Written by: Isaac Dubovoy
What Is Diversification Through Hedging Industries?
Diversification involves building a balanced local economy by developing industries that complement each other. Hedging industries take this a step further, pairing sectors whose risks are less correlated. In other words, when one industry faces challenges, the other can stabilize the local economy. This approach isn’t about replacing the dominant industry but rather about creating additional revenue streams that buffer against economic downturns.
In rural areas, diversification often aligns with natural resources, infrastructure, and community strengths. It requires thoughtful planning to ensure new industries integrate seamlessly with the existing economic landscape while fostering long-term sustainability.
Access to Financing
Securing adequate funding is one of the first hurdles rural communities face when pursuing new industries. While federal programs like the Business and Industry (B&I) Guaranteed Loan Program, administered by the U.S. Department of Agriculture (USDA), provide valuable support by encouraging private investment, they are just one of many options available.1 There are also many programs available by state or local economic development agencies. Rural businesses can also explore alternative financing mechanisms such as state-level grants, partnerships with community development financial institutions (CDFIs), or private capital tailored to align with regional economic goals. These diverse pathways ensure rural entrepreneurs have the resources needed to pursue innovative projects, foster economic growth, and adapt to changing market demands.
In addition to having the financial resources, it’s equally crucial to understand why diversification matters, especially for rural communities reliant on a single economic driver.
Why Rural Communities Need Diversification
Communities that rely on a single industry face significant risks. For example, farmers may experience financial strain during droughts or commodity price drops. Similarly, areas dependent on fossil fuel extraction face challenges when energy prices fall or as policies shift toward renewable energy. Diversification provides a vital safety net by offering alternative sources of income and job opportunities that reduce vulnerability to these uncertainties.
Beyond economic stability, diversification strengthens social resilience. A community with varied industries attracts a broader skill base and workforce, creating opportunities for families to remain in their hometowns. It also helps rural areas compete for investment and resources, making them more attractive to both businesses and residents.
Examples of Hedging Industries
Rural areas offer unique opportunities to pair industries effectively. For instance, a farming community can embrace agri-tourism, inviting visitors to experience farm-to-table dining, harvest festivals, or educational tours.2 Similarly, regions with abundant wind or solar resources can combine agriculture with renewable energy projects, such as wind farms or solar arrays.
Forestry communities, traditionally reliant on timber sales, can diversify by promoting outdoor recreation, including hiking, fishing, or eco-tourism. Water infrastructure, essential for farming, can also support recreational businesses like fishing lodges or kayaking tours. These examples illustrate how hedging industries can work in tandem to reduce economic risks while generating growth.
Numerical Example
Consider a rural farming community that relies heavily on wheat production, where the local economy depends on volatile wheat prices influenced by global supply, demand, and weather.
Without Diversification: Single Industry (Wheat Farming)
- Total Annual Revenue from Wheat: $10 million
- Wheat Price Drops by 20%: Revenue falls to $8 million
The community faces a $2 million revenue shortfall, leading to lower incomes, reduced local spending, and economic hardship.
With Diversification: Wheat + Renewable Energy + Agri-Tourism
- Annual Revenue Breakdown:
- Wheat Farming: $7 million
- Renewable Energy (e.g., wind farms): $2 million
- Agri-Tourism (e.g., festivals, farm tours): $1 million
- Total Revenue: $10 million
- Wheat Price Drops by 20% and Renewable Energy/Agri-Tourism prices remain constant:
- Total Revenue: $8.6 million
While the wheat industry continues to struggle, diversification has reduced the overall impact to $1.4 million instead of $2 million.
The Role of Engineers and Planners
Engineers and city planners play a vital role in enabling strategic diversification. They design the infrastructure needed to support new industries, from transportation networks to broadband access. They also collaborate with local leaders and private investors to identify opportunities aligned with community strengths. By focusing on sustainable development, they ensure that diversification efforts provide long-term benefits without depleting natural resources.
Our engineering and planning teams often collaborate with local governments and stakeholders to evaluate a region’s capacity for renewable energy, agri-tourism, or other potential industries, ensuring new projects are synchronized with existing operations rather than replacing them.
Conclusion
Diversification through hedging industries is a powerful strategy for rural communities to build resilience and thrive in uncertain times. However, challenges—such as high start-up costs, environmental risks, and community resistance—must be carefully managed. Moreover, understanding the difference between broad diversification and strategic hedging is key to ensuring both methods work in tandem rather than redundantly.
While diversification spreads risk across multiple sectors, hedging is specifically about pairing industries whose risks do not significantly overlap. This means carefully selecting industries so that one thrives or remains stable if the other faces a market or environmental downturn. For rural communities, employing both broad diversification and strategic hedging can create a more robust buffer against economic shocks.
If your community is ready to explore these opportunities, consider:
- Assessing local assets (e.g., land, labor, unique attractions)
- Identifying industries with complementary or uncorrelated risk profiles.
- Engaging engineers and planners early to evaluate infrastructure needs
- Exploring multiple financing options (federal/state-level grants or loans, CDFIs, private capital, etc.)
By pairing complementary industries, rural areas can reduce economic vulnerabilities while creating opportunities for growth and stability. Planners, engineers, and policymakers have a unique chance to lead this transformation, fostering a future where rural communities aren’t just surviving, but flourishing.
References
- U.S. Department of Agriculture (USDA). FY 2025 Budget Summary. Washington, D.C.: USDA, 2025. Available at https://www.usda.gov.
- Whitt C., Sarah A. Low S., Van Sandt A., Agritourism Allows Farms To Diversify and Has Potential Benefits for Rural Communities, Economic Research Service, US Department of Agriculture, Nov. 2019