Basic Economics of High Tunnels

Basic Economics of High Tunnels

Minnesota Statewide High Tunnel /
Season Extension Conference
December 3, 2009
Alexandria, Minnesota
Karl Foord

MN High Tunnel Season Extension 12/3/09 - 1
Karl Foord
© 2009 Regents of the University of Minnesota

Basics
 Production
 Irrigation

 Fertility

 Economics

Karl Foord

Economic Question
 Can I make “enough” money
with this enterprise?
 “Life is at the Margin!”

Karl Foord

Margins & Market Channels
 Consider the margins
 Wholesale
 Retail

Karl Foord

Both costs & price affect margin - I
Cost side
 Tomato budget
 Breakeven analysis
 Cost of construction of high tunnel
 Profitability analysis (Net Present Value)
 Critical factor– People Skills
 Labor – Managing other people

Karl Foord

Both costs & price affect margin - II
Revenue side
 Gross Revenue = price x yield
 Critical factors – People Skills
 Managing the customer’s
perception of value

Karl Foord

THE COST SIDE

Karl Foord

TUNNEL CROP BUDGET - TOMATOES
$/Tunnel (20' x 96' - 5 rows - 320 plts/tunnel)
Yield (lbs. per plant) 7 10 14 17 20
Yield (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400
VARIABLE COSTS
Fertilizer $40 $50 $60 $70 $80
Pest Control $50 $50 $50 $50 $50
Black Plastic Mulch $20 $20 $20 $20 $20
IRRIGATION
Dripline $25 $25 $25 $25 $25
Drip Irrigation Operation $25 $25 $25 $25 $25
Plant Maintenance (Stakes, Twine) $30 $30 $30 $30 $30
Fuel $30 $30 $30 $30 $30
Transplant Materials $48 $48 $48 $48 $48
Packaging - Boxes (@$1.50) $105 $150 $210 $255 $300
Marketing (3% of ave. revenue) $50 $75 $100 $150 $200
LABOR
Transplanting $66 $66 $66 $66 $66
Trellis - Staking, Training $110 $110 $110 $110 $110
Weeding $25 $25 $25 $25 $25
Ventilation & Monitoring $220 $220 $220 $220 $220
Machinery Operation $35 $35 $35 $35 $35
Harvest $263 $315 $350 $438 $525
Grading/Packing $68 $81 $90 $113 $135
Seasonal Cleanup $55 $55 $55 $55 $55
Land Preparation* $55 $55 $55 $55 $55
Interest Expense $64 $71 $77 $88 $99
TOTAL VARIABLE COSTS $1,383 $1,536 $1,681 $1,907 $2,133
FIXED COSTS
Land (rent of .2 ac at $150 per acre) $30 $30 $30 $30 $30
Depreciation $700 $700 $700 $700 $700
TOTAL FIXED COSTS $730 $730 $730 $730 $730
TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863
BREAKEVEN PRICE
32# box $30.18 $22.66 $17.22 $15.51 $14.31
per pound $0.94 $0.71 $0.54 $0.48 $0.45

Karl Foord

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS
Item Yield Cost Breakeven
YIELD (lbs. per plant) 7 10 14 17 20
YIELD (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400
TOTAL VARIABLE COSTS $1,383 $1,536 $1,681 $1,907 $2,133
TOTAL FIXED COSTS $730 $730 $730 $730 $730
TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863
BREAKEVEN PRICE
32# box $30.18 $22.66 $17.22 $15.51 $14.31
per pound $0.94 $0.71 $0.54 $0.48 $0.45

Karl Foord

High Tunnel Construction Costs (26' x 96')
Cost Range
Item
Low High

Site Prep. Site specific

Upgrade Options
Manufacturers Base Kit Ship-ping
Roll-up

Gothic Frame Kits Ledgewood Farms, NH* $5,750 $520 $746 $7,016

Farmtek, IO** $4,995 $339 $5,334

Local Labor 94 man-hours**** Where on the learning curve? $10 per hr. $940

Const-ruction***
Professional Construction Per sq. ft. basis Cost per tunnel 2496 sq. ft.

Ledgewood est. $0.50 to $1.00 $1,248 to $2,496 $ $2,496

Non-kit Materials Materials obtained locally for: End walls, doors, baseboards, hipboards, metal banding and clamps, nails, screws, rope $250 $500

Irrigation Includes: set up, headers, drip tape, and a basic computer. $500 $750

Item per unit # reqrd cost
Aluminum U-Channel Extrusions for Plastic Single U-Channel - 8' $7.69 24 $185
Optional
Attachment
Double U-Channel - 8' $15.95 24 $383 $383

Construction cost range based on above estimates $7,024 $11,145
Totals
Construction estimate from Penn State $2.75 to $3.00 sq. ft. basis $6,864 $7,488

*Higher gauge pipe 1’900”OD

**1.66" OD pipe. 30'W tunnels use 1.90" OD pipe.
Notes
***Includes setting up metal frame, installing hip & baseboards, building end walls, & covering frame w polyethylene

****Ledgewood estimate

Minnesota Statewide High Tunnel/Season Extension Conference, December 2, 3, 2009, Alexandria, Minnesota; Economics - Karl Foord

Karl Foord

REVENUE SIDE

Karl Foord

Projected Gross Revenue
Price Yield Matrix
Yield Price per lb. ($)
lbs./plant lbs./tunnel $1.50 $2.00 $2.50 $3.00 $3.50 $4.00
7 2240 $3,360 $4,480 $5,600 $6,720 $7,840 $8,960
10 3200 $4,800 $6,400 $8,000 $9,600 $11,200 $12,800
14 4480 $6,720 $8,960 $11,200 $13,440 $15,680 $17,920
17 5440 $8,160 $10,880 $13,600 $16,320 $19,040 $21,760

20 6400 $9,600 $12,800 $16,000 $19,200 $22,400 $25,600

Karl Foord

Evaluate the enterprise
 Is your money best spent in this
way?
 Projected profits vs. cost of entry

 Sensitivity analysis
 Optimistic, pessimistic, average
scenarios
Karl Foord

Profitability Scenarios ( 5 year life expectancy of tunnel)
Scenario # 1 - Low Price Low Yield
YEAR
YEAR 0 1 2 3 4 5
AVERAGE YIELD (lbs. per tunnel) 2240 2240 2240 2240 2240
AVERAGE PRICE (per pound) $1.50 $1.50 $1.50 $1.50 $1.50
REVENUES $3,360 $3,360 $3,360 $3,360 $3,360
EXPENSES $2,113 $2,113 $2,113 $2,113 $2,113
PROFIT / CASH FLOW $1,247 $1,247 $1,247 $1,247 $1,247
PV OF CASH FLOW @ 10 % ($7,500) $1,134 $1,031 $937 $852 $774
NPV @ 10 % $4,728
($2,772)

Karl Foord

Scenario # 2 - Medium Price Medium Yield
YEAR
YEAR 0 1 2 3 4 5
REVENUES $11,200 $11,200 $11,200 $11,200 $11,200
EXPENSES $2,411 $2,411 $2,411 $2,411 $2,411
PROFIT / CASH FLOW $ 8,789 $ 8,789 $ 8,789 $ 8,789 $ 8,789
PV OF CASH FLOW @ 10 % ($7,500) $ 7,990 $ 7,263 $ 6,603 $ 6,003 $ 5,457
NPV @ 10 % $33,315
$25,815

Karl Foord

Scenario # 3 - High Price High Yield
YEAR
YEAR 0 1 2 3 4 5
REVENUES $25,600 $25,600 $25,600 $25,600 $25,600
EXPENSES $2,863 $2,863 $2,863 $2,863 $2,863
PROFIT / CASH FLOW $22,737 $22,737 $22,737 $ 22,737 $ 22,737
PV OF CASH FLOW @ 10 % ($7,500) $20,670 $18,791 $17,083 $ 15,530 $ 14,118
NPV @ 10 % $86,192
$78,692

Karl Foord

PRICING

Karl Foord

General thoughts on pricing
 Business vs. Customer
Perspective
 Behaviors and attitudes
 Strategic pricing

Karl Foord

PERSPECTIVE

Business vs. customer

Karl Foord

PRICING DECISION CHART
COMPANY VIEW
Our Asking
Price
Our Costs - Our Goals
Pricing
Goal No
($) Exchange
Profit WIN - WIN
Profitable Enterprise
Exchange MARGIN

Total Costs LOSE - WIN
Exchange
Fixed Costs

Overhead Salaries, Etc…
Variable Costs

Direct Costs Materials

Karl Foord

Customer CUSTOMER VIEW
Value Satisfy a Want
Determination
Perceived Value > Price
WIN - LOSE or
Line of Perceived Value
Price No Exchange

Window WIN - WIN
Focus of Marketing Efforts
Exchange

Perception Factors
Convenience
Philosophical Match - Ecological
Emotional Health Benefits
Benefit Quality - Reputation - Dependability
Selection - Uniqueness
Confidence: no frustrations, headaches
Reference Prices
Context - Urgency
Functionality
Low Perceived Value

Karl Foord

Exchange
 Something of Value for an amount of
satisfaction
 Largely behavioral not mathematical
 Usually an emotional trigger
 Buy and justify
 Perceived value > price
Karl Foord

What Are We Really Selling?

“Revlon sells chemicals
Women buy glamour”

 Fruits and vegetables
 Flowers

Karl Foord

What Are People Really Buying?
 Health
 Taste
 The experience of the market itself
 Support of local growers
 This experience is the future in
marketing

Karl Foord

Variation among customers
 Buyers use products in different
ways
 Product attributes change
rankings
 Rankings impact value equation

 Value varies among buyers
Karl Foord

Value perception equation

 Value = quality + service +
relationship + price

Karl Foord

PERCEPTION FACTORS

Karl Foord

Quality - internal
 Quality
 Philosophical Match
 Ecological
 Organic / Natural
 Selection – Uniqueness
 Context – Urgency
 Health Benefits
Karl Foord

Service - external
 Convenience
 Confidence
 No frustrations
 No headaches
 Reputation
 Dependability
 Reference Prices
Karl Foord

Improving customer experience
 Parking & Access
 Ease of movement within market
 Stall Presentation
 Cleanliness
 Culls & sorting out of sight
 Comfort in all weather
 5 Sense your market
 Taste, touch, smell, sight, sound
 Do you provide recipes?
 Sensory extrapolation
Karl Foord

Proactively manage customer
perception
 Attending to customer perceptions
increases perceived value
 Increasing perceived value minimizes the
price component of the value equation
 Keeping perceived value high permits
high (fair) prices
 High (fair) prices permit good margins &
successful businesses
Karl Foord

Price
 One important factor in our plan is that we
are not afraid to ask a profitable price for
all of our produce.
 Our customers need to be aware that it
costs more to produce early crops and we
must remember that highest quality is the
only crop you should market.
 Ed Person, Ledgewood Farms
Karl Foord

Author and References
 Karl Foord Ph.D. MBA
 Regional Educator, Horticulture
 foord001@umn.edu
 (651) 558-1218

Karl Foord

Handouts
 Tomato Budget (2 sided assumptions on
back)
 Tomato Sensitivity Analysis (financial)
 High Tunnel Construction Budget
 Pricing Decision Chart

Karl Foord

COMPANY VIEW Customer CUSTOMER VIEW
Our Asking
Value Satisfy a Want
Price
Our Costs - Our Goals Determination
Pricing Perceived Value > Price
Goal No WIN - LOSE
($) Line of Perceived Value
Exchange Exchange
Profit
Profitable Enterprise WIN - WIN Exchange
Focus of Marketing Efforts

Total Costs LOSE - WIN Perception Factors
Exchange
Fixed Costs

Convenience
Philosophical Match - Ecological
Overhead Salaries, Etc…
Emotional Health Benefits
Benefit Quality - Reputation - Dependability
Selection - Uniqueness
Variable Costs

Confidence: no frustrations, headaches

Direct Costs Materials Reference Prices
Context - Urgency
Functionality
Low Perceived Value

High Tunnel Conference - December 2, 2009, Karl Foord

Karl Foord

References
 http://www.ledgewoodfarm.com/
 http://www.farmtek.com/farm/supplies/home
 http://plasticulture.cas.psu.edu
 http://www.plasticulture.org
 http://www.intrinsiccoach.com/english/ho
me/

Karl Foord

Basic Economics of High Tunnels

Recommended

Recommended

More Related Content

Similar to Basic Economics of High Tunnels

Similar to Basic Economics of High Tunnels (20)

More from University of Minnesota-Horticulture

More from University of Minnesota-Horticulture (20)

Recently uploaded

Recently uploaded (20)

Basic Economics of High Tunnels