Part 2: Advantages, Disadvantages and Major Pitfalls of Farm Diversification

Over the next few weeks on Table Talk we will be focusing on farm diversification.

In our first post, we looked at a range of farm diversification options available to producers and landholders. In this post, we look at the advantages, disadvantages and major pitfalls of diversification, and our third post in the series will highlight key issues to think about when considering farm diversification.

Then, in the coming weeks we will bring examples of farm diversification from all over Australia. Chatting to producers across the country about their initiatives has been enlightening and we can’t wait to share them with you.

Diversification is not a silver bullet and can be a very complex process, however it can also be incredibly stimulating and rewarding. It can take a variety of forms, whether agricultural or non-agricultural.

Agricultural diversification includes the introduction of a wider range of output options within a traditional farming enterprise. For example, prime lamb production added to wool production, or the introduction of non-traditional crops and livestock such as agroforestry, deer farming and aquaculture.

Non-agricultural diversification includes enterprises such as farm-based accommodation and recreation, on-farm processing and or direct marketing of food and fibre, and passive diversification where land and/or buildings are leased for non-agricultural purposes.

Value adding is a form of non-agricultural diversification, where the farmer takes control of processing and or marketing of their primary product in order to capture the value that is added as the product moves along the production chain towards the final marketed product. (AgriFutures Australia)

Farm diversification is encouraged in Australia so it is key to understand both the advantages and disadvantages of this approach.

Advantages of farm diversification

Some advantages of diversification include:

  • Spreading risk

Most people have heard the phrase “don’t put all of your eggs in one basket.” There are several meanings behind this phrase. One meaning suggests that the basket will be too heavy to carry while another is that if you slip or fall, you may break more eggs if they are all in one basket. For agriculture and business, I prefer the second meaning. If you are only engaged in one enterprise (growing corn for example) and have a crop failure, it will be more devastating than if you grew more crops. By diversifying, you are spreading the downside risk over more than one enterprise.

  • Cash generation
  • Adaptability

Adding a new activity will help to build flexibility into a system and may help you make future changes to your farm business and respond to new market opportunities as they arise.

  • Better resource utilisation as farm labour can be utilised year round
  • Increasing interest in the farm/income for other family members
  • Learning new skills and adding variety to workflow
  • Developing an understanding of where personal strengths lie
  • Being a part of new networks
  • Crop diversification can reduce erosion, improve soil structure, conserve moisture and create new markets.

Disdvantages of farm diversification

Disadvantages include:

  • Significant financial outlay
  • Can often increase risk due to increased demand on time, management skills and other resources
  • Increased workloads with subsequent less ‘free’ time leading to increased stress and inability to meet outside responsibilities
  • Too much diversification can lead to mismanagement and conflict between business members
  • Failing to use good management accounting can lead to an inability to understand which profit centres are performing
  • Potentially significant negative financial and social consequences if fails or affects the core farming business
  • Difficulties associated with marketing and distribution of the new product and unfamiliarity with the new supply chain.

Pitfalls to avoid

Struitt and Parker outlined a number of pitfalls of farm diversification and how to avoid them:

  • Weak core business

Rather than seeing diversification as the answer to a problem, you still need to have a strong core business underlying it. Their advice is to first focus on getting core business in shape, perhaps through bringing in an external consultant.

  • Poor market research

When making any business decision, sound market research is key. Taking your time, research the market, competitors and pricing is important.

  • Not having the right skills

Struitt and Parker state “Just because you can produce it, doesn’t mean that you can produce it well or know how to sell and market it.” They suggest that you have two main options: retrain yourself so you’re equipped with the right skills and knowledge to manage the new arm of your business; or hire in someone with the skills. These both cost money so should be factored into your business plan.

  • Lack of infrastructure

Farms have significant existing infrastructure, but this might not be suited to your farm diversification idea. Access and connectivity are key for many types of business opportunities, which may be a large barrier to entry for many.

  • Upfront costs

Lack of access to finance may be a barrier to diversifying. However, there may be suitable funding out there to assist. Check out our Funding and Grants database to see if anything may suit.

  • Planning hurdles

If new business premises are needed or you are selling directly to consumer, you may need development approval and consider new laws and regulation that are new to you.

Catch up on our first post here and stayed tuned for our next post in the series.