How to Diversify Without Betting the Farm

February 22, 2016 12:00 PM
 
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Low milk prices are leading many dairy producers to seek out opportunities in side businesses, says Dave Kohl, ag economist at Virginia Tech University. Yet new endeavors can quickly become a sinkhole rather than a route to higher profits without a strong written plan and a willingness to lose money or break even for the first few years.

“Everyone’s grasping right now,” Kohl explains. “You have to go through that self-examination. Another thing that’s really critical is, do you have a passion for the diversified enterprise you’re going into? If you go into something and don’t have passion, it can become a beast of burden.”

Because dairying is so labor-intensive, producers should stay away from diversified enterprises that will require more than 1,000 hours of their time each year—and oftentimes, a safer threshold is 500 annual hours. Pursuing a business that demands that much time or more could hinder your primary milking operation says Kohl, who is part-owner of a diversified milk processing, ice cream production and home delivery business started 16 years ago.

Think through operations, markets and financing for your new product or service, he says. Hire an outside facilitator who can ask difficult questions and facilitate your team through the process, from goals to marketing. Never hire a consultant without providing them your regular input along the way, Kohl advises.

Producers should be aware it takes between two and five years to build a brand, Kohl says. During that time, dairy operations need to do cash-flow budgets as well as variance analysis to determine whether revenue is improving or losing traction.

“If you start finding that you’re not covering your variable costs after a couple of years, you’d probably be better off shutting it down,” he says.

Operators shouldn’t forget to factor in the value of their own time and wages.

“Good budgeting and having accurate financials are very critical, and then monitoring it as you go through is extremely important,” Kohl says.

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