EU Exit Perspectives: Diversification or distraction?

In this week’s blog, our senior strategic insight manager, Sarah Baker, shares her thoughts on when or whether diversification is the right approach for farmers looking to mitigate the loss of direct payments.

With the recent announcement on English Agricultural Policy post-Brexit, and the news that Direct Payments will be reduced by around 50% by 2024, farmers will be examining their businesses to work out how they can fill that funding shortfall.

Diversification would seem one such solution. Renting out unused farm buildings as office space or workshops, starting a livery yard or a glamping business, or renovating an old barn as an events venue may all seem viable ways of bringing in extra revenue in these challenging times.

However, in the AHDB publication, ‘The Characteristics of Top Performing Farms’, the characteristics that define the top 25% of performance in every sector includes specialisation. So how can this be reconciled with the need to generate income?

Data suggests that farms that concentrate on doing one farming system rather than many tend to be more profitable. It focuses the mind and prevents distractions. Fewer enterprises gather fewer overheads. It also makes it easier to ensure each enterprise is an efficient and optimal size. Enterprises tend to generate greater overall profit and return on income as they grow, up to a point. Small farms can be efficient and successful if they are in proportion and costs and time are curtailed to meet the enterprise requirements. Only grow a business once it is operating at a high performance or the mistakes it contains will also grow.

Specialisation is also an indirect way to increase size. Many of the size issues are concerned about enterprises rather than farms per se. For example, a 200-hectare mixed farm with arable, dairy and beef is a small area for three major enterprises. However, if that farm was solely a dairy farm, it would be a reasonable-sized farm and, therefore, benefit from economies of scale associated with specialisation, as well as fewer overheads.

Diversification is more complicated. If a business is not already performing at the top of its particular sector, while increasing income for the business, diversification can lead to a drop in performance for the farming enterprise. Undertaking non-agricultural activities distracts from farm performance.

In general, if a farmer is doing a good job with his or her farm, it is likely they are simply good managers and, therefore, will do a good job managing new non-farming enterprises. The corollary is also true; a poor farm manager is less likely to manage a diversified interest into a considerable success. There are overlaps such as the ability to create a vision, personal time management, and staff management, diplomacy with contractors or customers and so on. There are plenty of cases of farms whose diversification has stretched the farmer’s management ability too far and the entire business has suffered as a response.

So, while diversification may seem an attractive option in these times, it shouldn’t be seen as a quick fix. Farmers should assess the time and resources that the new enterprise requires to be profitable, and how that will impact the core farming operations before making any swift decisions. There is no doubt diversification opportunities exist on many farms but they need careful consideration by business managers before decisions are made.

For more information and resouces, visit: EU exit: food, farming and agriculture