Year of the Family Farm - Diversification
Nearly two-thirds of Britain’s farms have diversified, but families should think very carefully before following the crowd.
Opportunities for farms to diversify are almost limitless. Success stories are everywhere, suggesting all farmers should consider broadening their horizons beyond just agriculture. But that is not always the case, according to William Waterfield of the Farm Consultancy Group.
“Diversifications nearly always require a different skill set from what most farmers possess,” he said. “Those who find that their farm business is struggling should be putting more time and effort in to the core operation rather than diluting that effort it in to something else.”
Defra figures show 61 per cent of farm enterprises have diversified. And, with lower levels of direct support likely post-Brexit, it is natural for farms to challenge themselves to look for opportunities to derive new income streams.
For some that might be as simple as growing a non-food crop – using their core agricultural skills and existing machinery to produce for a new market.
Advice - Why do most farm diversifications fail?
- Not understanding the market is the biggest issue, said William Waterfield. “Other businesses struggle because of scale,” he added. “If their product is short shelf life or is perishable then they need sufficient volume to get it to market. “The classic example is yoghurt or ice cream. A lot of those businesses fail because they cannot get to the required scale to survive.”
Other farms will move away from farming completely and utilise assets such as land to create attractions for tourists, or build equine facilities. Done right, they can have a huge impact on the sustainability of a farm business.
“Within a matter of years they can be significantly bigger than the farm,” Mr Waterfield said. “I know of an example that operates on 1 per cent of the farm’s land area but turns over four times what the farm turns over, probably earning three times the profit.”
The list of options is huge, but suitability and feasibility are two important watchwords, Mr Waterfield said.
“If you identify that the business is going to face challenges or has the capacity to change, you should look at your options. “The process should start with some really good analysis of where the farm business is now. Look at your strengths, weaknesses, opportunities and threats. Bringing in someone who is not part of the family or the business can bring fresh perspective. This does not have to be a consultant, just someone you know who can throw ideas about with you.”
Mr Waterfield said the catalyst for a diversification often comes from outside. “A lot of the successful cases I have seen have involved an outside party or a younger member of the family – or perhaps someone with a different skill set – coming in to get hold of it.
They have the time and enthusiasm to see it through.”
Expert opinion - Include insurance costs at research stage of your diversification business plan
- The draw of the financial rewards diversification can bring to the family farm is clear for all to see, but the inclusion of insurance costs at the research stage of your business plan can be critical to the success of the venture. Whether selling hand-made ice-cream, letting commercial buildings or running a B&B business, the underlying insurance implications for a diversification venture will remain the same. By considering the key points we have highlighted during research, you can shape the direction of your venture to succeed.
- Include insurance costs and implications in the research stage of your business plan. You need to factor in items such as payroll increases, liabilities, indemnity limits, business interruption, value of machinery
- Is planning permission required?Often non-agricultural activities carried out on your land may be subject to planning permission. Also consider location, for example biosecurity could prevent public access near poultry farms
- Consider inheritance tax. Could the proposed diversification upset or over-complicate your business and lifestyle in respect of inheritance tax? Some tenancy agreements rule out diversification often because of inheritance implications for landowners
- Be aware of the business regulations you must comply with, such as food hygiene certification, health and safety. Consider if additional staff training and risk assessments are required
- What is the planned period for the venture to return a profit? Have a structured plan and as the business develops, make sure your insurance arrangements accommodate the changes
- By Alexandra Wellings, Farmers & Mercantile managing director
Questions to ask yourself
- How is your current farm business performing?
- How profitable is it and how profitable will it be in five, 10 and 20 years’ time?
- Are you benchmarking data – are you an average or top performer?
- Do you have the time to manage a diversification?
- Have you got the skills to do it?
- Do you have the right ideas that would work for you?
- Are you prepared to invest the time and money in to a feasibility study?
- What do you want from it?
Ideas for diversification
- Growing novel or non-food crops
- Organic or premium food production
- Converting buildings to residential or commercial use
- Letting out sheds or houses
Popular alternative diversifications:
- Renewable energy
- Small-scale food processing
- Pre-school nurseries