Milk Matters
By Christine Pedersen Senior Dairy Business Consultant The Dairy Group
christine.pedersen@
thedairygroup.co.uk www.thedairygroup.co.uk
SLURRY INFRASTRUCTURE GRANT SCHEME DEFRA announced the details of the long-awaited Slurry Infrastructure Grant in December. The grant will run over multiple years to give as many farmers as possible in England the chance to upgrade their slurry systems. Grants of £25,000 - £250,000 are available to help replace, build additional or expand existing slurry stores to provide 6 months’ storage. Farmers can apply for a Slurry Infrastructure Grant if they farm dairy, beef or pigs and their farming system already produces slurry. The grant can be used for slurry stores including tanks, lagoons and concrete stores fitted with impermeable covers (fixed or floating) or large permanent slurry bags. The Slurry Infrastructure Grant cannot be used for a cover alone although farmers can apply for a self-supporting or floating cover through Countryside Stewardship. The Slurry Infrastructure Grant will also fund items necessary for the basic functioning of new or expanded slurry stores, such as reception pits, slurry pumps and agitators. The grant uses standard costs i.e., a fixed contribution towards the cost of the items and the planned storage. Farmers will need to finance the balance of costs. Stage 1 of the application process: Before completing the online
checker, applicants must have a good understanding of their current and future slurry storage requirements. The AHDB Slurry Wizard can be used for this. The next step is to use the online checker to see if they’re eligible and to check how much grant they might get, based on their storage needs. If demand is high, RPA will prioritise projects that have the greatest environmental benefit, based on location. The online checker closes on 31 January 2023. Stage 2 of the application process: If eligible and their project is
prioritised due to its environmental benefits, farmers will be invited to make a full application which will result in a grant offer if it is eligible and all the conditions are met.
Further details of the scheme can be found at:
www.gov.uk/government/publications/slurry-infrastructure-grant
FARM FINANCE Ongoing investment plans (including slurry storage and handling) and the successive rises in interest rates in 2022 means that my colleagues and I have been reviewing farm finance options. Debt can play two very different roles in the life of farm businesses. Farms that are overwhelmed by debt find that they have very little cash available to meet their monthly commitments, which is very stressful. On the other hand, debt allows farmers to exploit economic opportunities, meet regulatory requirements or weather unexpected circumstances. A healthy relationship with debt is essential for peace of mind and places a farm business in a position of readiness when new opportunities or threats emerge. There are three really simple but effective measures to establish
the health of a farm business and its relationship with debt. The first is return on tenant’s capital. Return in this context means net profit with all finance charges added back to the profit. Tenant’s capital refers to all the assets that a tenant would typically own, such as machinery and livestock. By adding back finance charges and considering only tenant- type capital, comparisons between farms can be made regardless of whether they are owned or tenanted and regardless of their level of debt. Farm businesses should target a return of at least 20%. A second measure, the debt coverage ratio, considers the farm’s
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ability to generate sufficient cash to meet its commitments as well as capital and interest (bank debt) repayments. EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) is a measure of the cash generated by a business and so is a starting point that banks frequently use to calculate the debt coverage ratio. The debt coverage ratio is the cash available to service bank debt divided by total bank debt repayments (capital + interest charges). It is obviously important that this ratio is greater than 1, but a ratio of 1.5 or more is healthy. When banks extend new finance, they typically expect this ratio to be at least 1.25 (including the new debt) after stress testing at higher interest rates (lenders have recently been stress testing at rates as high as 8%) and at lower milk prices. If a business has a debt coverage ratio already close to or below 1.25, securing finance will be challenging. Banks look at three-year averages from farm accounts, so having a trading history that demonstrates a healthy debt coverage ratio is important otherwise robust forward budgets must be presented that demonstrate strong debt coverage. The third measure, loan to value, measures the ratio of all debt (HP
and bank loans) to the value of land and immovable assets (buildings and improvements to property) and therefore applies to farm owners. To get a proper measure it is important that land and improvements have been
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