FREEDOM FARMER BLOG

The Diversification Myth…

benchmarking financial analysis financial literacy kpis profitability resource optimisation Apr 25, 2024

In today’s blog, we won’t be exploring something new… 
 
Instead, I want you to forget something that you may have heard time and time again as a farm owner. 
 
It’s possible that this may have even informed many of the decisions that you have made around the enterprises you run on your farm. 
 
If you feel really strongly about this then I invite you to treat it like a jumper. 
 
Try it on for a bit and see if it fits. If it doesn’t, you can always take it off again. 
 
The concept we need to unlearn is one that we have all grown up hearing. The problem is that it sounds really good in theory and it just seems to make intuitive sense.  
 
But, the numbers tell us that it just ain’t so. 
 
As Mark Twain once said… 
 
“It ain’t what you don’t know that gets you into trouble. It’s what you think you know for sure that just ain’t so” 
 
And that’s as true in business as it is in life. 
 
In business, there is often more to be gained from unlearning commonly held beliefs or theories that we think are true but aren’t, than there is from accessing the newest & latest information. 
 
Talk to any group of farmers about their businesses and at some point, you will have a discussion about diversification and running multiple enterprises as being the way to being more profitable and managing business risk. 
 
But, for most farm businesses running more than one or two enterprises is reducing profitability and increasing business risk… 
 
…keep that jumper on for a little longer and I will explain… 
 
The contradictory thing that Farm Owners Academy benchmarking shows us about the most profitable farm businesses. 
 
The image below shows the results from Farm Owners Academy benchmarking for our Platinum Mastermind and Platinum Mastermind Alumni Members between 2020 and 2022.

Our Platinum Mastermind Members are completing a 3-year business education & coaching program that helps them achieve more profit, more control and more freedom in their farm business. It helps them transition from great technical farmers to strategic farm business owners. Our alumni members have graduated from the 3-year program and continue to learn, grow, network and benchmark with us.  
 
Each year our members complete a farm business benchmark that helps them assess the performance of their business model for the past 12 months, and they tell us that this is a really valuable tool for identifying opportunities to improve their business. 
 
They also work with a Farm Owners Academy Business Analyst to understand exactly what the benchmark is telling them and to explore opportunities to improve their farm business based on their numbers. 
 
The chart above shows the average ROAM (Return on Assets Managed, a measure of farm profitability) for Platinum Mastermind & Alumni Farm Businesses aggregated by the number of enterprises that they run on their farm. The white numbers in the bars show the number of farms in each  
 
A higher average ROAM means that the business generates a higher level of Net Profit for every dollar of assets (owned land, leased land, sharefarmed land, livestock, plant & equipment) used to generate the Net Profit.  
 
For example, a 4.7% ROAM means that you generate $47,000 in Net Profit for every $1,000,000 of Assets in the business vs a 3% ROAM which means you generate $30,000 worth of Net Profit for every $1,000,000 in assets. 
 
THINK: 4.7% ROAM is 1.57 times better than 3.0% ROAM when it comes to money in your pocket.  
 
What this benchmarking data shows us is that the most profitable and best performing farm businesses focus on farming only 1 or 2 enterprises really well…they don’t diversify and try and run lots of different enterprises. 
 
Why 1 or 2 enterprises is better than chasing the diversification myth 
 
Let’s explore this further… 
 
The best way to reduce business risk or increase profitability as a farm business owner is to focus on farming 1 or 2 enterprises and do them really well. Contrary to common belief diversification is costing you a Ute load of money. 
 
Running 1 or 2 enterprises gives you the best chance of getting to a scale that allows you to become a low Cost of Production producer (i.e. low cost per unit of output) which reduces your business risk. Note that this is different to a low cost per ha. Your business still might have high costs per ha but have a low Cost of Production. Click here to download Free Profitable Farmer Playbook if you want to learn more about this KPI.


The key reasons why 1-2 enterprises outperform those running 4 or more (the diversification myth):

  • Most farm businesses don’t have adequate size to run more than 1 or 2 enterprises at a scale that allows them to be consistently profitable or have a low cost of production. When you think scale think revenue generated from that enterprise. A great goal for farm enterprise scale is greater than $1m in revenue per enterprise farmed and to have a Cost of Production that is below the Decile 2 price for your chosen commodity.

  • The more enterprises you run the more complicated your farm business becomes. This plays out in lots of different ways. The multiple different enterprises start to compete for labour and resources which means things don’t get done in the timeliness that they should. Often you may even compromise the management calendar of one or more of the enterprises just so labour is available, or you end up fighting nature. This leads to sub-optimal performance in one or more enterprises.

 

  • Specialising allows you to focus and become a master of your chosen enterprises. You would have heard the tale of the dog that chases multiple rabbits and catches none.

 

  • Many farm businesses running more than 2 enterprises have an enterprise that is significantly under performing and erodes profit rather than adds to it. Just getting rid of this enterprise and expanding the 1 or 2 that they do best has an immediate positive effect on their profitability. 

 
In Summary

Farm Owners Academy benchmarking shows that farm businesses running 1-2 enterprises are 1.57 times more profitable than those caught in the diversification myth and running 4 or more enterprises.  
 
The data also tells us that running 1-2 enterprises well is not what most farm business owners are doing. 
 
The first step to figuring out if the diversification myth is holding back your farm business is to get involved with farm business benchmarking to an enterprise level so you can identify what is working and what isn’t for your farm. 
 
I encourage you to explore this for your farm business using your own numbers. To find out how Farm Owners Academy can help you with this, you can book in a Complimentary Coaching Call and talk to a Farm Business Coach.
 
You can also ask yourself these questions: 

 

  • Do all the enterprises I run have the scale they need to be highly profitable? 

 

  • What 1 or 2 things do we do really well and can do as well or better than anyone else? 

 

  • How do we focus on doing more of the things we are great at? 

 

  • Where are we overcomplicating our business? 

 

  • What do we need to stop doing to allow our business to be more profitable and simpler to run? 

 

  • Who can help us identify the most profitable path forward for our business? 


So, if the jumper feels like it fits, or perhaps it still feels a bit prickly but you think it’s worth looking into a bit further, join us at the next 2 day Top Producers Workshop. We will explore this and other tactics to run a great farm business in a lot more detail.
 
Have a great week!  
 
Sam Johnsson
 
CEO - Farm Owners Academy

 
 
 
 
 
 

The 7 Reasons That You Are Lacking Cash in Your Farm Business

May 09, 2024

The 3 Keys to a Profitable, Scalable Farm Business Model

May 02, 2024

While you're here, explore what's on at Farm Owners Academy

FREE COACHING
COMPLIMENTARY COACHING CALL

Ready to take your farm to the next level? We are here to help you overcome common challenges and achieve your business and personal goals.

BOOK YOUR CALL >
SHORT COURSE 
PRODUCTIVITY & TIME MANAGEMENT SHORT COURSE

A short course designed for busy farm owners and managers to help reduce the overwhelming workload and time management struggles you encounter daily, and increase your productivity and results.

ACCESS THE COURSE >
ATTEND EVENT
TOP PRODUCERS

Over the 2-Day Workshop you’ll learn the concrete tools and strategies to create a lasting transformation in your farming business, and your life, that you can’t get anywhere else.

RESERVE YOUR SEAT >
Head Office

252 Playford Hwy
Kingscote SA 5223

Let’s Talk

0447 184 167
[email protected]