5 December 1997

Quota choice not so simple

By Philip Clarke

AS the end of the milk quota leasing period approaches, many dairy farmers will be trying to decide whether to lease in before the Dec 31 deadline or buy on a fixed-term loan.

With lease values having firmed, with Brussels now expected to keep quotas to 2006 and with financiers offering structured loans spread over the same period at seemingly attractive rates, the choice would appear to be a simple one.

But things are not so straightforward, argues Axient consultant Derek Gardner. "Too often it is forgotten that leasing quota is wholly tax deductible, while the capital loan repayment is not – only the interest can be offset.

"While the p/litre quotes given in the money lenders literature look competitive, on closer inspection leasing is often a better bet."

Taking a late November price of 46p/litre for 100% clean, 4% butterfat quota, Mr Gardner estimates that a seven-year loan at 9.25% would cost 9p/litre a year, which compares favourably with the 9.6p/litre lease charge.

But, as the table shows, with an available profit margin of 13p/litre (assuming the milk is produced using extra cows, rather than just stepping up concentrates), the net cash available to the farmer after quota costs is less under the purchase option.

This reflects the higher tax charges associated with quota purchase which, at a 23% marginal rate leaves net cash of just 1.6p/litre and at 40% leaves the farmer facing a small loss.

"The money lenders are doing a very good selling job on dairy farmers by quoting their loans in p/litre," says Mr Gardner.

But the real considerations behind buying or leasing quota include:

lLong-term security versus long-term risk.

lIndividual views on quota prices over the term of the loan.

lThe balance sheet strength of the business.

lThe emotional attitude of the individual.

"These are personal matters," he says. "But whatever he chooses, the one thing that is certain is that there is not much money left for the dairy farmer at current prices for quota and winter milk." &#42

Derek Gardner… Do not forget the tax considerations when trading quota.

To buy or lease quota – which is best?


Buy* (p/litre)Lease** (p/litre)

Available margin13.013.0

Tax deductible cost-2.4-9.6

Taxable profit10.63.4

Less tax@23%@40%@23%@40%

-2.4-4.2-0.8-1.4

Surplus8.26.42.62.0

Less loan repayment-6.6-6.6–

Cash remaining1.6-0.22.62.0

*Assumes price of 46p/litre on seven-year loan at 9.25% interest, giving annual cost of 9p/litre.

**Assumes a lease price of 9.6p/litre.