Diversification of Your Operation, Why

By diversifying, you are spreading the downside risk over more than one enterprise.
Diversification of Your Operation, Why - Articles

Updated: August 8, 2017

Diversification of Your Operation, Why

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.

In general, diversification refers simply to an increase in the number of enterprises operated on the farm. In practice, this may take several forms. You may grow more than one field crop to spread the work over a longer planting and harvesting season. You may spread the risk over more than one enterprise (such as livestock), or you may add value to a crop you currently produce. Another method of diversification is to utilize your resources to their optimum level. This may take the form of custom planting or harvesting, storing grain for others, or utilizing existing labor or management abilities to their best advantage.

If you are currently struggling to meet your cash flow demands, it may not be a good idea to try something new. Trying to learn new crops and production methods may stretch your management abilities and many new enterprises may not be profitable the first year. You will need to learn all of the new practices and methods while trying to be profitable. Start with a small plot (1 acre or less) the first year and grow the enterprise as you develop the new skills. You should also be developing your marketing plan while starting the small enterprise.

Because of crop rotation and replenishing soil nutrients, growing more than one field crop is highly recommended. Planting small grains before row crops may enable you to produce two crops on the same land within a twelve month period.

Adding a legume crop into the rotation will help raise nitrogen levels in the soil and increase the organic matter within the soil structure. This also spreads your time over several crops allowing for better use of management overhead. Adding livestock to an agronomic crop business may benefit both enterprises. The benefit to the agronomic crops would be to have manure to spread on the fields to reduce the amount of purchased fertilizers and increase organic matter. Your farm or ranch may have slopes too steep to plant in crops and the livestock could utilize this land. For the livestock enterprise, you may not need to purchase all of the grain to feed the animals. The livestock may also provide income for months in which no grain is sold, thus producing better cash flow for the business.

Many producers have the equipment necessary to accomplish all of the tasks for their enterprises. Smaller producers may be unable to purchase this necessary equipment because of cost. If you have excess machinery capacity, you may diversify your operation to include custom hire for others. This will make better use your equipment, labor, and management resources throughout the year. There are many times a farmer or rancher wishes they had larger or more equipment to complete their tasks in a timelier manner. Being poised to do custom planting, harvesting, or hauling may increase your income and profits for the year.

Diversification may also take the form of adding value to existing production. You may have the expertise within your farm or ranch operation to be able to make pies from fruit crops, cider from apples, or direct market fruit or vegetable production. Anything you do to increase the returns for production you have. Or you may venture into agritainment if you have a member of your team who enjoys working directly with the public.

Market diversification is another positive practice. Some farm or ranch businesses such as dairies may not be able to take advantage of marketing to several cooperatives. However, forward contracting a portion of your production would be a form of market diversification. Grains may also be forward contracted to take advantage of higher prices throughout the year. Fruit and vegetables may be direct marketed (if you have the varieties demanded by consumers) or sold through local stores or farmers' markets.

The goals of diversification are to protect against downside risk and against cash flow problems and better utilize your land, labor, and capital. Diversification also spreads the risks associated with your farm or ranch business over a greater base. If you keep your income levels constantly increasing, you may be better poised to withstand a disaster without relying on a disaster program to supplement your income. Insuring your crops, livestock, or revenue, will also help accomplish this goal. Through insurance policies, you are paying someone else to assume a portion of your potential risks. However, not putting all of your eggs in one basket is also a good idea.

Prepared by Lynn F. Kime, senior extension associate - Penn State and Dr. Jeffrey Hyde - Penn State

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