Part 3: 5 steps to consider before diversifying on farm

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 our second post, we looked at the advantages, disadvantages and major pitfalls of diversification, and today we highlight  key issues to think about when considering farm diversification.

Most of the resources we examined relating to farm diversification stated that starting with your long-range vision in mind is key. A succession expert and chartered accountant advised:

  • “What do you see this looking like in 20 years?  Line up the business structure with that future vision.”

The other advice is to ask the question, Why?:

  •  Is it about profit? Or to more effectively use your resources? Perhaps to reduce risk?

If it’s unprofitable, it’s a hobby

Recommendations from interviews with 25 Victorian farmers who have diversified were:

  1. Take into account life stage/s
  2. Estimate the workload involved in your chosen diversification
  3. Spend some time with your family discussing your tolerance for risk and debt
  4. Consider investing off-farm as well to provide a reduction in vulnerability to market fluctuations
  5. Spend some time understanding the priorities of your family
  6. Research and network with other farmers and business people already engaged in this activity consider whether the diversification complements and/or integrates with your existing business.

Agriculture Victoria list five steps to consider if thinking about farm diversification. They are:

Step 1: Compatibility

It is easiest to act upon an idea that is highly compatible with what is already being done. It is harder to diversify into a completely new opportunity.

Step 2: Observing

Observing an activity can enable you to assess complexity and risk. Understanding the product lifecycle, learning from other’s mistakes and speaking to as many people as possible is key in this step.

Step 3: Trialling

Trailing on a small scale reduces financial risk and enables you to learn and refine.

When a diversification activity is trialled on a small scale it will have high average costs of production. As production increases average costs should begin to fall and can potentially reach a minimum efficient scale where in the long run, average costs can be minimised.

Step 4: Complexity

The more complex the idea the greater the changes needed to fit the idea into an existing system. As complexity increases, the risk of failure increases. As complexity increases, the need for, and the costs of gaining additional knowledge increases.

Complexity can be understood through three lenses:

  • Technical complexity
  • Financial complexity
  • Marketing complexity

This table from Agriculture Victoria summaries the relationships between different levels of complexity, different types of complexity and barriers to entry into different activities.

Step 5: Resource Advantage

What is your resource advantage? Resource advantages can increase your chance of succeeding and can fall into the following categories:

  • Financial resources: Access to cheap finance, Disposable income and cash reserves, Off-farm income, Access to competitively priced inputs, Financial model of the current and new enterprise applied to the business
  • Physical resources: Soil type, water, temperature, altitude, vegetation, Machinery and equipment, Access to quality roads, Access to power, Proximity to other businesses providing support services such as cool stores, packing sheds, abattoirs, Proximity to markets
  • Human resources: Skills associated with the business, Access to people with specialist skills and knowledge, Disposition to risk, Access to labour, Ability to plan, Predisposition to continuous improvement, Ability to learn from experience and innovate, Competency to harness & develop the existing resources base to deliver value, Strong industry leadership or champion
  • Organisation resources: Strategic long-term approach, Business reputation, Culture of quality management, Industry structure.
  • Information resources: Knowledge of the supply chain customers and consumers, Knowledge of the market forces, Knowledge of competitors strengths and weaknesses, Systems to make best use of information, e.g. IT systems, Access to, cost of, and ability to analyse information
  • Relational resources: Degree of integration of production, processing and marketing, Vertical relationships with suppliers and customers, Horizontal relationships with other producers, Geographic concentration (or dispersion) of producers, input suppliers, buyers, Relationships with advisory services
  • Legal resources: Trademarks, licences, copyright, Proprietary information, intellectual property, Ability to brand the product and be recognised by customers and consumers, Exclusive marketing arrangements, Regional branding activities, Legal structure associated with organisation, Degree and usefulness of government regulation, trade policy, tax incentives, subsidies, etc.

Further Reading

This UK government resource assists farmers to understand how they can add business activities to traditional farming to develop new sources of income. helps you explore different enterprises that could help generate additional income.

AgriFutures Australia’s report sets out a series of 10 whole farm case studies across Australia. The case studies examine the costs and benefits of diversification. It is a little dated, but the financial cost benefits and investment analysis is a rare find.

The case studies are from:

Each study also has a detailed cost benefit and financial analysis.

Access our previous posts here:

Over the next few 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.