Difficult Decisions: Getting out of dairy

Friday 29 March 2013 06:00
Gemma Mackenzie on the farm in Stornaway

The past 10 years have seen 10,000 milk producers leave the sector – and many challenges mean others may be thinking about doing the same.

In the first of our Difficult Decisions series, Farmers Weekly’s deputy business editor Gemma Mackenzie talks to her own family and others who have made that tough choice

Mackenzie family, Goathill Farm Dairy, Isle of Lewis - Closure marks the end of an era

Rising input costs, competition with supermarkets on price, a dwindling customer base and difficult growing conditions led to my family ceasing dairy production in October 2012.

My father, Gordon Mackenzie (pictured below), is a third-generation dairy farmer in Stornoway on the Isle of Lewis. His decision to quit marks the closure of the last remaining dairy farm in the Western Isles. In fact Grandpa Hamish, 78, says we were the last liquid milk-producing dairy on the west coast of Scotland from Oban to Orkney.

Gordon Mackenzie

I’m too young to remember the heyday, but at our peak the family was milking more than 140 cows across two sites, producing, bottling and delivering milk to a third of the island’s population. Both Dad and Gramps admit it was once a very profitable business.

Come the late 1980s it was all change, though, with the advent of larger supermarkets on the island – first up the Co-op, followed by Presto – bringing with them the loss-leader culture for milk. Despite a short period of supplying milk to the supermarkets, my family soon realised they couldn’t compete on price.

Thereafter our customer base slowly declined, and rather than dropping us completely, they gradually reduced the amount of milk they were buying. However, we were still having to drive from house to house to deliver it, just selling less milk in the process – a problem heightened by increasing diesel costs over the years.

That, topped with expensive haulage costs to get feed and fertiliser to the island – at around £45/pallet (1.5t) – resulted in the business contracting and by the late 1990s we were only milking on one site.

Dad says it was a double-edged sword with the customer base dwindling at the same time as sharp increases in all input costs – diesel, electricity, water, fertiliser and so forth – in the past 10 years. In addition, a growing number of greylag geese has made growing grass and fodder crops very difficult.

He says he realised he needed to move away from the mentality of seeing farming as a way of life and look at the business as a whole. And the constant pressure of red tape, especially when you are a producer retailer, led both him and Gramps to question whether working 60-80 hours weeks was really worth it.

“No other business would continue if it wasn’t viable so why do farmers? It makes no more sense than sitting down and burning a pile of fivers,” says Dad.

Hindsight is a wonderful thing and maybe my family should have stopped dairying years ago but quitting the moment it gets tough certainly isn’t in the farmer mentality.

And although it has been a painful process for my family to take stock and stop production, in the end it was a positive decision to draw a line under the business, be proud of the service we provided to the island for more than 60 years, and start afresh.

Gramps has finally retired and Dad, 49, is currently looking at his options to see whether it is feasible to develop holiday lets on the farm.

Mackenzie family tips

  • Regularly monitor your costs and performance against your business plan and be honest with yourself about how the business is faring
  • Ask for advice early on – advisers may see solutions/pitfalls/alternatives that you do not
  • Move away from the “it’s a way of life” mentality – view the enterprise as a business
  • What are your other options if you do stop dairying?

Seare family, Blandford, Dorset - Fresh direction secures future

A combination of factors, including the high level of investment needed to meet future NVZ requirements, led one Dorset tenant farmer to assess his future in dairying.

With three daughters pursuing different careers and his milking staff Andrea and Roland Pitman (pictured below left with the family) nearing retirement age, Andy Seare decided the level of investment required to bring the dairy up to scratch wasn’t going to improve returns and the decision was made to cease production.

Seare family

“We budgeted it two or three times but were only going to be buying a ticket to carry on milking. At the end of the day you have to recover that money one way or another,” says Mr Seare.

“To meet the NVZ requirements we were looking at about £140,000, and the parlour also needed investment along with livestock housing improvements.”

The decision was made in early 2012 to stop milking, but a TB breakdown meant the family was only able to sell up its 200-head pedigree Holstein herd in March this year, following a clear test.

Giving notice on the milk contract wasn’t a problem, says Mr Seare, and stopping production didn’t breach the terms of his dairy and mixed arable tenancy on the 800-acre farm at Mapperton, Blandford, Dorset.

The herd was sold on a herd election basis (watch the video below), which allowed a tax-free sale.

For those selling up, Mr Seare advises getting paperwork in order, including milk recording and health records.

All revenue raised from the sale of the herd is being invested in property and Mr Seare and wife Lynne are starting a beef-rearing enterprise, taking calves from one week old to 16-18 months old. In addition, the arable enterprise will increase in size.

“I didn’t want to put the money into the farm account and buy a lot of shiny machinery. That’s the mistake I know a few people have made,” he says.

“We are going to invest it in property and ring-fence it. Because we are tenants we don’t own our own property so I have always been mindful of that.”

Seare family tips

  • Assess financial viability of investment required to update existing farm facilities
  • Check terms of tenancy to ensure stopping milk production doesn’t breach the contract
  • Get paperwork in order ahead of selling the herd
  • Make a business plan for your next enterprise
  • Plan sensible use of revenue raised from dairy sale

Redman family, Girvan, Ayrshire - Quality of life, health and family first

Rising production costs, high borrowings and the constant threat of bovine TB forced one couple to re-evaluate life as dairy farmers.

Simon and Sarah Redman, who have two children, started milking in 2002 and at their peak had 330 cows on a purpose-built farm in Cornwall.

However, after taking stock of their situation, the decision was made to cease production and move 350 miles away from Cornwall to Girvan, Ayrshire.

Redman family

As Farmers Weekly meets the couple to discuss the difficult decision to stop dairying and start afresh with beef and sheep north of the border, they seem relaxed, with Sarah saying “there is life after dairy cows”.

“Like all dairy farmers we struggled with cost of production against milk price – it never seemed to be quite enough and we were probably just breaking even,” says Simon.

“We had built up debt in expansion and while the times were good the milk cheque was enough to cover bank repayments. But with the cost of production rising, it was getting difficult to pay the bills.”

The couple admits it wasn’t an easy decision, involving 12-18 months of serious deliberation, but once they had decided that they wanted to get out, it was as if a weight had been lifted.

“If you are not enjoying what you’re doing, the hardest thing is to admit you are not enjoying it,” says Simon.

“At the end of the day, you have a choice. Quite often, if you are arguing about milk price, dairies and supermarkets say, ‘If you don’t like it, don’t do it,’ and that’s it in a nutshell.”

Making the decision to leave before they encountered problems meeting bank repayments enabled the couple to use capital from selling stock and their Cornish unit to buy their Scottish farm outright.

“I could see a way for us to end milking, buy a farm and continue farming,” explains Simon.

“If we hadn’t made the decision when we did, and we had carried on for another 12 months, we might not have been able to do this.”

He advises any producers deliberating whether or not to carry on with milk production to ask themselves how their health and family life is affected by their current situation. “It can be a very difficult decision to make but at the end of the day you need to look after your health and family life,” he says.

The Redmans also run a charcuterie business - Creeside Charcuterie. Follow their progress on Twitter @creesidelife.

Redman family tips

  • Look at what you want in life and ask yourself are you happy with your work/family life balance
  • Look at the debt:asset value of your business and what equity you might have after getting out of milk
  • Assess the long-term sustainability of your business before making large investments on farm
  • If you have TB problems, speak to the Ministry about your plans. The Redmans were able to test batches of cattle and sell them as soon as they passed the test, rather than a whole herd test, reducing the risk of reactors

Take stock with key questions for your business

Tax, legal and business considerations must be addressed alongside family issues and objectives

1. Do I enjoy what I’m doing?

“Making an active decision about not continuing is just as important as making a decision to continue. Being in control is crucial,” says John Allen of Kite Consulting.

  • Be honest about how much enjoyment you and your family get from what you are doing.
  • Assess quality of life and work/family life balance.
  • How “in control” of the business are you? Often anxiety and depression are caused by a feeling of lack of control.

2. Is my business sustainable?

It is important to carry out a review of the sustainability of the business, says David Cooke from Promar.

“Sometimes the writing is already on the wall; if you know the business isn’t sustainable in the long-term, you can look at improving the assets on the farm to make sure that their sale value is better,” he says.

Future requirements on manure or slurry storage need careful consideration, as does succession planning and whether or not you have a pension to live on, he adds.

  • Consider financial, social and environmental sustainability – all are essential for the success of any dairy business.
  • Profitability, cashflow, job satisfaction and the ability to meet environmental obligations all need to be assessed, alongside succession.
  • What investment is needed?

3. When do I know I’m in the ‘danger zone’?

“If you are only making sensible profits one year in four, then you don’t have a sensible business,” says Mr Allen.

Don’t just look at how the business is operating now, but look at how it has operated over the past two years and what the financial outlook is going forward, adds Mr Cooke.

“Look at how much money you have borrowed – some businesses are in financial strife and no-one can carry on losing money,” he says.

“Do your balance sheet and look at the value of the assets you have.”

If you can’t become more efficient and further reduce costs, the situation is only going to get worse irrespective if you are making money now, advises Mr Cooke.

Measuring the strength of a business is a combination of looking at the balance sheet and at trading performance, says Mr Allen. If the net worth deteriorates over a number of years, this should ring alarm bells.

  • As a benchmark, tenants should have equity representing at least 50% of the business, says Mr Allen. While it is possible for liabilities to account for more than half of a business if it is trading profitably, debts of 70% would usually represent a serious situation.
  • With owner-occupiers, you don’t want debt to be more than 30% of the business – again if you were trading profitably it might not be such an issue or if you had a mixed business the ratios could be different, says Mr Allen.
  • It’s very important to monitor the business and see what is happening to these and other benchmarks.

4. What finance and tax issues should I consider?

Before embarking on the sale of any assets speak to your accountant about how best to minimise tax charges, advises Rob Hitch from accountant Dodd & Co.

“Some loss-making businesses may not have been claiming all the allowances that have been available in recent years, which may mean there is no profit on the disposal and in some cases even a loss,” he says.

“If the numbers are big enough then bear in mind that relief for carryback of losses, relief against other income and capital gains will be restricted to £50,000 per individual from 6 April 2013.”

Although losses can be carried forward, these will need to be relieved against future farming profits, he adds.

  • Seek tax planning advice at an early stage – what you plan may have capital gains tax and inheritance tax impacts.
  • If selling some or all of the farm, ensure ownership is in the correct hands to achieve entrepreneurs’ relief on the capital gain – this will reduce the tax charge from 28% to 10% on gains of up to £10m for each individual involved.
  • Disposing of milk quota creates large capital losses for some, but with planning these can be offset against capital gains on other assets such as land and property.
  • When selling plant or machinery, be aware that you will be taxed on any proceeds that exceed the tax written down value of machinery.

5. What legal issues should I consider?

“Check your tenancy agreement – particularly in the case of county council tenancies,” says solicitor Julie Robinson of Roythornes.

“Make sure you are not in breach by using the land for something other than dairy. You may need to play safe and get consent from your landlord.”

In addition, always make sure that the right kind and length of notice is served on any milk buyer to ensure no comeback, she adds.

  • Tenants must check the terms of their agreement to ensure they are not in breach of contract if they cease dairying.
  • When giving notice on a milk contract, ensure you do not breach any terms. Most buyers will not argue if you are ceasing production altogether.

6. What do I need to be aware of when selling my cows?

The key advice for any dairy producer selling their herd is to give the auctioneer as much notice as possible about the sale and provide them with up-to-date paperwork on health and production, says Livestock Auctioneers’ Association executive secretary Chris Dodds.

If producers don’t already have a herd basis election in place, they may be able to arrange it – relief is only available within two years of first ownership of the herd, says Mr Hitch. However, there are opportunities to trigger this ‘first ownership’ for example with a change to a partnership or other business structure change, such as a move to sole trader status.

Producers are advised to allow at least a year between a business structural change and selling the cows.

  • Allow up to two years planning and organising time so that the best result is achieved for the family and for tax purposes
  • Know the health status of your herd and gather as much information as possible ahead of a sale – somatic cell count, butterfat and protein levels, average yield
  • Sell your herd at the optimum time – although dairy cattle are in great demand, buyers are willing to pay more for freshly calved cows or those close to calving, however consider the tax timing too.
  • If profits are locked into cattle, ensure a herd basis election is in place. This allows the herd to be treated as a capital asset, so revenue from sales can be taken tax-free.

7. What options are there for me after dairy?

Many people ceasing dairy production choose to rent out land or do grass keep. Mr Allen warns that unless a proper budget is in place for maintenance of the farm, many find themselves with a decreasing asset value due to buildings and land falling into disrepair.

You need to think long and hard about what you will do after dairying, adds Mr Hitch.

“Will you keep farming in some form or will you cease altogether? There is a danger we see with a lot of businesses, where they sell cows and do something else, where they don’t make any money at all. It’s best to have a business plan from day one.”

  • The main choices for those remaining in farming post-dairying include heifer rearing, share farming, renewables, grass lets, beef and sheep production or forage production for neighbours.
  • Having a business plan for any new enterprise is essential. “You need a business plan for whatever your income is going to be. If you move towards a low-intensity farming option, be careful that you don’t lapse into living off the asset,” warns Mr Allen.

    More on this topic

    Keep up to date with the latest dairy industry news

    Visit our milk price crisis page

    blog comments powered by Disqus

    Most read

    Livestock academies

    More academies