AgDM newsletter article, May 1997

Specialize while diversifying – Custom farming

Don HofstrandDon Hofstrand, retired extension value added agriculture specialist, agdm@iastate.edu

A strategic decision facing modern farmers is whether to specialize or diversify.  Specialization allows you to focus your management skills on one major enterprise.  Some would argue that you need to specialize to be efficient and keep up on the latest production technology.  However, proponents of diversification reply that you need to diversify your operation in order to spread your production and price risk, an important concept in today’s high risk agriculture. 

The answer may be to find a way of doing both—specializing labor and management while diversifying income sources.  Some pork producers are considering doing this by having their crops produced by a custom operator. This allows you to specialize your labor and management on hog production because the custom operator provides the labor and some of the day-to-day management for the crops.  However, you are still diversifying income sources because you get the income from the portion of the crops that are sold (not fed to hogs).  Also, the hogs are fed with home-raised corn rather than purchased corn.

Below are ideas you may want to consider in making this decision. 

Advantages

Disadvantages

Partial strategy

You may follow a partial strategy by selling big ticket items like a combine and large tractor, but continue to do the time-sensitive operations like planting, spraying, and cultivating.  This allows you to substantially reduce your capital and labor investment while maintaining control over the critical parts of the crop operation.

Decision criterion

The objective is to increase the overall income from the farm while maintaining the risk management feature of diversification.  The income from the hog operation should increase because of the increased investments of capital, labor, and management.  Also, due to the reasons cited above, the decline in crop income may be small.  In fact, crop income may not drop at all, or actually increase.  The key is to find the right custom operator.  However, with the pressure on grain farmers to expand their land base, your chances should be good.

Only careful year-end analysis of the performance of the whole farm and individual enterprises will determine if you are successful.  So you may want to implement this strategy on a trial basis.  The first year you may hire a custom operator to do only a portion of the operations.  The second year you may hire all of the operations done.  Also, you may wait to sell your crop machinery until you are sure that the arrangement will work.

Summary

This is one method of specializing your management while diversifying your income sources.  Other methods may fit better in your situation.  However, specializing while diversifying is one of the strategic decisions facing today’s farmers.

 

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