Betting the farm on income diversification

Small farm businesses find it particularly difficult to remain competitive in the business of raising produce and livestock. Given the income challenges small farms face, it’s not surprising that two thirds of those surveyed engaged in some form of income diversification.

First published in the W. P. Carey magazine, Spring 2016.

Research by Ashok Mishra, Kemper and Ethel Marley Foundation Chair in Food Management  

Small farm businesses find it particularly difficult to remain competitive in the business of raising produce and livestock. Generating gross incomes of less than $250,000, these farms struggle to keep up with larger agribusinesses, which have the resources to invest in technological advancements, new managerial practices, intensive cultivation practices and more profitable enterprise combinations that blend crops, forestry and livestock.

With these impediments built into their business model, small farm businesses are being forced to find other ways to raise revenue and remain financially viable. With approximately 91 percent of all U.S. farms falling into this category, it’s worth taking a closer look at their strategies for income diversification. Agribusiness Professor Ashok Mishra has been doing just that. His research has focused on two main areas of income diversification — agritourism and off-farm work. Given the income challenges small farms face, it’s not surprising that two thirds of those surveyed engaged in some form of income diversification.

The agritourism opportunity

Agritourism includes a wide array of activities, including outdoor recreation, educational experiences and entertainment and hospitality services. On the list are harvest festivals, berry-picking, farm stays, cooking classes, wine tastings, and hunting, fishing and horseback riding excursions. Although agritourism has a long legacy in Europe and Japan, Mishra reports, it is a relatively new phenomenon to American farms, but it is growing fast. According to the 2002 and 2007 censuses, total revenue from agritourism jumped from $202 million in 2002 to $567 million in 2007. In a paper recently published in Agricultural and Resource Economics Review, Mishra, along with colleagues Hyunjeong Joo and Aditya Khanal dug deeper into the topic. They found that for a sampling of farms of all sizes, agritourism’s effect on return on assets, total household income and net farm income per dollar of owned assets was not significant. In fact, large farms participating in agritourism tended to incur a loss of between $90,000 and $91,000 in total household income as a result.

Based on this, large farms would be better suited to exploiting economies of scale and scope and focusing on growing cash grain crops to maximize income. But for small farm businesses, agritourism is a very different opportunity, increasing farmers’ return on assets, total household income and net farm income per dollar of owned assets. This amounted to $16,524 to $19,043 in additional income for small farms, improving their overall sustainability. Through small farm businesses success, agritourism can also play an important role in bolstering rural tourism and extending rural economies — especially in areas where agriculture as an occupation is declining. In addition, agritourism can enhance the value of local resources while simultaneously generating publicity for local products and demand for onsite casual and permanent labor. In this way, agritourism is becoming an important economic boost for many farmers as it monetizes more of the recreational aspects of the farm.

Adding off-farm work to the income mix

While a fair amount of research has been done on agritourism, scholarly studies have generally overlooked analyzing the effect of participation in both agritourism and off-farm work by small farm business owners and members of households. They set about addressing this gap by studying small farm businesses that earned income from both activities simultaneously. With approximately 66 percent of the surveyed small farm businesses participating in some kind of diversification strategies, their mean gross income was $57,211 — significantly higher than the $46,864 earned by those that didn’t diversify. Breaking this data down further, we see that of the 9,990 small farm businesses surveyed, the vast majority, 8,289, did off-farm work only. Just 68 farms opted for agritourism only. This left 269 farm business owners who participated in both agritourism and off-farm work.

Few farmers have adopted the double diversification approach, but the impact on income suggests that it may be the way of the future. The study found that total farm household income is highest for participants in both agritourism and off-farm work at a mean of $96,120 annually. Those who diversified through off-farm work only earned a mean household income of $79,043. And small farm businesses who added agritourism only to their income mix, came in a distant third at $45,978. Clearly, the greatest financial benefit goes to farm businesses with more income diversification in the form of both agritourism and off-farm work. This suggests a business model in which the work of farming itself is fundamentally secondary in terms of income generation and time allocation.

These findings raise an important question: if small farm business households are busy with both agritourism and off-farm work, how much time is left for actual farm work? The trend is probably driven by need rather than choice as evidenced by the finding that the small farm business households with lower farm income are more likely to participate in diversification strategies than those with higher income. The highest mass of small farm businesses doing so earn less than $100,000 in gross cash farm income and total farm household income.

Why don’t more do it?

Given that farm businesses participating in both forms of income diversification tend to make the most money, it’s worth asking why more don’t do it. The answer may lie in the challenges of agritourism, which as a more entrepreneurial endeavor requires greater risk tolerance, creativity and overall business acumen. For example, succeeding would require marketing expertise, as well as the ability to deliver the service and experience itself. Off-farm work, on the other hand, can be as simple as applying for and getting a job. And since the farm business owner (operator) is just earning a paycheck, rather than creating a full business, the obstacles to entry and level of commitment required are both much lower.

The research also revealed that the older and more educated the farm business owners were, the more likely they were to engage in agritourism. This makes sense considering that many of these activities have an educational component, so experience would be an empowering element. The authors also posit that older and retired farmers may place a higher value on agricultural activities and prefer it to off-farm work. Size is also a factor for agritourism. Farms with higher land acreage were found more likely to opt for it. More space may allow farmers to organize more recreational activities on the farm without disrupting production. Also, in the case of hunting and fishing, wide open land offers obvious added benefits. For off-farm work, larger family size and higher educational attainment indicated a greater likelihood of choosing off-farm employment. Location also plays a significant role in how small farm businesses diversify their income.

Living near a metro area was a factor increasing off-farm employment, probably because there are simply more opportunities, at least in the short-term. Farm businesses in metro counties, having larger acreage, higher debt-to-asset ratio and more highly educated operators are more likely to participate in the “off-farm work only” option for diversifying their income (as opposed to combining with agritourism). Meanwhile small farm businesses located in non-metro farming counties are more likely to choose the both-and option. Overall, the work of Mishra and his colleagues shows that the operator’s age and educational attainments, the location of the farm, and the business’s financial condition all help influence the choice for “agritourism only,” “off-farm work only” and “both off-farm and agritourism” alternatives for income diversification. He suggests that more in-depth analysis with wider spectrum of alternatives may lead to further insights regarding the farmer’s decision process and behavior. More in-depth analysis is required for an understanding of all real options available for a particular farmer at given time. Nonetheless, his work provides a solid basis for insight into how small farm businesses diversify income and to what end.