*Dangers in Dairy Conversions*

Farmers converting to dairying could face the very real risk of losing money or not making enough profit to justify the change, according to farm business strategy specialist Peter Floyd.

"Banks are making plenty of cash available for conversions and expansion, but investment decisions are being made on the basis of historical tax accounting figures and best guesses," says Floyd.

"I'm afraid many farmers don't actually know their current profitability levels or returns on invested capital, so how can they justify committing themselves and their families to massive long-term debt? I am continually disappointed at the financial accounts I see from well established farmers, which do not show accurate profit analyses."//

Floyd acknowledges that buoyant dairy prices have created business opportunities, but says the costs of land, livestock and everyday inputs are also rising to meet the demand, and there is a serious shortage of labour. He points out that over 70% of dairy farmers made a book loss last season, and yet he cites dairy, sheep and beef farmers who have increased profits by 18% in each of the past four seasons.

"In terms of both profit from dry matter consumed and returns on invested capital we see a number of sheep and beef businesses doing at least as well as dairying. Farmers need to guard against buying into the cashflow mentality and using performance indicators that have a lot to do with production but little to do with profit," he says.

"Without solid financial facts and robust, proven analyses, the idea of dairy conversion becomes just another farming fad that generally ends up in confusion, poor investment decisions and disappointing profits.

*/Peter Floyd is the Managing Director of eCOGENT www.eCOGENT.biz

ENDS