Expanding a dairy business affects business and financial risk

Australia's dairy farmers have expanded the size of their businesses in response to rising costs and falling prices. Dairy farmers pursuing increases in wealth encounter a greater risk associated with increased size, complexity and output. It is the consequences of risk that matter. Risk in a farm business can be partitioned into either business risk or financial risk. Previous research on changes to farm systems has primarily focussed on the impact of business risk, with less regard for financial risk. Our analysis has shown that expanding a farm business is likely to increase financial risk more than business risk. Before committing to the decision to expand their businesses, dairy farmers have control over the amount they borrow and, thus, some control over the exposure of their businesses to additional financial risk. Knowing the extra risk associated with extra debt is additional information that contributes to more informed decisions. In this research, an approach to assessing the change in business and financial risk associated with different expansion options is demonstrated.