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Why consider…diversifying your agricultural business?



If you’re currently running a farming or agriculture-based business, you might want to consider diversifying and thereby increasing your revenue streams. MoneySense for Business tells you what you need to think about when starting your own business in the agricultural sector.

 

Introduction

If you’re currently running a farming or agriculture-based business, you might want to consider diversifying and thereby increasing your revenue streams. Many businesses in this sector have taken this innovative approach and have achieved greater rewards as a result.

By diversifying your business, you can create new opportunities for growth, as well as help protect yourself from potential downturns in the market. There are many different ways that you can diversify your business, these can be broken down into three main categories:

New farming enterprises

Think about your produce and how it can be used more creatively to bring in new revenue. Farming enterprises can be new types of crops or livestock, but they can also be a move into retail. Farm shops can be popular, as the public becomes more interested in the source of its food. You might also look for ways to add value to your food by turning it into a product.

Some farmers have created successful brands by creating a food manufacturing business alongside their farms.

Non-farming enterprises

Non-farming enterprises can involve using your land for things other than farming. One of the most common types of diversification is letting your farm buildings out to tenants. However, there are many other ways you might be able to use your property. Creating a model farm for visitors such as schoolchildren, making a track for off-road driving or enabling country sports are a few examples of non-farming activities.

Off-farm activities

As a farmer or agriculturalist, you have skills and machinery that might be useful to other businesses. This could be on another farm or in an entirely different business. If you have an HGV license or other skills, industry may want to employ you in that capacity. This could be useful during quiet or fallow periods.

In brief


Business Planning

Once you have an idea of what you want your new enterprise to be, you should construct a business plan. This will be useful for both understanding what challenges lie ahead and financing the new venture.

As you have an existing business, you should consider carefully what you already have at hand to make your new idea work. For instance, do you have a building that could be converted into a different type of facility such as a shop or factory unit? Also, as a producer of foodstuffs, what could you do to allow you to sell these foodstuffs for a greater price? From here, you can see what you need in addition, how much this will cost and in what ways you might fund it.

Market research

Arguably the most important part of a business is research into the market itself.

Arguably the most important part of a business is research into the market itself. You need to be as sure as you can that there exists a demand for your new venture if you are going to make it into a success. Read widely to discover information from sources such as your main library, trade press and any industry journals that may contain valuable market data. You want to know how big your future market is worth, how much competition there is, who the main players are and if there are any gaps in the market that you can fill. Also, it can be worth talking to other businesses that have gone down a similar route, particularly if you’re not going to be directly competing with them. Getting information from the inside on things such as costs and probable returns is also valuable. Finally, remember that the most important aspect of market research is the opinion of the customer. Consider doing some direct research yourself. For instance, if you’re thinking about setting up a farm shop then prepare a questionnaire and talk to people in your area about the types of things they might like to buy from you, how often and how much they would be prepared to pay. Information such as this will really help you appreciate what your future business might look like. So, whoever your future customers or clients might be, try to get as much information from them as you can before you start.

Sources of Funding

Grants

Also, grants are usually made prior to work being carried out and generally not afterwards.

Grants are available specifically for farmers and foresters who wish to diversify. Your first step should be to approach Business Link, who will be able to advise you on what’s available in your region. The Regional Development Agencies (RDAs) are responsible for a great deal of grant funding. However, each has its own unique priorities in the types of funding it will offer. In applying for a grant or enquiring about one you should be clear that even though you are a farmer/agriculturalist, the money you’re looking to obtain is for a new project and not to support your existing business. For instance, if you’re looking to create a manufacturing facility, then you’re looking to access the same sources of funding as other manufacturers, not farmers. Also, grants are usually made prior to work being carried out and generally not afterwards. Therefore, it’s advisable that you make inroads in this area as soon as you can.

Commercial mortgages

If you’re looking to build or renovate a building for use as a commercial property then a commercial mortgage might be the best form of finance. However, as the money will be fixed on the asset, you need to be sure that firstly you’ll be able to afford the monthly payment, and secondly that this will still prove profitable. However, interest payments from commercial mortgages are tax deductible, so check with your accountant how that would work out for you.

Mezzanine finance

This is a form of finance often used for large-scale developments that might require more time before they are generating revenue. Part debt and part equity, they can provide you with a large amount of money upfront, which can fund those initial months or even years of development. Often, the financier will ask for a ‘bullet payment’, and will potentially have options on the equity of your business. Therefore, before agreeing to a deal, it’s important to fully understand your own timetable and then discuss this with the financier to ensure that your aims are the same.

Asset-based finance

This can be useful if you need to purchase items with high sell-on values, such as stock, machinery or premises. This can be of particular use to agriculturalists who might require heavy machinery such as tractors or food processing equipment, as it means that you lease rather than buy outright.

Invoice finance

If, as a result of diversifying, you’re selling goods to other businesses and not charging upfront, you might encounter some cashflow problems. With invoice finance, the financier will forward you money on an invoice while you’re waiting for the debtor to pay.

The pros and cons

Pros

  • Makes your business more secure Having multiple revenue streams means your business is more secure during a market downturn
  • Maximises potential Your business may contain all sorts of potential that can be unlocked through new business practices
  • Creates revenue Ultimately, the big plus to diversifying is, if it’s done right, it can make you a lot of money.

Cons

  • Makes doing business more complicated There will be more challenges in a diversified business and you’ll have to be careful to ensure your core business doesn’t suffer
  • Starting a new business may be costly Starting up a new business will cost money and there’s always a risk that you might lose that money.

The statistics

In England and Wales today, there are about 110,000 farms, although only 57,000 of these are big enough to occupy a farmer for half of the year.

In England and Wales today, there are about 110,000 farms, although only 57,000 of these are big enough to occupy a farmer for half of the year. However, these larger farms account for over 91% of farmland and 96% of production. More than half (51%) of this larger group have diversified their enterprises, and this has been the case for several years, showing that many farmers and agriculturalists are open to the idea of diversifying. Indeed, for 17% of this group, their additional revenue streams actually proved to be more profitable than their existing business.

The letting of buildings has traditionally been a popular method for farmers to make additional income. In England and Wales, 35% of farming enterprises do this and the letting out of farm buildings accounts for 76% of diversified farming income. However, there is clear evidence that farmers have, in recent years, been increasingly interested in other types of diversification. Between 2003 and 2008, the number of farms involved in diversifications other than the letting of buildings rose from 18% to 28%, whereas the number of farms involved in lettings has remained broadly flat over the past five years.



Common pitfalls

Here are some pitfalls to avoid when diversifying your agricultural business:

  • Taking your eye off the ball Diversifying can be time-consuming and it’s important that you don't neglect your existing business while you’re creating a new one. Make sure that you’re committing enough time and resources to all aspects of the business and, if necessary, get some help from staff, partners or even friends and relatives, as long as they’re up to the task and don’t mind mucking in.
  • Unexpected costs and events Plan carefully but allow yourself some flexibility, in terms of both time and money, in case things don't go as planned. This is a step into the unknown but so long as you research carefully and prepare yourself mentally you should be able to overcome most challenges.
  • Customer confusion One problem with offering a new service is that customers and clients tend to think you’re discontinuing an old one. Make sure you communicate clearly with staff, suppliers, customers and clients that you’re diversifying and not ending a business.
  • Cashflow issues Cashflow is always an issue for small businesses and in a diversifying business cashflow is even harder to keep track of. Work with your accountant to make regular cashflow forecasts and, if you see problems emerging in future, take action as soon as you can.

Moneysense top five

  • Before you start your new enterprise, devise a thorough business plan. This should include start-up costs, running costs, timeframes and information on the market that you’re looking to move into.
  • Assess your existing business and make sure it’s in good shape. The best diversifications are done from a position of strength not desperation.
  • Monitor your cashflow throughout the transition and beyond. Keeping a tight rein on costs is key, so make sure you have regular meetings with your accountant, especially during the initial stages.
  • Consider forming a separate company for the new enterprise. This might be more expensive from a tax and administration point of view, but it’ll shield your existing business from the risks associated with a new venture.
  • Use your existing assets wisely. Your stock, machinery, buildings all contain significant value and can be used to great effect if you take a considered approach.

How I did it

Edible Ornamentals: ‘Our response to market demand’

Joanna Plumb's family had been growing and selling fresh chillies for about 40 years. However, in 2001 they were suddenly left with a huge overstock. A large store cancelled an order at the last minute and was left with 3,000 unwanted plants. Joanna stepped up to the challenge, but rather than trying to sell the chillies separately, she sold the plants at local car boot sales. She successfully sold them all and realised there was a healthy demand for the plants. She soon moved into selling jarred chillies and sauces. Naming her company Edible Ornamentals Joanna has built up the business, supplying restaurants and farmers’ markets and is now selling in large retailers and supermarkets. During this time, Joanna has seen demand steadily grow and the market change. “We sometimes have difficulty convincing people that you can grow chillies in this country and that they don't have to be hot. However, now the public is getting a lot more savvy and asking for a wider range of varieties,” she says.

In 2007, she gained a £1,000 grant from Bedfordshire Council to establish her own site in Cherwood, Bedfordshire. This is now open to the public as a ‘Pick Your Own’ (PYO) venue, one of the few places that does PYO for chillies. The business now has six staff, but is looking to quadruple in size in the next four years. “In the next few years we’re going to expand the business, so we’ll be putting up more tunnels to increase production. We need to quadruple production in order to keep up with demand.”

Mackie’s of Scotland: ‘How we created our own food brand’

Karin Hayhow's family (the Mackie family) has run Westertown Farm for four generations and initially produced milk for the local area. The 1,600 acre farm has a herd of 500 dairy cows and each cow can produce between 20 and 30 litres of milk each day. However, during the 1980s the milk market began to change; customers were increasingly buying from shops and supermarkets. Also, tastes were moving towards semi-skimmed milk, rather than full fat and creamier varieties. Karin’s father, Maitland, began to experiment and soon he created his own ice cream. He named it Mackie’s of Scotland and his ‘affordable luxury’ brand was born. The company started selling to local shops and stores, but is now available at large supermarkets across the UK. Today, the business makes about 10 million litres of ice cream per year. Karin believes that much of its success is down to the company's brand values: “I think that provenance is becoming much more important to the public when they’re buying products. They can find information very easily and there’s quite a drive for local businesses. Our background is very genuine, this is a family business and our ice cream is created on a working farm.” With the success of its ice cream business pushing them forward, the company is now involved in a joint venture with another farm to produce Mackie’s Crisps, made from locally produced potatoes. Also, in recent years Westertown Farm has enabled wind turbines to be put up on its farm, which means that it’s powered by 100% renewable energy.

The Farm Kitchen: ‘We moved from farming to catering’

Victoria Howe comes from a family of farmers, as does her husband. However, after a stint in industry, and a Cordon Bleu training course, she decided to make a new business based on her husband’s family farm and her knowledge of food. Founded in 2006, The Farm Kitchen supplies schools across Lincolnshire with meals created from fresh food. “We started in a small way by supplying four local schools with food from a local restaurant kitchen that we hired,” Victoria says. “We realised very quickly that we needed to expand and with some redundant buildings on the farm were able to convert them into a fully fitted bespoke catering kitchen.” The company has now grown considerably and currently employs 20 staff and provides 1,500 meals per day at 46 schools. The Farm Kitchen also buys products from other farms, but these are primarily local providers. Indeed, Victoria puts down much of the business’ success to the fact that the meals are made from fresh, locally grown produce. “The meals are freshly prepared each morning and then delivered using our own delivery vans to the schools. We only use British meat and try to use as much local produce as possible. We are in a brilliant position being in Lincolnshire with so much high quality fresh vegetables surrounding us. We offer a menu with a variety of traditional meals and also give the children the chance to try meals they may not have tried at home.” The business is expecting to expand and rent another kitchen and is also honing its credentials to win The Gold Food for Life Partnership Award.

Useful contacts

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Sources