Finding success in diversification

Multiple streams of income can bring financial success for any business owner. Agriculture is no different. Evolution is important if you want to “stay in the game.” However, a game plan is vital for those who wish to do so.

Diversification can be driven by several factors, says Penn State Extension Dairy Educator Ginger Fenton, Ph.D. She was joined in a recent presentation by Sarah Cornelisse, senior Extension program specialist, and Assistant Professor Becca Weir to discuss diversification for dairy producers.

Some operators might be looking to absorb or reduce financial risk factors. Some might be looking to strengthen their existing farm operation’s portfolio. Perhaps there are underutilized resources at play or surplus product that needs an outlet. There is also the promise of a better quality of life. Hypothetically, increased income means less financial anxiety.

Diversification can mean any divergence from the current business plan: a pivot in production or milk market (switching from a grass-fed operation to organic). It can involve the creation of value-added products like cheese, butter and ice cream. It can involve the introduction of additional crops and livestock – beef, poultry, corn or soybeans. It can look like opening the farm to agritourism: U-pick operations, farm tours, farm stands and markets, farm stay accommodations and more.

There are also those who engage in custom work – any work taking place off-site from the farm. Fenton gave examples of manure hauling and trucking milk.

It all qualifies as diversified income.

Statistically, younger farmers are more likely to diversify. They benefit the most in real time from technological access and are often more equipped with the network to facilitate any new initiative.

What are some of the challenges? A diversified operation can require year-round input, especially in its infancy. There might be limited financial resources available. There might be contractual limitations with an existing co-op or other market collaborators, reflected in territory boundaries and non-compete clauses.

Navigating the proper licensing and certifications with the state can be challenging. Sometimes, a farmer might lack the specialized knowledge needed to produce the product or service – and they might have to deal with a less than supportive team or family.

Evaluating the current operation is important. Couch any discussion about diversification with the caveats that not every farm should diversify – they’re simply not equipped for it – and a solid foundation and sufficient preparation are more important than creativity here.

This is a time of introspection for the farmer. What are their goals? Is it to increase the farm business’s income and stabilize revenue streams? Is this a strategic investment in the operation’s long-term growth and opportunities for the next generation?

Reactive answers (as well as the absence of an answer) are cause for concern – “keeping up with the Joneses,” concerns over milk prices and other market indicators, etc. However, operators can feel secure if there are clearly defined goals in mind, like “I want to improve the business’s financial stability with another stream of income.”

Ask “Do I have the capacity – physically, financially?” Adding this new enterprise will result in increasing complexity, with front-loaded investments of time, finances and more to get started.

Who is going to manage this enterprise – the farmer or a team member? Do they have the capacity and resources to do so and balance existing responsibilities? Does any delegation need to happen?

What resources are available? Think equipment, land and facilities, existing skillsets. Time is one of the biggest assets for a farm owner – avoid overestimating available time and stretching yourself and your farm team too thin when examining this new project.

What is the status of the farm’s existing operations? “Diversification is not a Band-aid – it should support what is already in motion,” one of the presenters noted. Use some of the same introspective questions to evaluate the farm: what is the status of any current facilities? Are they adequate or in need of repair? Do any major operational issues exist? Is the current business model profitable? Can current operations support those front-loaded investment costs of a new project?

Finally, has the entire farm team been included? Is everyone in agreement and aligned with long-term goals? Being on the same page as a team is paramount to the success of any diversified effort.

The next step? Brainstorming with those essential team members – family, farm partners and workers. Create an environment where everyone can think big and suggest without judgement, no matter how far “off the path.” Document the process exhaustively via a note taker or simply record the conversation. For ideas, explore existing industry resources together. Examine gaps in the market together. Revisit notes from the initial evaluation stage.

Run each idea through the same sieve: “Does it align with the farm’s values and goals? Does it leverage existing assets? Is there genuine market demand? Do I have or can I acquire the necessary skills to do this?”

Rank the top two or three ideas for further analysis. Cornelisse shared the idea of a “business idea scorecard” – sorting each idea into subcategories of evaluation criteria (market need, market size, profit potential, competitive advantage, ease of implementation, etc.), a weighted score and notes/evidence of those findings in action.

This criterion provides a deeper window into the idea’s viability. Based on the ranked outcome of the scorecard exercise, move forward with the leading options that make sense for your operation. The next steps? Conduct a detailed feasibility study to continue to boil down your list to that golden idea. Assemble the project team. Develop a business plan.

A 2023 article from Penn State Cooperative Extension titled “Developing a Business Plan” has some great pointers for those wondering “what’s next.”

Fenton stressed “diversification should not be reactionary. It can be a strong business strategy, but it should be carefully considered and implemented. Readiness is more important than creativity. Asking the tough questions early will eliminate hiccups down the road.”

by Andy Haman