The When and How of Diversification
April 19, 2017
Featured Writer: Gwen Anderson, AgChoice loan officer
There are many different motivations to diversify or find your niche. From spreading out risk, to finding a way to improve your business’ profitability, diversification is the hot new buzzword in many businesses, and agriculture is no exception.
The definition of diversification is simple and often overthought. Diversification is adding new products and services. It may sound like an easy idea but do not underestimate the action of diversifying a business, especially if your business is not healthy in today’s market.
A dairy farmer who started a successful on-farm cheese business once told me his best advice about diversification. “If you can’t take money out of cash flow to do it, do not do it.” There is truth behind this saying because, after all, the idea of diversification is often to ease a financial burden and make less headaches, not create more. However, cash flow is not the only thing you need to think about when planning to take the first step on a diversification journey.
In an ideal world, diversification is a process in which one change leads to another. With an on-farm cheese business, the “chain of diversity” might play out this way. First, you could ship your milk to an offsite maker and sell the cheese on your farm with a custom-made label. Eventually, you might make some of the less intense production cheeses on your farm site, and then you might add an aging room to sell more types of cheeses. As the business grows, you could build your own tasting room to host special groups, events, etc. The options are endless depending on your type of operation. All types of farm operations have one thing in common: to diversify, plan a systematic, well thought out process.
Market research becomes a fundamental piece to the diversification puzzle. What is your area looking for? A rural area with lower incomes probably does not need an all-organic, grass fed beef shop next door. Take stock of your community and its market potential rather than focusing on other businesses’ diversification examples. Ask yourself what products and services your neighbors would like to see offered and what they would utilize. Poll customers, take surveys or ask questions at your local general store for opinions. Many times this approach is more successful than trying to replicate how another agricultural business approached diversification. It is not a one-size-fits-all process.
In addition to the how of diversification, often solved with a dash of creativity and a pinch of market research, timing is the toughest aspect of diversification. When you are thriving, should you keep doing what you are doing? If you are struggling, should you go into a different field or diversify what you offer? Diversification requires an investment, illustrating the “cash flow is king” argument from the dairy farmer mentioned earlier. There is no set guideline to determine when the financial numbers magically align and signify the perfect time to diversify. A good timing indicator is when there is a niche that needs to be filled and there is demand for a certain product or service.
Diversification can be beneficial to the agricultural industry if you carefully consider the when and how behind the decision. The niche markets exist, but not all niche markets exist in every area. Before diversifying, review your business plan, the processes available, the market around you and the timing of any decisions. These important steps will help you make diversification decisions that are profitable, sustainable and enjoyable for your farm business.