Why Not Try to Diversify?

Friday, October 21, 2022

'There are tremendous opportunities to profit'

By Geoff Geddes

Though there are exceptions (remember Cheetos lip balm?), diversification can offer many benefits. In an industry challenged by droughts and floods in recent years, extra income streams may be a welcome addition for producers. As with any aspect of farming, however, success hinges on knowing where you're headed and crafting a plan to help you get there.

"There is no magic recipe for diversification," says Steve Duff, chief economist, Strategic Policy Branch, Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) in Guelph. "It tends to be a very individual matter, and there are a few things for producers to consider before going that route."

As a starting point, what kind of income or cash flow do you require?

"Where it's a matter of needing off-farm income to support the operation, that often meant historically that the husband continued farming while his wife used her previous training to return to work as a nurse, for example."

If the business is not struggling, but you just want to maximize your return from the farm, how much time and effort are you able to devote to diversification, and when is that time available to you?

"Finally, you have to assess your farm operation and your own abilities and determine what skill sets and resources you can apply to generate more income," says Duff.

Tapping opportunity

An example of using existing assets is the farm with a maple tree on site. Selling maple syrup is a seasonal business, generally running from mid to late winter through early spring. This makes it an increasingly popular option for producers following harvest, or for dairy farmers with time between milking sessions.

Another attractive choice might involve a woodlot, which could support the sale of wood for heating or cedar poles for fencing.

"Certain producers will simply 'push the bush' (bulldoze the woodlot and use the area for crop land), yet the volatility of crop prices prompts others to find alternate uses for that wood," says Benjamin Hamm, farm management specialist with Manitoba Agriculture in Vita, Man.

"I see farmers who earn stumpage from logging companies (the price a private firm pays to a landowner for the right to harvest timber from that land). Others get into the firewood business, selling it for $250 to $300 per cord."

Lumbering toward success

Dealing with firewood can be quite labour intensive, however, as it must be cut down, cut up, split and marketed.

Some ambitious farmers have even built small sawmills and tried their hand at niche markets like high-end hardwood flooring and furniture. This, too, can be time consuming once you dry down all the wood through kiln or natural drying, but it does offer some intriguing possibilities.

Out west where the cattle roam, hay has potential to fill that income void.

"Hay can offer profits through contracting with a processor or broker, or by marketing to individuals," says Neil Blue, provincial crop market analyst with Alberta Agriculture, Forestry and Rural Economic Development in Edmonton, Alta.

"Over the last several years, hay acreage has been dropping in favour of annual crops, but demand remains high, especially with the dryness on the Prairies last year," says Blue. "Farmers should keep in mind that both the volume and quality of hay are weather dependent."

As well, though it might be tempting to sell directly to customers and avoid the middleman, dealing with one hay processor is less time consuming. It also offers more security when performed under contract with guaranteed payments, and usually includes an 'act of God' clause in case there is a problem.

The direct approach

Still, "direct to consumer" transactions do have their place in the quest for diversification.

"There is a growing interest in purchasing meat right off the farm, along with feeder pigs, poultry and laying hens," says Blue.

"It can almost become an event in itself, with families planning a fun farm visit to buy these items and learn about agriculture at the same time.

"To succeed with this, you must be good with people and enjoy spending time with them, but with the right care and attention, there are profits to be made."

Providing services is another option and could include anything from bookkeeping to daycare to repairing appliances. Startup costs are usually minimal, as you just need a workspace in your home and perhaps some training to polish up your skills.

In choosing which path to take, farmers should be mindful that variety isn't just the spice of life – it's the basis for diversifying effectively.

"In the crop sector, we tend to talk about diversification in terms of adding new crops, thinking that if one does well, it will offset one that doesn't," says Duff. "Realistically, though, if there's a drought in Western Canada, my canola and barley will be equally bad.

"Consequently, it's prudent to choose income streams that are unrelated – such as raising livestock for your primary operation and fixing small engines on the side."

As with farming itself, diversification is not for everyone, and there is much to ponder before taking the plunge.

"With mainstream crops, you can usually count on a certain price each year, and the information on how best to raise and market that crop is readily available," says Duff. "Depending on where you live, however, you may have no experience with hay production.

"On the other hand, livestock farmers already possess the necessary knowledge and equipment, and have a network they can access to sell their hay."

Lean on me

If you're venturing into new territory, make sure to find others who are already doing that work successfully. There are groups across the country that can help producers get started and offer tips, such as the Ontario Maple Syrup Producers Association or the Woodlot Association of Alberta.

"I know a couple of hay-growing cooperatives in Ontario that share resources and equipment," says Duff. "Not everyone can afford to own a high-end hay dryer, but together, they can share the load.

"However you decide to diversify, it's about asking and learning, leaning on others, and benefiting from the experience of those who went before you."

While acknowledging his own bias, Duff also points producers to Farm Management Canada (FMC), where he serves on the board of directors.

"FMC aids in farming success by offering relevant tools and information," says Duff. "We have some pretty strong resources for people thinking about diversification, and we look at it in the context of strategic planning for both your farm and your family. How can adding income help you achieve your goals on both fronts?"

For their part, other industry experts echo the value of seeking advice that can pave the way to profit.

"Whether it is academia, technical staff, government or agronomists, use the information that is out there as your guide, especially in the early going," says Hamm.

In Alberta, growers may access resources on the Government of Alberta website, where they can also connect with business development specialists who will help them craft a business plan for the new venture.

Pick a path, any path

With so many options out there, how do you decide what's right for you? The choice of how to diversify is personal, and it can be hard to pick just one, but it's important to do exactly that. At least to start, maybe choose just one.

"A lot of farmers are fixing heavy equipment and pumping septic tanks and clearing driveways – then they wind up running late and not getting their cattle off in time," says Duff. "If you try and be a jack of all trades but master of none, you might not like the results."

Few farmers succeed if they are not realistic, and it pays to have your eyes wide open when adding an income stream.

"Problems can arise when your expectations around a side activity don't match reality," says Duff.

"The farmer who starts selling maple syrup to cover their mortgage payment is primed for disappointment."

In large part, being able to play the long game when it comes to diversification means managing risk – a concept that most farmers understand all too well.

"If you need to buy equipment to pursue a second business, you face risks like interest rate hikes," says Hamm. "Rates have already started to climb, and to lock in now for the next 10 to 25 years will put you at the higher end of the rate scale."

For farmers seeking to diversify by adding a second crop, there are risk management tools like production insurance that can assist. It pays to be aware, though, that longstanding supports such as AgriStability – a program based on margins that aids farmers who suffer significant drops in income – may not fill the void in all cases.

"AgriStability can be counterintuitive, in that it depends on fluctuations to set the parameters for what it offers; you really need highs and lows to qualify," says Hamm. "If you raise two crops, where one does well and the other does not, they could offset each other and fail to trigger a payment."

Apart from private insurance and government programs, producers can limit their risk by choosing a second income stream for which they are already well equipped.

"Let's suppose that you decide to pursue maple syrup sales and invest significant dollars in equipment to boil and bottle sap," says Duff. "If the business is not profitable, you already have a sunken cost that may be hard to recoup. It is vital to look closely at what you already own and what you can do with it."

Depending on the nature of diversification, access to labour might be another issue, as worker shortages run rampant in Canada.

Even so, the upside of adding a second income is often worth the risk.

"In general, diversification is a positive thing," says Hamm. "By not putting all of your eggs in one basket, you spread out your risk. Just make sure that you manage both endeavours closely and carefully so that they both succeed in the end."

Juggling two or more enterprises is not without its challenges. Even so, many argue that the end justifies the means, especially these days.

"These are interesting times for agriculture," says Hamm. "We see volatility in land prices, interest rates, fuel costs and market prices. Returns on grain have doubled in one year, and a lot of external factors are impacting the economy from many sides.

"For growers, now is the moment to take advantage of what is being thrown at you. When you are seeing great rewards in one aspect of your operation, it can be hard to focus on another where the returns are not guaranteed.

"If you can make both income streams successful, though, there are tremendous opportunities to profit in these ever-changing times." BF