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Independent.ie

Friday 9 December 2016

Contingency fund 'offers way to cover your losses'

Published 21/12/2011 | 06:00

Most farmers might claim to be struggling to earn enough from their business to meet day-to-day living expenses.

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However, with all the experts predicting that volatility will feature large in farming for the foreseeable future, one dairy farmer in Tipperary believes now is the time to create a contingency fund to cover another annus horribilus such as that of 2009.

Jim Delahunty, who milks 109 cows at Carrig on the Tipperary-Offaly border, told delegates at Teagasc's National Dairy Conference in Athlone that he was in the process of putting together a pot of money that will cover all household essentials for a full 12-month period.

"I got into the habit of putting money aside to cover the tax bill over the last number of years," said Mr Delahunty.

But it was when he was analysing the greatest threat to his business with Teagasc's dairy specialist, George Ramsbottom, that he hit on the idea of the need for a contingency fund to cover a bad year for milk prices.

"We were doing an analysis and realised that the biggest threat to my business is not so much disease or lack of finance. Instead, it is a low milk price year like we had in 2009," he said.

Mr Delahunty believes that all dairy farmers should be working on the basis of how they will be covered when, not if, another low milk price year occurs.

"In the past, dairy farmers were protected," he said. "Now there's really no bottom to where the milk price can go. It's a bit like stocks and shares. To be honest, I don't think dairy farmers really knew what a bad year could be like until 2009 hit us."

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If anything good has come out of his experience of 2009, Mr Delahunty feels it is that it has made him think harder about new investments.

"If you start thinking that you need to prepare for another low price year, it puts a different perspective on the things you spend on in the good year. You might be more prepared to put up with the old jeep for another year or two."

benefits

The Tipp farmer believes that a contingency fund has other added benefits.

"It will give you massive credibility with the bank to be able to show them that you've been proactive," he added. "If you can show them that you don't need to draw an income out of the business in a bad year, then I think you've a much stronger case to negotiate a switch to interest-only repayments on loans if needs be."

Mr Delahunty doesn't see any contradiction in a farmer putting aside money for a contingency fund while at the same time making repayments on loans.

"It's normal for a business to have ongoing borrowings while at the same time putting money aside in savings," he said. "There should be room for manoeuvre on bank repayments but it's harder to squeeze the household essentials. At least you'll be able to protect what's inside the kitchen door and, I believe, be in a better position to deal with what's going on outside."

Mr Delahunty feels that any contingency fund should be put in a demand deposit account where it can be accessed at short notice.

"There's no point putting it in a high-interest account that imposes huge penalties if you need to get out money in a hurry. But you should be able to get 2-3pc interest on your money and have it accessible."

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