Buying quota could be best alternative

By FW staff

MILK producers planning on leasing quota this season would do well to cost out the buying option as well, advises Ian Wilcock, finance manager with property consultants Bruton Knowles.

“Faced with lower milk prices, continued strength in the leasing market, and the fact quotas should be here until at least 2008, purchasing could be the better alternative,” he says.

There should be up to 700m litres coming to market this year, and producers have a range of finance possibilities including retained profit, cash assets, sale of assets and borrowed money.

“With this in mind, it is important to consider which source of funding will provide the best return,” says Mr Wilcock.

“For instance, it may be worth selling land to buy quota if production can be intensified, as this means exchanging a low returning asset for a high yielding one.”

Some of the best deals are to be found with borrowed money, he adds, pointing to interest rates at 30-year lows

Real cost of quota purchase (ppl)
Purchase price 5 yrs @ 7.25% 7 yrs @ 7.3% 10 yrs @ 7.3%
30 7.21 5.51 4.25
33 7.93 6.06 4.68
36 8.65 6.61 5.10

Long-term finance also allows a farmer to stabilise outgoings, reducing exposure to lease market fluctuations.

“But quota buyers should factor-in the tax implications. Leasing costs can be set against tax, whereas purchased quota only attracts tax relief on the interest element of the loan repayment.”

Writing-off the cost of buying quota may also have a greater impact on a farms profitability than leasing over the same period, Mr Wilcock adds.

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