As inflation drives costs up and subsidies wind down, the business case for rural diversification is stronger than ever.
That’s the message from Stephen Smout (pictured), head of agriculture at McLarens, who highlighted a recent report from Savills which found that 51% of farmers earned some form of non-farming income in 2022. Thanks to technology and innovation, he said, the range and types of diversification are broader than ever, with rural tourism and leisure, alongside other areas, offering unique opportunities for farmers to increase their income.
Smout noted that diversification in agriculture typically involves optimising the use of a farm’s assets and unique features.
The variety of diversification strategies that farmers might adopt can include:
New opportunities inherently bring new threats and Smout highlighted some of the key risks and exposures facing farmers as they look to embrace rural diversification.
“From hosting leisure events, glamping and more to selling produce via a farm shop, many of the areas in which farmers typically diversify are not typically covered under a regular farming insurance policy and thus many farmers are left underinsured,” he said. “The biggest risk with most farm diversification projects is the significant increase of people coming on to the farm with little or no agricultural background or understanding and the subsequent potential for personal injury claims.
“The general public tends to view farms as being idyllic and tranquil locations without realising that they are also a rural factory floor, particularly at busy times, with time pressures and deadlines like any other business.”
Many of the established farm insurers have built up experience in dealing with farm diversification projects that can be incorporated within a standard farm policy, he said. However, he noted that both brokers and insurers must be mindful that if a diversification project grows, it may have to be set up separately in a more specific and appropriate commercial policy.
“Quite often farm diversification can happen by accident whereby the farmer is approached by someone looking for storage space or a barn to carry out a small business activity,” he said. “The farmer quickly agrees terms and with no or very little outlay. Therefore, the farmer does not give any thought about the need for insurance or notifying their insurers of the change of use.
“Clearly, the risk has changed and if there is a claim, insurers will no doubt be very concerned regarding any possible non-disclosure. This is one of the biggest headaches between farmers and their brokers and insurers - there have been a number of instances where farms have found themselves uninsured as a result of non-disclosure.”
Commercial forestry industry is one area in which many farming businesses are diversifying, Smout said, and also an area where having the right policy, regularly reviewed with updated values, is essential. Policies are typically fire cover only but can be extended, with additional premium, to include storm.
Smout added that policy coverage varies across the market but there are bespoke growing timber policies that cover the timber on a valued basis with various extensions such as firefighting costs, site clearance, fencing and consequential felling of undamaged trees for continued good silvicultural management. The owner and his forestry consultant specify the value of the timber per hectare which should reflect the tree species, age and yield class.
“Many insurers offering farm insurance policies will add growing timber cover,” he said. “Generally, these policies are on an indemnity basis and may only provide cover for site clearance and replanting costs, without any of the extensions listed above.
“In more recent times, we have also seen farms diversify to take advantage of the green energy boom including biomass production, solar energy parks, wind farms and anaerobic digestion systems. These are also quite unique and will require specialty lines and expertise. Whether farmers have the correct insurance in place or not, such diversification brings new operational risks and often costly equipment. Wind power motors burning out as a result of strong winds, or anaerobic digestion systems exploding certainly don’t fall within the category of ‘stereotypical farming claims’.”
There are a lot of ways to support clients looking to harness rural diversification opportunities, Smout said.
“The increasing value, complex nature of claims and availability of masses of data - both performance & financial – necessitate environmental, engineering, liability and accountancy disciplines within the loss adjusting field, working alongside specialist agricultural adjusters,” he said. “As such, we’ve been focused on building a multidisciplined agricultural offering that can support farmers as the nature of commercial farming continues to evolve.”
