Agricultural diversification involves movement of resources from low value commodity mix to high value commodity mix. It focuses mainly on horticulture, dairy, poultry and fisheries sector. While most definitions of diversification in developing countries do work on the assumption that diversification primarily involves a substitution of one crop or other agricultural product for another, or an increase in the number of enterprises, or activities, carried out by a particular farm, the definition used in developed countries sometimes relates more to the development of activities on the farm that do not involve agricultural production. For example, one section of the British Department for Environment, Food and Rural Affairs (DEFRA) defines diversification as “the entrepreneurial use of farm resources for a non-agricultural purpose for commercial gain”. Using this definition DEFRA found that 56% of UK farms had diversified in 2003. The great majority of diversification activities simply involved the renting out of farm buildings for non-farming use, but 9% of farms had become involved with processing or retailing, 3% with provision of tourist accommodation or catering, and 7% with sport or recreational activities. Others adopt a broader definition, which may include development of new marketing opportunities.
In developing countries such as India, which has been one of the leaders in promoting diversification, the concept is applied both to individual farmers and to different regions, with government programmes being aimed at promoting widespread diversification. The concept in India is seen as referring to the “shift from the regional dominance of one crop to regional production of a number of crops ...... (which takes into account)..... the economic returns from different value-added crops... with complementary marketing opportunities”.
Diversification can be a response to both opportunities and threats.
In making decisions about diversification farmers need to consider whether income generated by new farm enterprises will be greater than the existing activities, with similar or less risk. While growing new crops or raising animals may be technically possible, these may not be suitable for many farmers in terms of their land, labour and capital resources. Moreover, markets for the products may be lacking. The United Nations Food and Agriculture Organization (FAO) has been one of the development organizations promoting diversification by small farmers and has produced booklets identifying beekeeping, mushroom farming, milk production, fish ponds and sheep and goats, among others, as diversification possibilities.
Agricultural diversification is measured in a number of ways throughout the world. For example, one such measure is the index of maximum proportion, which is "defined as the ratio (proportion) of the farm's primary activity to its total activities".