What do wind farming, an apple cannon (that’s right, an apple cannon), and commodity trading all have in common? These are all examples of ways to diversify a farmer’s revenue streams to lower risk. The more diverse a business is, the less risk they face if any one revenue stream declines. Consider Amazon, which started as an online bookstore. Now they sell millions of items online, they have a web streaming platform where they produce their own shows and movies, they own a grocery store chain, and they have over 40 other subsidiaries. Amazon is an extreme example of diversification, but there is something to learn from them. If book sales fall, any of their other businesses can offset the loss.
How does a farmer look for diversification opportunities? Last year a farmer called me because he was considering signing a lease to allow an energy company to install windmills on his farm. We looked over the contract and talked through the potential ramifications. He was most concerned with lost acreage. After we did a thorough review and talked with his lawyer and accountant, he made the decision to sign up with the energy company. The biggest opportunity he had with the deal is in the consistent cash flow. The windmills provide him with annual income higher than his profit per acre had been over the last 10 years. This is just one example of the benefits of diversification.
Another example is at Stepp’s Hillcrest Orchard in North Carolina, they started diversifying decades ago. According to their website (www.stepapples.com) they started “pick your own apples” in the 1970’s. In the 1990’s demand for apple juice was shrinking as plants closed in the area. By that point, Hillcrest Orchard was doing a lot of their business in “pick your own apples”. Diversification helped them immensely because they weren’t dependent on traditional delivery of apples to the market. Now, they continue to grow their business by adding new things for their customers. They see great growth in agritourism. As Rita Stepp told me, “Farms that can invite guests to visit are very popular. We see that as a viable business model. There are several options for agritourism. Farmers interested in diversifying should identify their niche market and consider their demographics. In other words, do your homework.” They now have a 5-acre corn maze, pick your own pumpkins sunflowers and grapes, and yes, that apple cannon. One note, they didn’t start out as an agritourism farm. They started diversifying and it led them to a very profitable agritourism business model.
Commodity trading is another way to diversify your income. As prices increase our human nature is to expect the trend to continue. Some of us may remember former Federal Reserve Chairman Alan Greenspan referring to this as irrational exuberance. He was speaking of the run up of the stock market during the late 90’s which was fueled by the internet bubble. At the time, many smart people believed the market would keep going up. But no one ever really knows when a correction will happen… until after it has happened and everyone can point to the market top. At Global Commodity Analytics and Consulting we develop hedging strategies to lower your risk as prices fluctuate. One goal is to diversify your income stream through futures trading. We’ve found by focusing on revenue per acre instead of focusing only on current commodity prices, people are less likely to fall into the irrational exuberance trap.
Now, I’m not advocating you start an agritourism farm or that you search out an energy company for a windfarm. These are examples of ways you can diversify your business. It takes a lot of market research and review before making a decision. You should, however, be open to opportunities to diversify as they come along. Some opportunities you will choose to ignore, while some opportunities will bring you more profit. Who knows, maybe one day you’ll be purchasing an apple canon of your own! -Cary
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