Diversification - why you should think before you diversify

Matt McWhirter, of Farmers and Mercantile Insurance Brokers (FMIB), explores the opportunities and risks associated with diversification and explains why farmers should think before they diversify 

Market volatility, slashed subsidies, and economic uncertainty have all played a hand in farmers looking further afield to seek out new revenue streams.  

With plentiful resources at their disposal, farmers are increasingly turning to diversification and successfully launching enterprises up and down the country.

From rural tourism to renewable energy schemes, more than two thirds (66 per cent) of farm businesses in England have diversified, according to the latest Farm Business Survey. 

The total income from diversified activities on these 36,100 farms was £680 million in 2017/18, up 8 per cent on last year.  

New ventures not only bolster farmers’ income but can also help ensure the survival of the traditional working farm, making it an attractive – and potentially prosperous – choice for cash-strapped farmers.  

However, as with any new venture, diversification inevitably comes with business risks and a lack of experience in new non-

farming activities means many of these may be unforeseen.  

Before blueprints are drawn up or ground is broken on any new project, considered business planning, robust risk management and prudent insurance arrangements are all needed.

This proactive approach will ensure farmers are fully aware of and compliant with legislation and regulation, and that risks are identified before commencement, which will help the supplementary business get off to the best – safe and protected – start.  

Staycation fever

The opportunities for making use of buildings on farms is vast, from office space to holiday homes. 

This considered, it is unsurprising that letting out buildings for non-agricultural use was the main diversified activity for farmers in 2017/18. 

The rise in ‘staycations’ has fuelled the trend for alternative experience-type breaks, from glamping to treehouses, offering farmers a wealth of different rural tourism options.

Tourist accommodation and catering generated an average income of £21,500 per farm in 2017/18, making it a profitable option for farmers, particularly those with an abundance of unused land.  

Of course, getting the right permissions from the council is a top priority but the myriad of risks associated with members of the public spending time on a working farm should also be a key consideration.

Health and safety risk assessments, along with measures and procedures to ensure a safe environment, is essential at the design stage.  This would include creating adequate boundaries between the working farm and the public facilities, appropriate signage, and safe separation of visitors with animals and machinery.  

Insurers may request an inspection of the site to satisfy themselves that quality standards are being met during development.  

Even with the most careful planning and execution, accidents do happen, so it is of paramount importance that diversifying farmers have public liability cover.  

Landlord or holiday home policies will need to be acquired, but this may not be adequate for the more non-traditional accommodation types.  It may be that specialist cover is needed, which a broker can advise on. 

Energising enterprises 

The second most popular choice for diversifying farmers is solar energy, with 11,500 farms tapping into this income source in 2017/18.  

Whilst solar energy generated £7,000 on average per farm, other renewable energy sources, including wind turbines, anaerobic digestion and renewable heat initiatives, generated £24,800.

The cost of renewable energy technologies has fallen, creating opportunities for farmers to not only reduce their own existing energy costs but also create a viable income avenue. 

This is one of the more attractive choices for smaller farming operations, who are low on resources, as it does not require as much time and attention as other diversified businesses. 

From anaerobic digestion and hydroelectric schemes to wind, solar, battery storage and biomass projects, there are a number of routes farmers can choose.   

Farmers considering renewable energy should explore all of the options available to them, and make an informed choice based on the suitability and long-term objectives of the farm.  

When it comes to equipment and installation, quality can vary greatly, so be mindful.  For equipment deemed less reliable, premiums can prove extremely costly and, in some cases, uninsurable.  

Insurance brokers can provide specialist advice on what cover is necessary, including contract works, delay in start-up, environmental liability, and machinery breakdown with resultant loss of revenue.

Farm-to-fork era

The most profitable form of diversification in 2017/18 was processing and retailing of farm produce, generating on average £27,100 per farm.

Farms are successfully ‘cutting out the middle man’ and producing and retailing the food products, as well as harvesting the source.  

For example, ice cream and cheese production is offering a lifeline to dairy farmers, who have had a widely-publicised downturn in fortunes over the past decade due to low market prices of milk.  

The emergence of an eco-friendly, health-conscious society has helped to drive these types of initiatives, as consumers demand more responsibly-sourced, sustainable, organic and locally-produced food.

It is easy to see why farmers would be keen to tap into this lucrative trend but a clear understanding of relevant legislation and regulations, from trade descriptions to food safety, is a must. 

Environmental Health Officers will be involved in operations, ensuring good practice in production and hygiene, as will Trading Standards, who will look at areas such as labelling, weights and measures.  

From an insurance perspective, a suitable level of products liability cover should be in place, should sold produce inadvertently cause illness.  Although products liability is usually included alongside public liability insurance for farms, the indemnity limits may be deemed inadequate. Employers’ liability will cover risks associated with processing and production.

Other insurable risks, such as loss of income from product recalls in the case of large-scale processing or cover for high value stock kept in storage, should also be considered. 

Don’t go it alone  

Diversification is becoming a viable route to generating much-needed income, allowing farmers to futureproof their business and provide a level of security in uncertain times.  

But critical gaps in knowledge and experience are inevitable and need to be addressed from the outset. 

As farmers continue to fulfil the demand for more unusual experiences, trends and crazes – such as woodland yoga, open air cinemas, and llama trekking – these gaps in knowledge will become even more pronounced and varied, and the need to seek specialist advice will become greater.  

From a risk management perspective, a specialist insurer or intermediary can offer valuable consultancy advice, helping farmers to identify potential liabilities and avoid the pitfalls of venturing into a new, unknown field of business.  

For more information about FMIB services, call 01604 782 782 or visit fandmgroup.co.uk.