Diversification Trends - DEFRA Survey Shows More Farms Involved But Income Down

DEFRA has just published its annual analysis of farmer diversification activities in England, and the income generated from them. (Diversification being defined as “The entrepreneurial use of farm resources for a non agricultural purpose for commercial gain.” )
The survey is peppered with statistics and makes for dry reading. But for those happy to delve into the detail there are some useful insights to be had.

Income from diversification fell sharply to £400m in the year to April 2008, compared with £430m in the year to April 2007, and dropped from 21% of total income to 15%. The fall is not due to less farms being involved in diversification. Indeed there were 29,600 diversified farms in 07/08, compared with 28,700 in 06/07. Rather, the drop is due to a fall in the amount of income generated per farm. In 06/07 the average income per farm was £14,500 compared with £13,700 in 07/08.
The survey figures are not sufficiently robust to draw hard and fast conclusions about the reasons for the drop, but anyone considering diversification might want to think about the following factors, which boil down to the size of the market opportunity, competitive conditions, and costs to operate.
For example, is there now so much competition that diversifiers are having to reduce prices to get business. Or, are the new businesses being established very small because most of the market has been mopped up by existing players. Or, have costs now risen sharply, but competitive conditions mean that prices cannot be put up to offset them, and so margins are squeezed.
Another factor is that the drop in diversified income coincided with a rise in income from core farming excluding subsidies, so it could be be that diversification loses focus once financial circumstances improve. This is in itself dangerous as business once lost will be difficult to recapture.

The survey also compares the number of new and discontinued enterprises, and shows that the number of new enterprises exceeded discontinued ones in all areas except food retailing and processing. 3,100 farms started diversification in 07/08, compared with 2,200 discontinuing. The biggest jump was in sport and recreation, and tourist accommodation and catering (although the survey says the sample size for tourism is small, and may not be totally accurate). By contrast, 1,100 food processing and retailing enterprises were discontinued, compared with 800 start ups.

Letting of farm buildings accounts for just over half of all diversification enterprises, and 68% of diversified income, and has the highest profit margin.
Letting buildings gives a margin of 83%, compared with 62% for sport/recreation activity, 58% for tourist enterprises, and 25% for processing/retailing. It is perhaps no wonder that letting of buildings is so attractive given the high margins and low hassle factor.
The average enterprise incomes per farm are as follows:
Letting of buildings = £13,000
Processing/retailing
of farm produce = £9,800
Sport/recreation = £4,700
Tourism = £10,300
These look like healthy returns, but they are average figures which disguise the fact that most diversified enterprises are small. 56% of all enterprises have an output (turnover) of less than £10,000 and 15% have an output of less than £1,000.

It is often thought that small farms are more likely to diversify than larger ones, but the opposite is true, with 66% of the very largest engaged in diversification compared with 42% of the smallest. Less surprising perhaps is the fact that the largest make considerably bigger profits than the smallest, averaging £25,100 per farm versus £10,900 for the smallest.

Reading through the survey results reminds us that diversification requires thorough research about the size and profitability of a market opportunity before proceeding, and constant attention to consumer trends and competitive activities once up and running. It also reminds us that most diversifications are small.

But encouragingly, the survey shows that just 2% of diversified businesses made a loss in 07/08, which indicates that diversification can be a very useful addition to farm income.

From the Farmer's Mouth - More Farmer Views on Diversification

DEFRA's startling statistic that 19% of farm profits come from diversification compared with 5% from core farming has prompted a regular look at what farmers who have taken the diversification plunge are saying about the good, bad, and ugly of stepping along this path. Information is collected from farmers featured in the farming press.

Over the last twelve weeks there have been 16 diversification stories, covering adding value to beef, lamb, pigs, poultry, dairy, and vegetables, plus a milk round, 2 farm shops, marquee hire, property development, and, in a sign of the times, eco farm holidays, and an eco friendly visitor centre and restaurant.

Once again there is a high level of agreement about what makes a diversification successful. Most speak about the need for a top quality, great tasting product. Peter Willes, producing cheeses from Higher Alminster Farm near Bideford in Devon, says " Milk must be a particular quality, 4% butterfat and 3.5% protein", adding that he favours cow condition and a moderate yield over pushing too hard, so that quality is maintained. Ian Burdess, who farms with his wife Zoe at Dottril Farm in the Yorkshire Wolds, says " I think its very important for flavour that lamb has been on grass. Our customers tell us that it is superior to lamb that has never been outside." Peter and Henrietta Grieg of Piper's Farm in Devon say that their aim is to sell " pre packed meat of high quality, meat that is wonderful to eat". James Hague of Lyde Green Farm Rotterwick in Hampshire who has a milk round says " The key is providing good service, and above all good quality milk". Malcolm Sutton and his wife Kate of Postern Lodge Farm Belper sell ice cream, and Malcolm talks about the need for a top quality product, "no additives, just milk, cream, eggs and sugar, with natural flavours."

Product consistency is important too. Zoe Burdess sells to restaurants, and says "Chefs want consistency both in terms of quality and weight". Peter Grieg says " What drives this business is absolute consistency so that the customer always gets the same food to the same high standard."

Another common theme is to understand what customers want not just at the start of a project but regularly, by doing market research. Peter Grieg spent hours in Marks and Spencer watching how people shopped and what they bought. Rod Smith of Beal Farm near Lindisfarne, who has opened the eco friendly visitor centre, spotted the eco trend, and noted that 500,000 people pass by the front door annually. He is now "Inviting constructive criticism and suggestions about our menus and facilities in order to improve them". Richard Scoles who farms with sister Rachel on Railton Farm near Driffield Yorkshire has started growing speciality vegetables like chicory, squash, pumkins, flageolet beans and kohlrabi, and their sales manager Mark Southwell says " We have a strong emphasis on attention to detail, listening to our customers requirements, and making sure we supply what they want and deliver when they want it." Hugh and Sascha Grierson from Newmiln near Methven Perthshire started by selling organic meat but were constantly asked by customers for organic chicken.

All the farmers sell their produce under a brand name, sometimes the name of the farm, sometimes something completely different, but all with the objective of setting themselves apart from competition. Scott Milligan from the Ballathie estate near Stanley Perthshire sells beef direct and says " We see branding as very important so that Ballathie is associated with high quality". Malcolm and Kate Sutton have two brand names for their ice cream, the upmarket Cowhouse Dairy brand, and Udder Stuff for younger consumers. George and Pat Booth who farm near Ellon in Aberdeenshire developed "The Store" as the name for their farm shop, but it now goes onto a range of products. Ian and Zoe Burdess registered the name LUST (Lamb U Can taste) so that no one else could steal it.

There is much similarity in where farmers sell their produce.Farmers Markets are usually the start point, followed by local shops, delicatessens, catering outlets, and even cinemas and garden centres. Some sell to supermarkets.

Most regularly publicise their products. Free samples to taste are popular, as is attendance at food fairs and local events, often offering cooked food, getting stories published in local newspapers, compiling a list of customers and sending them newsy updates. Two farmers had entered local food competitions with James Hague the milkman really landing on his feet when Antony Worrall Thompson, one of the judges decided to use the milk in his restaurant.

The farmers also give good advice about the downsides of diversification. Four of the meat sellers warn that selling the whole carcass is vital to making a profit. Some dealt with the forequarter by making beefburgers, some sausages, and one did ready meals. Two warned about the time it takes to become profitable with one being honest enough to say that the first year was bad and the second worse, and then it turned around. As Malcolm Sutton said "Diversification is easy to say, but it is not a cheap or easy option. You have to be interested and live the dream."
Overall though diversification does seem to work. DEFRA's analysis says that only 1.5% of diversification projects fail to make a profit, meaning that 98.5% contribute positively to farm earnings.
(See blogpost of 12/2/08 for further analysis of DEFRA's diversification report, and blogpost of 28/2/08 for the first in this series of reviews about farmers' thoughts on diversification).

Diversification - A Key Part of Farm Income

Heaven knows what planet Jeff Rooker is on when he calls the latest TIFF (Total Income from Farming) figures an encouraging sign for the industry.The farming press and NFU have rightly called for numbers and commentary to be viewed by enterprise so that the precarious position of livestock farming is disentangled from the dazzle of arable and better returns from dairy.

Simultaneously with the TIFF, an analysis of numbers from the Farm Business Survey England were published by DEFRA. These figures highlight the patchy returns from farming, especially if subsidies are excluded, but they also point up the amount of farm income which depends on diversification. Latest actual figures are for the year to April 2007, and these show income for the 60,000 farms who support at least one worker half-time, as follows:

£m
TIFF Total - 2250
Agri income excluding subsidies - 80
Subsidies - 1740
Diversification income - 430


So income from diversification is over 5 times the size of income from regular farming, and about 19% of total income. Not a small amount. Diversification is defined (deep breath here) as "non agricultural work of an entrepreneurial nature, on or off farm, which utilises farm resources".


About half of the total sample of 60,000 farms have diversified, and the biggest activity by far is renting out farm buildings, followed by sport and recreation, processing and retailing farm food produce, tourist related activity, and "other" which is not broken down further but would include activities such as spinning wool, or woodwork from farm trees.


The numbers of farms involved in diversification are:
Diversified total - 30,000
Letting buildings - 21,400
Sport/recreation - 6,700
Processing/retailing - 4,500
Tourist related - 2,600
Other - 4,800
About 30% of farms have more than one diversified enterprise.

The average income per farm from the various enterprises differs alot, with processing and retailing leading the field, followed by tourism.

Income £ per farm
Letting buildings - 12,200
Sport/recreation - 5,100
Processing/retailing - 14,200
Tourist related - 13,800
Other - 10,500
Only 1.5% of farms failed to make a profit from their diversification.

Diversification shows no sign of slowing down. An additional 2,400 farms came into sports/recreation in the year ending April 2007, and 1,100 into processing and retailing.

Against this rosy picture should be set the fact that most diversified enterprises are small. 57% have an output, ie sales, not income, of less than £10,000, and 12% have an output of less than £1000. Also, about 2,800 farms stopped diversifying activities, and what the numbers don't tell us is whether profits fell unacceptably in the core business when the diversification took place because the eye was taken off the core farm ball.


Overall though, the DEFRA numbers are encouraging for existing or would-be diversifiers. Particularly the one about only 1.5% of enterprises failing to make a profit. Many diversifications may be smallish in size, but the majority seem to help make ends meet, and some turn in a substantial profit. All in all, its probably worth taking a regular look at what else the farm's assets could be used for other than core farming, particularly as subsidies shrink. And of course any venture needs thorough market research and detailed costings before going ahead.