Diversifying farming businesses
How farmers can add business activities to traditional farming to develop new sources of income.
This guide is for farmers who are thinking of diversifying, by adding new business activities to traditional farming. Farm diversification is not guaranteed to boost your farming business and can be a complex process, but can also be very rewarding. If you are wondering whether to diversify, and how you might do so, you are advised to seek independent advice. Commercial business consultants offer analysis and advice on diversification planning for a fee. You can also receive professional advice from a government adviser, your accountant and bank.
This guide identifies key issues to discuss with government and other professional advisers. These include basic questions about your short- to medium-term business intentions and motivations, and how to work out if diversification is right for your farm.
It outlines various possibilities for diversified farm businesses and the need to consider the implications for your core farm business, especially around tax planning. It explains how you can plan, prepare and develop new skills and access funding for diversification.
Deciding if diversification is right for you
When you meet your professional adviser, you need to be aware that diversification will not work for every farm business. To find out if diversification is the right choice for you, you should be ready to discuss:
- why you want to diversify
- the implications on your time, your core farm business activities, cashflow, staffing, potential liabilities etc
- information about skills, resources and market conditions that you have gained from other local farmers who have diversified
- how much the diversified business will cost to set up
- how you will finance it
- how profitable it will be
- how to market it
- legal requirements, tax and national insurance issues
Be sure to give realistic answers to these questions. If you reach a positive conclusion, you will be in a position to prepare a business plan for your diversification from these answers. You will then be able to see if it is possible to fund your start-up.
If, after considering all these questions, it becomes apparent that diversification is not for you, you will be in a better position to think realistically about the choices you need to make in your existing farm business.
Planning for farm diversification
About half of all UK farms use some form of diversified activity in their farming business and these bring an average of £10,400 extra revenue per farm. Other benefits of diversifying your farm include:
- making better use of your farm’s physical resources and characteristics
- finding new uses for your existing skills
- integrating your farm with – and recycling money within – the rural economy
You will need to decide from the start what benefits you hope diversification will bring.
There are few limits on the kind of businesses you can diversify into. They can be either agricultural or non-agricultural, such as:
- livestock products – eg producing and selling sheep cheese, llama farms, goat dairying
- crop products – eg growing and selling speciality flowers, energy crops
- retail outlets and catering – eg opening a farm shop
- training and promotion of rural crafts – eg offering dry stone walling workshops
- opening facilities for craft making and retailing
- tourism – eg opening land up for camping or a bed and breakfast
Assess your existing business
Before deciding to diversify, you should carry out a detailed assessment of your existing business. Your financial accounts can help you to see how moving in a new business direction would affect your turnover. You will also need to have all your tax information to hand, so you can discuss tax planning with your professional adviser.
To learn more about using your accounts to plan changes to your business, see the page on using financial figures in whole farm planning in the guide on farm business and financial planning: the basics.
Alternative agricultural products
As part of your diversification strategy, you may want to look into developing alternative agricultural products, for example:
- fish farming
- alternative livestock or livestock produce
- non-food crops
Aside from the business considerations that you will be evaluating, you should also bear in mind that different rules and regulations may apply to your new business options. Generally, diversifying into other forms of agricultural activity does not require planning permission. If in doubt, you can contact your local authority for advice. You may also have to consider new health and safety, and employment issues that do not currently affect you.
There are over 1,000 registered fish and shellfish farms in England and Wales, mostly farming salmon in inshore waters on the west coast, and western and northern islands of Scotland. Freshwater fish farms are found throughout the UK.
The Department of Environment, Food and Rural Affairs (Defra) classifies fish farms as ‘Aquaculture Production Businesses’ – all of which must be authorised in advance and licensed or, in some specific niches, registered. The Food Standards Agency (FSA) is responsible for hygiene issues relating to fish and shellfish. Fish farming is not eligible for funding from the Rural Development Programme for England.
To prevent the introduction of listed diseases, strict requirements are in place when importing any aquaculture animal that is to be released into the wild or placed in a ‘put and take’ fishery, including:
- health certificates must accompany every shipment
- specialist aquaculture transporters must be registered
- record-keeping requirements
- notification duties in the event of disease outbreak
Alternative livestock markets
Another way of diversifying your farm’s agricultural products is through less traditional livestock options. These could include rearing or producing:
- certain species of goat for mohair or cashmere or angora rabbits for their wool
- sheep and/or goats for their milk and specialist cheese-producing potential
- new world camelids – eg llamas, alpacas, guanacos or vicunas for their pelts or wool
- birds or fowl for eggs and/or meat – eg ducks, quail, geese, guinea fowl and/or ostriches
- game – eg deer for venison and/or wild boar
- worms – eg for compost and bait
Regulations will differ depending on the species you wish to raise. Bovine tuberculosis (TB), for example, can occur in new world camelids, which means that these animals must be vaccinated against bovine TB. For more information, see the section on controlling disease.
All of the above products would also open new marketing opportunities, including farm shops, farmers’ markets and/or online selling or exports. See the guide on farm shops and farmers’ markets.
You could also diversify your agriculture by producing non-food crops, for example:
- pharmaceutical crops and related products
- energy crops – eg short rotation coppice and miscanthus
- industrial fibre crops – eg hemp, flax and cereal straw
- speciality flowers
For more information, see the guide on industrial fibre crops.
Climate change is creating opportunities to diversify into crops that are not native to the UK – eg vines and olives – or into crops for use in electricity, heat generation and/or biofuels. You can read about industrial energy crops in the guide on industrial energy and non-food crops. You can also access information from the Farming Futures organisation which provides advice for farmers looking to adapt their businesses to new conditions – eg by developing vineyards.
Diversification out of agriculture
You could consider opening a non-agricultural business on your farm, such as:
- tourist accommodation – eg bed and breakfast
- retail outlets and catering – eg a farm shop and tea rooms
- rural tourism – eg farm attractions
- converting redundant buildings to other uses – eg offices
- making and selling non-agricultural products – eg cakes and beer
- training and promotion of rural crafts and arts – eg dry stone walling workshops
- adding value – eg smoked-food products, cheese and ice-cream
- energy markets – eg woodfuel projects
Non-agricultural business regulations
Different business sectors will be governed by their own regulations – eg for health and safety, and food hygiene.
Your local council can advise you on regulatory issues relevant to your new business.
Develop your ideas
When developing a farm diversification strategy, you will need to:
- develop your ideas
- prepare a business plan
- seek planning permission where required
- research funding options and submit applications
- identify and undertake suitable training for existing personnel and/or recruit staff with the skills you need
Develop your ideas
Turning an idea into a functioning business requires detailed research and specialist advice. If the idea involves an invention or a new process, you may also need to protect your intellectual property.
Once you have established a new business, you will need a growth strategy.
Planning permission and diversification
You will need to seek planning permission for any new development – such as a building – or material change of use of your land from the planning department in your local council.
If you plan to use agricultural land or buildings for agricultural purposes, you do not need planning permission. Many agricultural and forestry operations are allowed under ‘permitted development rights’, without you having to apply for planning permission.
The rural planning system is run by local and national park authorities, who decide on applications based on their impact on the local economy and potential impact on the environment.
The type of land you farm will also influence what sort of development is permitted. For example, the Agricultural Land Classification system is used to assess the agricultural quality of land, while Environmental Impact Assessments look at the potential impact of any development on your land.
For more information, see the guide on planning land use.
Planning policy guidance
Planning permission decisions will take into account government planning policy statements, which set out priorities for local areas and regions.
The planning permission system in rural areas is based on the government’s Planning Policy Statement (PPS) 7, which includes guidance on farm diversification.
PPS 7 states that ‘diversification into non-agricultural activities is vital to the continuing viability of many farm enterprises’, and that local authorities should support ‘well conceived’ plans for diversification in rural areas, including green belt land.
The type of diversification you choose may also be influenced by your local parish or community plan – these are documents in which local communities set out their priorities for social and business development. This can help you see which planning permissions are likely to be successful.
Tenant farmers and diversification
Tenant farmers can diversify their farm business in the same way as landowning farmers, as long as they have the landowner’s approval. However, a lack of collateral is often a barrier to tenant farmers, as it means less access to capital.
Some tenancy agreements rule out diversification. This is often because of inheritance implications for landowners arising from a change of use.
Code of good practice for tenant diversification
The Defra has published a code of good practice to encourage agri-environment schemes and diversification activities on tenant farms.
This code recommends that for tenant diversification, there should always be:
- early consultation between tenants and farmers about planned diversification schemes
- an agreed timetable
- a detailed written proposal and responses
There is also an arbitration scheme for cases where landowners and tenants cannot agree on a proposed diversification scheme. If landlord and tenant cannot agree on the appointment of an arbitrator, either can apply to the President of the Royal Institution of Chartered Surveyors [RICS] to make an appointment.
For more information, see the page on arbitration procedures in the guide onagricultural tenancies.
You can also get advice on diversifying as a tenant farmer from the Tenant Farmers Association (TFA) by contacting the TFA Helpline on 0118 930 6130.
The National Farmers’ Union (NFU) also provides model clauses for business contracts – eg for activities such as leasing out shooting rights or letting holiday cottages.
Funding for diversification
You may need assistance in the form of grants/loans to develop plans for farm diversification. As well as funding from the Rural Development Programme for England (RDPE) and commercial banks, capital and revenue funds are available from a range of public sector, charitable and private sources. This is particularly important for tenant farmers, who may face problems obtaining credit from commercial institutions.
The RPDE supports the rural community in various ways, including funding for business development and to improve opportunities. You can find out more in the guide on the Rural Development Programme for England (RDPE).
The RDPE also includes environmental management schemes, for example:
- Environmental Stewardship schemes – see the guide on Environmental Stewardship: the basics
- forestry schemes – see the guide on trees and woodland
You can also find further information on the page on how to write a farm business plan in the guide on farm business planning: the basics.
Commercial loans and overdrafts
Private investment provided by banks and other financial institutions remains an important source of funding for business diversification. To get commercial funding, you will normally need a detailed and well-researched business plan.
There are funding schemes specifically designed to help you develop new technologies for a diversified business.
Funding for climate change adaptation or mitigation
Funding and advice are available to help farmers diversify their businesses in response to climate change, eg by growing biofuels, deploying commercial tidal energy farms or setting up anaerobic digestion facilities.
Farming Futures is a co-operative venture between the Department for Environment, Farming and Rural Affairs (Defra) and other agricultural organisations that provide advice for farmers looking to adapt to changing climates and markets.
The Carbon Trust
The Carbon Trust can provide advice and, in some cases, venture capital funding to help you adapt your farming business to climate change. The Entrepreneurs Fast Track offers commercial advice, networking opportunities and grant funding to small enterprises that are developing low carbon technologies in the UK. Find out about the Entrepreneurs Fast Track on the Carbon Trust website.
The Carbon Trust can also give you free advice about establishing a new low-carbon business, and they can carry out site surveys. Find out about Carbon Trust advice and services on the Carbon Trust website.
Rural Development Programme for England (RDPE) funding
Defra administers RDPE-funded grants for economic and social projects, which aim to increase the competitiveness of farmers, improve the quality of rural life and diversify the rural economy. This delivery has been taken over from Regional Development Agencies. Natural England administers the RDPE-funded Environmental Stewardship Scheme and the Energy Crops Scheme. The Forestry Commission administers the RDPE-funded English Woodland Grant Scheme. For more information, see the guide on Rural Development Programme for England (RDPE).
You may be able to get tax incentives for investing in a low carbon business.
For more information, see the guide on cutting your carbon emissions.
Rising energy prices have created business opportunities for farmers in anaerobic digestion. This involves breaking down organic matter in the absence of air to produce flammable biogas, which can then be used to provide power and heat for farms, or can be sold to power companies. There is also a nutrient-rich organic by-product.
Find business guidance on anaerobic digestion on the ADLib website.
It is also possible to set up a business to generate renewable energy from biomass.
Funding for knowledge transfer, innovation and training
Some diversification projects may require expertise or equipment not usually available to a farming business. You may be able to get funding from specialist schemes to help.
Before seeking financial support, you should research ways to exploit your ideas.
Knowledge Transfer Partnership
The Knowledge Transfer Partnership (KTP) scheme puts small and medium-sized enterprises (SMEs) in contact with academic institutions and research organisations.
Each partnership involves an associate from an appropriate organisation working with a business to help it develop the technology required.
KTPs are part-funded by government grants, averaging around £20,000 per SME. Participating businesses are expected to provide approximately one third of the costs themselves.
You may need training in business and technical skills to run a new farming business, and funding is available for this.
Lantra is the Sector Skills Council for environmental and land-based industries. Though it does not grant funding directly, it manages two agricultural skills funding programmes:
- LandSkills – available in seven England regions
- Women and Work – England-wide
See the guide on agricultural skills and training.
Training in non-land based skills
Your new business may be in a sector such as tourism, retailing, food processing or clean energy generation. There are many vocational training programmes where you or your employees can develop skills in these and other sectors, while continuing to work.
Learndirect provides online courses leading to nationally recognised qualifications in maths, English, information technology, business (including basic food hygiene) and management.
Your local Further Education College will probably offer a range of vocational courses on a block release or day release basis, which allows people to combine work with study. These courses are often based around apprenticeships, which are available in a wide range of sectors as well as Agriculture, Horticulture and Animal Care, including:
- arts, media and publishing
- business, administration and law
- construction, planning and the built environment
- education and training
- engineering and manufacturing technologies
- health, public services and care
- information and communication technology
- leisure, travel and tourism
- retail and commercial enterprise
The Employer Recognition Programme is a new vocational training programme run by the Qualifications and Curriculum Development Agency which allows employers to plan and deliver high quality in-house training which is nationally accredited through the Qualifications and Credit Framework (QCF).