Show caution when weighing up investment,farmers told
Teagasc chief dairy advisor Dermot McCarthy has warned the country’s dairy farmers that “any significant investment should be carefully evaluated” and they must prepare a cash flow analysis to see if the level of repayment being committed is feasible, if they are to avoid getting into difficulties as income tightens on the most profitable farming sector traditionally.
Investment in buildings and machinery must be minimised while cash is scarce on the farm and so as to avoid getting into difficulty with meeting repayments from investments which are not profit yielding.
He has advised the dairymen that the long term borrowing capacity of a 50,000 gallons quota producers is at best 50,000, provided that he has no other borrowings on the farm and additional indebtedness will be avoided for the foreseeable future.
Mr McCarthy said that to ensure that they can keep their business operating profitably, they must see the potential for a minimum return of 5%/annum on their investment.
“Currently I believe that there is limited potential for capital gain in the short and medium term for most asset classes. This means investments must earn a sufficient rate of return in the short term through additional profits to justify the investment.
“Some property developers currently work on a rate of around 7%. In the case of farm investments with a potential for long term growth, I suggest that a return of 5% should be the minimum requirement, but ideally we should be looking for 7-10% return,” he said.
He has warned farmers to be on their guard against difficulties in cash flow to meet capital repayments to the lending institutions under term loans stressing that “there is no tax relief on such payments” and the repayment of the capital must be financed from after tax income, which can become an added difficulty for farmers with heavy annual repayments to meet. Mr McCarthy has advised the farmers to concentrate available investment potential on the profit earning sectors in the current period of tightening margins.
He was speaking against the background of a fall of 20% in the income of dairy farmers in 2002 and the market outlook for dairy products continuing to look bleak for at least the first half of 2003, while processors will have increasing difficulty in trying to maintain the same level of price support to producers in the current year.
