The increasing importance and value of diversification for the Agriculture Sector

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The Office for National Statistics ("ONS") has recently issued its revised and finalised report on the 2016 Farm Business Survey of farm income. 

Typology of "diversified activity"

The ONS uses the term "diversified activity" to distinguish activities from income derived from agriculture, agri-environment and the basic payment.

Whilst the distinction might appear straightforward, the ONS acknowledges that in practice there is a degree of estimation in the categorisation of farm income, not least because different farming accountants interpret the same activity differently. For example: (a) accountants may or may not allocate income derived from the husbandry of energy crops would fall within "agriculture"; and (b) the carrying out of contracting work for other farms is not treated as "diversification" as it is deemed to be "agricultural work", even though that contracting work is intrinsically linked to the operation of - for example - an anaerobic digestion facility.  

These statistics should therefore be treated with caution when seeking to establish the importance of diversification to the rural economy in raw "percentage of income" terms.

Contribution of income from diversified activities to total farm income

On average across all types of farm there was a drop in average farming incomes in 2015/16 compared to 2014/15, but the picture of declining incomes was not common across all farm types, horticulture and general cropping farms being two categories of farming which, on average, increased income over the two years. 

62% of farm businesses in England carried some diversified activity in 2015/16, at very similar levels to 2014/15.

For 41% of businesses with diversified activities, income from these activities accounted for at least a quarter of the total farm business income (compared to 38% in 2014/15). For 26% of businesses, the income from diversification exceeded the income from the rest of the farm business (compared to 24% in 2014/15).

The ONS suggests that the increased contribution from income from diversified activity is reflective of relatively poor performance for the "traditional" side of farming businesses for 2015/16, especially given that the overall proportion of farming businesses with an element of diversification has remained relatively static.

In total, £580m was generated from diversified activities by 34,900 farms, with an average diversified enterprise income of £16,600. Different categories of diversification contributed to farm income as follows:  

Activity Proportion of farm income (average)
Letting out buildings  41%
Food processing and retailing enterprises 42%
Generating renewable energy 9%
Tourism, sport and recreation 8%

Interestingly the level of income from renewable energy is particularly telling when compared to the 6% reported last year. The ONS statistics do not provide any granularity on whether this is "commercial" income or income derived from FiT and RHI.

The value of the diversified income stream

The ONS infographic shows the volatility in income derived from "traditional" agricultural income streams.

By comparison, many forms of diversified activity:

  • Have a far smoother income profile (for example, consider the steady income derived from a 10 year lease of a farm building used as office space, or solar farm)
  • Offer an alternative market for existing agricultural products (such as on-farm shops and anaerobic digesters)

Even if the diversified income has the potential to wax and wane from year to year, that income stream can still offer value to a farming business if the peaks and troughs in income fall on different years to the peaks and troughs of income from "agriculture".  

All in all, diversifying the farming business should aim to spread risk and smooth cashflows, both of which add value to the farming business as a whole by improving and strengthening the economic viability of the business.    

For further information visit our Farm Diversification page or contact Jonathan Croley on /01392 334109.

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