Diversification: An Essential Approach In A Tough Economy

Don’t put all your eggs in one basket; if you fall, you run the risk of not having breakfast. Farmers should spread their risk by adding a second component to an existing farming operation, or even by investing in industries unrelated to agriculture, says Dawie Maree, head of information and marketing at FNB Agriculture.

Successful farming businesses in South Africa today are often well-diversified, with interests both on-farm and off-farm, and frequently operating in two or more regions.

Not long ago, diversification was a buzzword thrown around at almost every agricultural conference or meeting. But what exactly is diversification?

In short, it is a technique that reduces risk by allocating investments among various financial instruments (in this case, agricultural products), industries or other categories. It aims to maximise returns by investing in a number of areas, each of which would react differently to the same event.

Agricultural economists preach diversification to farmers to help them spread risk, and most farmers diversify within a category; for example, they might produce maize, soya bean, and sunflower, or peaches, apricots, and plums. But it seems as if South African farmers are not as genuinely diversified as they once were. I remember more herds of cattle and sheep foraging on lands after the harvest in the maize triangle than what I see nowadays. I realise, however, that livestock theft has made a massive dent in the country’s sheep flock.

Monocropping is becoming a thing of the past, but one still sees farmers planting maize year after year on the same lands. The practice is not sustainable in the long term, and we will see more and more farms advertised in the yellow pages.

WHY DIVERSIFY?

There are probably three reasons for farmers to diversify, and perhaps even more, depending on the situation.

The most important is that diversification is a tool to mitigate risk. This includes climatic, financial and market-related risk. There are other ways, such as insurance, to mitigate risk, but diversification is the best option in the long run.