Warren Buffett once said:

Diversification, as generally practised, makes very little sense for anyone that knows what they’re doing.

He was talking about investing.

But there's an important lesson in there for farm business owners too.

For years we've been told diversification reduces risk. So we add another enterprise, another commodity or another income stream on farm.

The theory makes sense. If one enterprise has a bad year, hopefully another one has a good year and balances things out.

But we're not convinced that's what happens in practice.

Through our benchmarking and the work we do with farm businesses, we often see businesses with four or five enterprises where only one or two have the potential to consistently make good money.

The others don't have enough scale. They compete for machinery, labour, capital and management attention, and often need a good season AND a good commodity price to make a decent return.

We haven't reduced risk. We've guaranteed complexity.

And complexity costs more than money. It costs time, headspace and ultimately freedom.

The other problem is that the diversification often isn't as diversified as we think. We're still investing in agricultural commodities exposed to many of the same seasonal and economic risks.

So rather than trying to spread risk across more enterprises, we think there's a better way.

Get really good at fewer things.

Our benchmarking consistently shows us that the most profitable farm businesses tend to build profitable scale in one or two core enterprises and do them at scale.

They focus on what suits their country and what they're good at, then work relentlessly to drive down their cost per unit of output. They are not necessarily low cost per ha businesses, but they are low cost per unit of the commodity they produce.

That's real risk management.

Because when we're a low-cost of production producer, we don't need high prices and perfect seasons to make money. We build a business that can remain profitable through the cycle and make exceptional profits when conditions are in our favour.

And scale matters here.

It's hard to be genuinely low cost of production when we've spread our machinery, people, capital and attention across five undersized enterprises.

If we want diversification, we should look off farm.

Build wealth in assets and investments that genuinely diversify our exposure. But on farm, pick one or two things we're good at, that suit our country, and put our energy into building profitable scale around them.

The result is not just a more profitable farm business.

It's a simpler business to own and run.

And ultimately, that's what we're trying to build. A farm business that gives us more profit, more control and more freedom.

If you're looking at your enterprise mix and wondering whether your business has become too complicated, or where your biggest opportunities are to build profitable scale, this is exactly the sort of work we do with our members.

Sometimes the biggest opportunity isn't adding something else. It's having the courage to simplify what you've already got.

If you'd like some help working out what that looks like for your farm business, book a Discovery Call with one of our coaches.

We'll take the time to understand where your business is today, where you want to take it and what's currently getting in the way. Together, we'll identify some of the biggest opportunities to improve profitability, simplify the business and create more freedom.

You'll leave the call with greater clarity on what to focus on next and, if we think we can help you get there faster, we'll show you how.

It could be one of the most valuable fifteen minutes you spend working ON your business this year.

Talk to us about your farm business →

Regards

Sam Johnsson
CEO, Farm Owners Academy

P.S. Simplifying the business doesn’t always mean doing less. Sometimes it means being smarter about who or what does the work.

In Hire AI Into Your Farm Team, I’ll show you how to work out what tasks are worth giving to AI, how to onboard AI properly into its role, and how farming families are already using it in their businesses.

It’s a 90-minute live online workshop on Wednesday 21 or Thursday 22 October, just $14, with the full replay included. Save your seat here.