Dairy Quota Purchase

[lsaken]

Looking for comments regarding the cost of dairy quota lately and the length of time required for payback. My best calculation show all revenue generated applied to bank loan will take 10 years. Can this even be an option? If not, any other ideas for dairy producers in an overquota situation besides OEP'S?

[lang]

By my calculation if you applied 100% of the revenue to the quota purchase it would take 6 years to pay it off. I used a price of $60 per kg. Our studies show that your operating expenses would be between 50% and 55% of revenue for a dairy operation so only 50% of revenue would be available for debt service. This would require 16 years to pay off.If you still wanted to pay yourself the amount you should be using for debt service is about 33% so the loan would not ever be repaid as you cannot cover the interest at that level. Right now with quota so high it may be beneficial to look at other enterprises that generate a better return than that.

[purdy]

If we assume a $900 per litre cost for fluid quota,and interest rate of 8% and financed the full cost over 10 years, you would need to payback $10.86 per month. The purchase of 1 litre of fluid with a utilization rate of 87% alows the operator to deliver 0.87 litres per day or 26.50 litres per month meaning $0.41 per litre in debt payments. If we use net return of $0.30 per litre after variable costs, this means for an average operation that the existing milk sales would in all probability need to subsidize the payments by approximately $0.11 per litre.We need to look at individual operations to determine the economics as there are vast differences in production levels, costs of feed, upkeep and maintainance, and therefore to how much debt each can support. But from the economics of say getting started in the dairy business, a high level of equity is required to keep term debt service payments to under 40% of sales. I am not certain on the use of OEP. and generally speaking if your variable costs of production are less than the OEP price, it may make sense. Keep in mind that this is variable costs not all costs.