Diversification Strategies

Agricultural producers operate in an environment that is constantly changing. Changing government policies, input and commodity prices, and uncertain financial conditions are all risks faced by modern farmers. Strategies for managing this risk include insurance and the use of financial tools like futures and options. However, diversification is also a means for managing risk.

Diversification is a strategy whereby a producer can spread his investment over several enterprises, commodities, or activities in order to reduce the risk of loss. Most often when speaking of diversification in a farm setting, we are speaking of crop diversification. Crops whose production and markets work countercyclical to one another may provide a useful means for diversification. Even off-farm income might be viewed as a diversification of income generating activities that utilize household resources like time and skill.

Another, often overlooked, form of diversification is geographic diversification. Unlike crop diversification or even our off-farm income example, geographic diversification is not a strategy that centers on the choice of enterprise, but rather one that focuses on location. We suggest that farmers who are sufficiently large enough to expand operations to new locations may benefit from a proper consideration of geographic diversification.

Presented here is an explanation of our method for analyzing the potential benefits of producing in diversified areas with a graphical tool for ease of interpretation.