Superlevy – Managing a Difficult Situation to the Quota Year End

by IFA National Dairy Committee Chairman Kevin Kiersey

At last week’s Ploughing Championship, the 2011/12 superlevy situation was one of the most pressing topics raised by dairy farmers.  While IFA is continuing to press for a “softer” landing and focussing on the EU Commission’s end 2012 review, National Dairy Chairman Kevin Kiersey stresses that there is no prospect of changing the current year’s  rules.  He also outlines the Committee’s recommendations to help farmers manage a difficult situation to the quota year end.
WHAT IS SO DIFFERENT THIS YEAR?
With relatively high milk prices and good production conditions, January to July milk production rose by 11%, 7.7% for July production alone.  Quota utilisation has been much higher than usual, and since April, deliveries over quota have evolved as follows: End April: 9% over quota; end May: 4.92%; end June: 4%; end July: 3.76% over and end August: 2.82% over quota.  Recent surveys show that no co-op is currently under quota.
A rising number of producers are exceeding their entire annual quota, a handful of who have very small quotas, and would have operated on this basis without ill-effect for the last three years.
As both the national and co-op superlevy situation is worsening rapidly, co-ops have started levying farmers in order to make sure that funds are available to pay fines – the legal liability for the fine is the farmer’s – and also in order to encourage them to reduce their exposure.
IRISH FARMERS HAVE PAID SUPERLEVY MANY TIMES SINCE 1984
In the last 10 years alone, Irish farmers incurred four hefty bills (see table below).  For a farmer to face a superlevy bill, the country needs to be over quota, the farmer’s own co-op needs to be over quota and the farmer him/herself must be over quota.  Any one of these links missing means the farmer will not have to pay superlevy.  Fleximilk provides some limited leeway at year end.
The disastrous year of 2009 saw Irish supplies dip 10% below quota, and some started to believe that there would never again be a superlevy problem for Irish farmers.  Some producers have taken the risk of not adjusting their production to their available quota, and have produced at will in the last three years.
However, as all indications from the industry are that we will exceed quota by 31st March next, co-ops have, as they are entitled in law, begun collecting the 28.66c per litre fine early from those farmers who have filled their entire annual quota.   Those farmers are effectively looking at the bulk of their cash flow disappearing, with serious consequences for their other financial commitments, to say nothing of the day to day needs of their family.

Year Available Quota (billion litres) Milk Deliveries  (billion litres) Quota Position Actual fine incurred – €
2001/2002 5.23 5.24 0.20% over quota €3.13m
2002/2003 5.23 5.22 0.18% under quota
2003/2004 5.23 5.26 0.54% over quota €9.58m
2004/2005 5.23 5.28 0.85% over quota €15.13m
2005/2006 5.23 5.14 1.76% under quota
2006/2007 5.23 5.22 0.26% under quota
2007/2008 5.24 5.28 0.75% over quota €11.18m
2008/2009 5.34 5.21 2.52% under quota
2009/2010 5.39 4.84 10.34% under quota
2010/2011 5.45 approx u/a 0.43% under quota  approx

RECOMMENDATIONS FROM THE NATIONAL DAIRY COMMITTEE – HOW TO MANAGE A DIFFICULT QUOTA YEAR-END
To assist individual farmers in cash flow difficulties linked to superlevy, and to help with a pullback which will hopefully reduce, or even remove the superlevy threat altogether, the IFA National Dairy Committee has made the following recommendations:

  • Approach your co-op early to check your and their quota situations.  IFA has contacted all co-ops to ask them to help minimise the cash flow pressure on farm families, including by modulating the amount of levy applied early, and dealing with over-quota farmers case by case if necessary.
  • Seek quality production management advice from your farm advisor to find the best way to reduce your production and your superlevy exposure (once a day milking, feeding protocol, strategic herd reduction, etc.).
  • Seek advice from a Teagasc or private consultant to review the farm’s medium term business plan, including all incomings and outgoings, cash flow, repayment capacity, day-to-day family expenses, and sustainable exposure to superlevy.  IFA has met with banks in recent months, and they have indicated they would work case by case with farmers.  Farmers with cash flow difficulties should approach their banks as soon as possible.
  • Consider reducing stock numbers temporarily at least to adjust production closer to quota.  Selective culling could also help farmers address some of their somatic cell count problems.  There is currently a strong market for milking cows in the UK and Northern Ireland, which could help secure some cash.  The option may also exist to lease cows to a fellow-dairy farmer with unused milk quota.  Please note the relevant animal health regulations as the cows must be moved to and milked on the lessee’s holding for the duration of the lease.
  • Finally, we have heard of farmers buying land and quota, reselling the land immediately and retaining the quota.  While this is not currently against the letter of the law, the quota prices reported to us far exceed the superlevy fine, and such transactions could have significant implications from a taxation point of view and for other important farm schemes.  Milk producers should be very weary of engaging in such costly and risky transactions.

To further help dairy farmers manage their short term situation, IFA has approached the Department of Agriculture to bring forward the second phase of the Temporary Leasing Scheme, and the Milk Quota Appeals Tribunal’s temporary quota allocations for farmers affected by animal disease.  Both are currently months away, and will likely be oversubscribed, but bringing them forward should help farmers make decisions earlier.
ONLY A PULL BACK BY ALL CAN MINIMISE OR ELIMINATE THE THREAT OF SUPERLEVY
Milk deliveries to the end of August, at 2.82% over quota, have shown a small improvement compared with end July (3.76% over quota).  However, this should not be a reason to take the foot off the brake.  Our superlevy situation is determined by the myriad of individual dairy farmers’ decisions: no-one can bank on what others will do, but with everyone’s co-operation it is still possible to minimise or avoid superlevy by next March.

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