (the UFU are currently meeting the main banks to discuss this) ; extension of farmer averaging from two to five years (in line with Republic of Ireland).
However, there is another option that the UFU are seeking to consider; a Farm Management Deposit (FMD) Scheme for Northern Ireland.
What is the Farm Management Deposit (FMD) Scheme?
The Farm Management Deposits (FMD) Scheme was established in Australia in April 1999 as a
tax-linked, financial risk management tool for farmers. The primary objective of the FMD Scheme is to assist producers deal more effectively with fluctuations in their cash flow resulting from changes in market prices. It is designed to increase the self-reliance of farmers by helping them manage financial risk and meet business costs in low-income years by building up cash reserves when times are good.
The scheme allows eligible primary producers to set aside pre-tax income from primary production in years of high income, which they can draw on in years of low income. Income deposited into an FMD account is tax deductible in the year the deposit is made. It becomes taxable income in the year in which it is withdrawn.
To be eligible for the FMD Scheme in Australia, farmers must; deposit $1,000 or more each time; hold no more than $400,000 in an FMD at any time; hold their deposit for at least 12 months to access the taxation benefits and only deposit primary production income in an FMD account.
Will this work in
To date no other mechanism exists to mitigate against price volatility and FMD is part of a package proposals which the UFU are asking government to consider.