Reduce Your Diversification Risks

December 27, 2016 11:28 AM
Reduce Your Diversification Risks

Weigh the pros and cons for new farming ventures

Continued weak commodity prices are prompting many farmers to seek new ways to spread risk. Is now the right time to add a niche crop or dive into a livestock enterprise or another 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.”

Diversified farms tend to enjoy many benefits. These can include 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 do your homework on the market venture.

If you’re not ready to commit to 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 putting their eggs in different baskets. 

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

Read the Fine Print for Niche Crops

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

Payment terms: Look for clauses of deferred payment. Will you be paid in 30 days? One day? Six months?

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

Cancellation terms: Can 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? 

Delivery terms: A 50¢ premium 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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