How to Reduce Your Diversification Risks

November 16, 2016 12:00 PM

For new ventures, weigh pros and cons 

Continued weak commodity prices are leading many farmers to seek ways to spread risk. Is now the right time to add a niche crop or perhaps to dive into a livestock enterprise or another kind of complementary business? 

“Farmers are willing to try new things to make a profit, and specialty markets have enticing premiums, especially looking into 2017,” says Katie Hancock, marketing consultant with Brock & Associates and a Kentucky producer. “But where’s the fine line between innovative and dangerous? Innovators are risk-takers by nature, but they do it wisely.” 


Due Diligence. Diversified farms tend to enjoy better resource use, improved ecology, additional revenue and growth opportunities, says Bret Oelke, farm management coach with Innovus Agra. 

Yet specialty-crop supplies can be overproduced easily, Oelke cautions. You must learn and invest in them.

“Unless you have a long-term commitment to maintaining or returning to a different crop rotation, it is most likely not going to be successful,” Oelke says. 

Do your homework on the market venture. If you’re not ready to dive into a new crop, Hancock suggests growing a niche variety of a common crop. For instance, if you grow non-GMO soybeans and the market vanishes, you can sell to a traditional buyer. “Sticking to a common product with significant demand lessens the risk,” she says. 

Farmers should look at dispensing their eggs into many baskets. 

“The earlier you are in your career, the more important it is to have complementary enterprises,” Oelke says. “Spend the time necessary to become confident that the investments you make in diversifying your income streams will improve or enhance your business.” 

Read Fine Print for Niche Crops

When producing specialty crops, carefully review the contract, advises Katie Hancock, marketing consultant with Brock & Associates and a Kentucky farmer. “An offer to pay you 50¢ above the market isn’t the fine print—that’s the advertisement,” she says. “Know the difference.” 

Payment terms: Look for clauses of deferred payment. When will you be paid? 

Title: Typically, the product is owned by the buyer once it is delivered. Double check this factor, though, as ownership sometimes takes effect after full or partial payment.

Cancellation terms: May the buyer cancel the contract?

Premium guidelines: Do you automatically receive the premium? Is the premium tied to quality? Ideally, the contract will state terms of payment or deductions.  

Pricing tools: Are you pricing by the acre, the bushel or the unit? Not all buyers follow the row-crop guidelines.  

Rights of refusal:
Can the buyer reject the product? Are there back-up buyers? 

Delivery terms: A 50¢ premium on your crop might actually be worth less or more depending on whether it occurs at harvest delivery or after several months in the bin. Consider storage and interest expenses.



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