Some farmers suggest the expansion in dairy processing facilities won’t happen at all because there will be no money available to fund the huge amount of investment required.

Glanbia and Dairygold alone have plans for investing over €300m over the coming years in new milk drying facilities. IFA suggest that the benefits of profitable on-farm and industry expansion in dairying far outweigh the investment required but availability of funds to kick-start this expansion could be an issue and a tax incentive scheme could help.

IFA, having worked with a group of industry representatives and taken advice from Deloitte, are proposing that farmers or non farmers investing in qualifying milk processing investments would be allowed a 100% deduction against total income in the first year with the relief at the marginal rate of income tax (41%). They are also suggesting that if the individual had insufficient income in a particular year that the deduction could be carried forward into following years.

We already have an existing tax relief scheme under the Employment and Investment Incentive Scheme (EIIS), but, given the level of investment required and the size of the respective milk processors, the relief via the EIIS would not be available.

Why look for tax

incentives?

IFA estimate that approximately €1.5bn will have to be spent on Irish farms to deliver the extra milk, and €392m needs to be spent on additional and/or rationalised processing capacity, marketing, R&D, etc.

In summary, the dairy farmer is being asked to carry a lot of investment on top of already increasing input costs.

Given the national credit crunch and dairy market volatility, funding these major investments will prove challenging. Processors’ profitability will determine how much they can borrow and, without some contribution from farmers, securing finance to fund this scale of investment will be a struggle.

Irish processors have indicated that banks and financial institutions will support investment but not 100% of the funds required, and they like to see farmer shareholders investing as proof of commitment by the sector.

IFA suggest that the investment scheme should be open to farmers and non-farmers. They propose that 30% of the overall cost of the capital spending required could be obtained through such a tax relief scheme from dairy farmers and other potential investors over an eight-year period. This would amount to approximately €118m (30% of €392m) and hence the tax revenue foregone would amount to €48m between 2013 and 2020.

IFA claim that this amount of revenue waived would help to create significant additional economic activity. There would be opportunities for greater employment, further output value, increased export revenue and, ultimately, higher tax returns from increased farm incomes, dairy processing profits and extra jobs which would make the tax incentive scheme more than self financing (Figure 1).

9,400 extra jobs

IFA estimate that the dairy industry expansion has the potential to create over 9,400 jobs, mainly in processing and construction.

In the short term, the expansion plans will give rise to increased employment in building the new plants, as proposed by Glanbia and Dairygold.

On top of this, a potential extra 380,000 cows on Irish dairy farms could create an additional 1,400 full labour units on farms.

A recent UCD study showed an employment multiplier of 1.5 in the rural economy for every labour unit in farming. Therefore, it is fair to assume an additional 930 jobs in ancillary services. The final increase in extra jobs comes from creating 1,000 jobs in processing additional beef output from the growing dairy herd.

Export revenue up 52%

If cow numbers continue to increase, as they have in the past, based on projected statistics of extra heifers and yield increases, and assuming continued reasonable levels of profitability over the period, then realistically we can produce approximately 52% more milk by 2020.

If we assume that all will be exported from Ireland, then this will lead to a €1,303m increase in export revenue.

Extra tax take

If more people are involved in the building sector, then this will have a beneficial effect on the national exchequer through savings in dole payments as well as increased tax revenue.

IFA estimate that could increase tax revenue by €16.5m in one year alone. Additional on-farm jobs could increase the tax take to €9.3m up to 2020 and savings in the social welfare budget could amount to €92m between 2013 and 2020. All other associated jobs would generate a further €142m in tax revenue by 2020. The extra tax take on extra milk output could be €24.5m and increased profits from processing companies could be approximately €14.3m between 2013 and 2020.

GOVERTMENT SUPPORT

IFA are in discussions with the Department of Finance and the Department of Agriculture on this proposal. They have requested meetings with the respective Ministers in advance of the 2013 budget to seek their support, and hope those meetings will take place over the coming weeks.

IFA national dairy committee chairman Kevin Kiersey said: “The proposed scheme will almost certainly require approval from the EU Commission. However, the first step towards this is to obtain support from our government. In light of the huge contribution we have shown the sector can make to the economy, we believe our government cannot ignore our proposed loan scheme.”

Key Points

IFA proposing a tax incentivised loan scheme for those (farmers or non-farmers) who want to invest in milk processing expansion.

IFA estimate that approximately €1.5bn will have to be spent on Irish farms to deliver the extra milk, and €392m needs to be spent on additional and/or rationalised processing capacity, marketing, R&D, etc.

Securing farmer and other investor finance through such a loan scheme would clearly be key to unlocking bank finance for the dairy processing sector.

This would help to ensure the sector’s potential is optimised in the best interest of the Irish economy as a whole, delivering additional milk output, jobs, export and tax revenue.

A tax incentive scheme would mean that Revenue would lose out on €48m up to 2020 but the extra tax benefits of producing and processing extra milk amount to almost €300m between 2013 and 2020.