What to think about in growing your farm or ranch through diversification

When the COVID-19 pandemic hit, many in agriculture diversified into new ventures to keep the lights on. But it doesn’t take a world-changing event to create new opportunities through agricultural expansion or diversification.

Agricultural expansion or diversification to include owning farmland, raising different crops and livestock or creating new ventures can create a lot of openings for new revenue streams. But it also can create new risk. Understanding and protecting yourself from that risk is the start of a good to-do list to prepare to diversify or grow your farm or ranch.

Ways to diversify a farm or ranch

Every ag business has its strengths and weaknesses. Think about those in exploring feasible farm expansion and diversification prospects for your specific land and assets. Ultimately, it takes a full view of what you’re good at and the pieces you have in place to make it happen. This includes:

• The right fit. There are countless ways to diversify or expand a farm or ranch. Find the option that will work best in your specific situation. A few options include:
  • Expanding your herd with bison
  • Entering into value-added beef agreements
  • Adding agritourism to your farm or ranch
  • Diversifying with Christmas trees
• Your risk tolerance or aversion. Are you willing and able to manage the risk of a new venture on your operation?
• Market opportunity for a new addition. Is there a market for what you intend to produce, sell or offer customers in your diversification plan?
• Revenue and growth prospects. Do you hope to generate positive cash flow immediately? What is your long-term plan?
• Adherence to farm laws and regulation. Will your diversification or growth follow local, state and federal farm law?

Think about up-front agricultural expansion costs

Some ways to diversify or grow may leverage your existing assets like farm machinery, buildings or farmland. Others may require capital purchases that may prevent immediate revenue creation. Having a good idea of the assets you need to make your diversification happen will help you get a feel for the revenue you can expect.

“When we think about diversifying our family farm operation, we tend to think about creating additional revenue streams with existing equipment, land and buildings first,” said Nationwide Agribusiness Senior Consultant Erin Cumings, who also farms with her family in Warren County, Iowa. “When we consider adding new revenue streams that will require additional investment, we tend to be pretty conservative, because every dollar spent on new equipment, for example, is one dollar less we’ll generate in revenue. It’s important to think about and have realistic expectations.”

Mitigate and manage risk with farm insurance

In most cases, the more you increase revenue, the more risk exposure you create for yourself and your operation. Once you’ve identified the most feasible way to diversify your operation, make sure you’ve got the right risk management strategy and insurance coverage in place.

"When revenue potential grows, so do your insurance needs. With any new venture, you need to get a feel for the risk you face, because it may vary widely from what you already are exposed to,” Cumings said. “It’s all about how much risk you’re taking on in diversifying. Think about your property and any safeguards you need to protect yourself from personal liabilities and property damage and don’t forget to protect your revenue stream with loss of income, disruption of farming or business income coverage.”