Posted: Wednesday, November 21, 2012 12:00 PM
Diversification efforts limited by small size of farms
Growers who seek profits from off-farm businesses bring in more money than those who diversify their operations with agritourism and similar ventures, according to an economic study.
"Off-farm businesses generate much higher returns," said Stephen Vogel, an economist with USDA who authored the report.
The study found that roughly one of every three farm households in the U.S. engages in business enterprises other than crop or livestock production for added income.
Roughly half the entrepreneurial activities were devoted to on-farm diversification, like agritourism, direct-to-consumer marketing and sales of value-added goods.
The other half were off-farm activities, including agricultural services, natural resource extraction, construction, manufacturing and services such as insurance and finance.
While the number of activities was roughly split between the two categories, off-farm sources generated more than 80 percent of the total $26.7 billion in alternative income, the study said.
The disparity in income between on-farm diversification and off-farm businesses may be attributed to company size, said Danny Klinefelter, an agricultural economist at Texas A&M University who reviewed the USDA study.
On-farm diversification is often the province of smaller operations that are constrained by acreage and production, he said. "The scale just isn't there to create a lot more income per unit."
Off-farm businesses -- like equipment dealerships or processing plants -- are the domain of larger growers, Klinefelter said. "The farm size doesn't limit how big those operations can be."
Klinefelter noted that off-farm businesses saw large swings in income due to economic turbulence in recent years at times when crop prices were relatively strong.
The balance of off-farm and on-farm income can therefore provide greater overall stability, he said. "It's possible for them to be counter-cyclical."
Off-farm businesses also help large growers keep year-round employees busy even during periods when there isn't much to do around the farm, Klinefelter said. "They more fully utilize assets."
Vogel said he has conducted other research which found that about 12 to 20 percent of small business owners -- including farmers -- are such "portfolio entrepreneurs" who operate multiple types of companies.
Not only is off-farm income important for the households, it's also crucial for rural economies, he said.
As farms have required fewer workers in recent decades, there's been a divergence between the agricultural industry and the rural economy, Vogel said.
For that reason, agricultural policy has been seen as separate from rural development policy, he said.
However, the study indicates that there's still overlap between the two spheres as growers with off-farm business contribute to local communities, Vogel said.
"They're much more important in rural areas than metropolitan areas," he said of portfolio entrepreneurs.
While farmers with off-farm businesses earned more overall than those without such ventures, their farm operations generated less income on average, the study said.
This phenomenon suggests that these households "are entrepreneurs first and farmers second," as they allocate resources to maximize the "combined income from both enterprises," the study said.