Basics of High TunnelEconomics     Statewide High Tunnel Conference             December 2, 2010                 Karl Foor...
Today’s presentation   Advantages of high tunnels    reviewed   Business strategy    discussion   Concerns reconsidered...
Advantages of HighTunnels   4-8 weeks earlier spring    production   2-5 weeks later possible fall    production   Very...
Advantages of High Tunnelscont.   Crop mix   Grow crops not usually grown in    the area   Natural disease control   U...
The Trump of Advantages    4 – 8 weeks earlier spring            production   New niche   Customer behavior   Competiti...
The Trump of Advantages –cont.   Fresh produce in high demand    after long winter   Selling early crops much-needed    ...
Business StrategyDiscussion   If you are in the fresh    vegetable business how will    you respond to High Tunnel    Com...
Concerns of High Tunnels Cost involved Education Planning Management Time         Statewid High Tunnel Conference 12/...
The Trump of Concerns Costs Pricing Margins Let’s look at each in turn         Statewid High Tunnel Conference 12/2/10...
Costs   Capital costs       Buying and erecting a High        Tunnel       Establishing maintenance        systems to m...
Capital costs Buyingand erecting a High Tunnel           Statewid High Tunnel Conference 12/2/10 - Karl   11             ...
High Tunnel Construction Costs (24 x 96)                                                                                  ...
Operation costs Tomatobudget and assumptions        Statewid High Tunnel Conference 12/2/10 - Karl   13                  ...
TUNNEL CROP BUDGET - TOMATOES                                          $/Tunnel (20 x 96 - 5 rows - 320 plts/tunnel)      ...
TUNNEL CROP BUDGET - TOMATOES                                         AssumptionsPlanting rate - 64 plants per 96 ft      ...
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS                                                   Yield Cost Breakeve...
Enterprise Profitability   Profitability analysis (Net    Present Value )   Combine capital costs and    operational cos...
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS                     Profitability Scenarios ( 5 year life expectancy ...
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS                     Profitability Scenarios ( 5 year life expectancy ...
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS                    Profitability Scenarios ( 5 year life expectancy o...
Pricing   Do not be afraid to ask a    profitable price for your    produce   Customers need to be aware    that it cost...
Customer perceptions   Exchange – Something of    Value for an amount of    satisfaction   The perceived value > the    ...
Price Sensitivity /Behavior Price ~ Quality Unique ~ Value Fairness         Statewid High Tunnel Conference 12/2/10 - K...
What Are We Really Selling?       “Revlon sells chemicals         Women buy glamour”   Fruits and vegetables   Flowers  ...
What Are People ReallyBuying?   Health   Taste   The experience of the    market itself   Support of local growers    ...
Pricing Decision Chart  Pricing                       COMPANY VIEW                                            OUR   Goal  ...
Pricing Decision Chart   OUR         CUSTOMER                          CUSTOMER VIEW ASKING          VALUE                ...
PRICING DECISION CHART                   COMPANY VIEW                                        Customer                     ...
Improving customerexperience   Parking & Access   Ease of movement within    market   Stall Presentation   Comfort in ...
Understand   Key customer perception factors   Product use & impact of attributes    on value   Value varies among buye...
References   http://plasticulture.cas.psu.edu   http://www.plasticulture.org   Minnesota High Tunnel Web Site     http...
High Tunnel Manual on theWeb   www.extension.umn.edu   Click on garden   See “ Whats new on the Web”   Or go direct   ...
Other High TunnelSuppliers   Farmtek   http://www.farmtek.com   1440 Field of Dreams Way, Dyersville, IA    52040   Le...
Author   Karl Foord Ph.D. MBA   Regional Educator, Horticulture   foord001@umn.edu   (651) 558-1218                Sta...
Handouts   Tomato Budget (2 sided assumptions on    back)   Tomato Sensitivity Analysis (financial)   High Tunnel Const...
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  • Terry’s comment: The people that are successful with high tunnels treat them like a dairy cow .
  • Consider this a tool for your chosen costs and features
  • Critical thing to remember is that you need to develop your own budget This one can’t possibly be yours and good exercise to go through your numbers Depreciation is low
  • If we know our entry input costs and we have a budget we can determine the profitability of the enterprise based on yield and price assumptions. We assume that the tunnel has a 5 year life thus 5 years to absorb the costs of the initial investment
  • Obviously as yield and price increase the enterprise profitability increases
  • If we use optimistic assumptions we can see where Dallas can make his statement of paying for the tunnel in two years Used as a tool we can change the costs of construction at year 0 and see how long it takes to pay for the initial investment
  • Guy with railroad injury – emotional trigger – grain marketing
  • Price-Quality Challenge Lexus vs. Mercedes – the system is dynamic People who get comfortable with the status quo do so at their own peril Fairness – most people think it is fair to pass on your increased costs i.e. our situation – some will think not - coke machines whose price varies with ambient temperature Unique – University of Minnesota – don’t ever discount your data or your ability to interpret it – we are not a commodity, will never be a commodity, and we would be making a critical error to ever consider ourselves to be one Behaviors: Give people the option to continue their learning with your materials
  • Talk about Kevin CFFM and their consultant – features vs. client benefits Farmers may have a different perspective on the “cool” parts of software than Win
  • The visual side of roundup ready fields Bailey’s view on the taste of his wine – what about a French lady bug All things being equal what can you add in this realm – HP Calculators Experience Engineering Inc. - Michael Vance and Walt Disney
  • Mark Boen – Customers talked about the great taste of the lettuce – they loved the variety Did you hear Mark talk about his customer responses?!! Did you hear him talk about the color shape mouth feel taste of the greens about the great characteristics of his cucumbers Orgasmic as a descriptor!! Did you hear his attitude, what wouldn’t you buy from him? 3rd grade teacher 9 Rubber duckie Berry Ridge Farm – Ron Branch’s farm His customer base has expanded through family lineages Is this the Hatfield McCoy’s or the Pleasantville McCoy’s? Did you hear him talk about his boys?
  • Basics of high tunnel economics high tunnel conference 12 2010

    1. 1. Basics of High TunnelEconomics Statewide High Tunnel Conference December 2, 2010 Karl Foord University of Minnesota Extension Statewid High Tunnel Conference 12/2/10 - Karl 1 Foord
    2. 2. Today’s presentation Advantages of high tunnels reviewed Business strategy discussion Concerns reconsidered Financial picture Statewid High Tunnel Conference 12/2/10 - Karl 2 Foord
    3. 3. Advantages of HighTunnels 4-8 weeks earlier spring production 2-5 weeks later possible fall production Very high yield per plant Reduce cull fruit Very cost effective Guarantee a crop Statewid High Tunnel Conference 12/2/10 - Karl Foord 3
    4. 4. Advantages of High Tunnelscont. Crop mix Grow crops not usually grown in the area Natural disease control Usually no pesticides needed Insect control Organic production Control water Statewid High Tunnel Conference 12/2/10 - Karl 4 Foord
    5. 5. The Trump of Advantages 4 – 8 weeks earlier spring production New niche Customer behavior Competitive Quality with field product Price and margin continuation into field season Statewid High Tunnel Conference 12/2/10 - Karl 5 Foord
    6. 6. The Trump of Advantages –cont. Fresh produce in high demand after long winter Selling early crops much-needed spring income Produce for the first markets – advantage  Customers in the habit of coming to your booth first, and continuing for whole season Statewid High Tunnel Conference 12/2/10 - Karl Foord 6
    7. 7. Business StrategyDiscussion If you are in the fresh vegetable business how will you respond to High Tunnel Competitors? How will you address the key features of the 4 – 8 week earlier produce? Statewid High Tunnel Conference 12/2/10 - Karl 7 Foord
    8. 8. Concerns of High Tunnels Cost involved Education Planning Management Time Statewid High Tunnel Conference 12/2/10 - Karl 8 Foord
    9. 9. The Trump of Concerns Costs Pricing Margins Let’s look at each in turn Statewid High Tunnel Conference 12/2/10 - Karl 9 Foord
    10. 10. Costs Capital costs  Buying and erecting a High Tunnel  Establishing maintenance systems to monitor irrigation and temperature Operation costs  Tomato budget and assumptions Statewid High Tunnel Conference 12/2/10 - Karl Foord 10
    11. 11. Capital costs Buyingand erecting a High Tunnel Statewid High Tunnel Conference 12/2/10 - Karl 11 Foord
    12. 12. High Tunnel Construction Costs (24 x 96) Cost Range Item Low HighSite Prep. Site specific Base Upgrade Options Ship- Distributor Gothic Kit Door pingFrame Kit J.R. Johnson $5,535 $196 $5,535 $5,731 man- Where on the learning Local Labor 114 $15 per hr. $1,710 hours curve? Const- Professional ruction Per sq. ft. basis Cost per tunnel 2304 sq. ft. Construction Estimate $0.50 to $1.00 $1,152 to $2,304 $ $2,304 Non-kit Materials obtained locally for: baseboards, hipboards, rope (may want extra $300 $500Materials screws and metal banding)Irrigation Includes: set up, headers, drip tape $200 $400 Misc. Miscellaneous items not anticipated $100 $200 Totals Construction cost range based on above estimates $7,845 $9,135 J.R. Johnson http://www.hightunnelhub.com/Hightunnel; http://www.farmtek.com; Note http://www.ledgewoodfarm.com Statewide High Tunnel Conference, December 2, 2010 - Karl Foord Statewid High Tunnel Conference 12/2/10 - Karl 12 Foord
    13. 13. Operation costs Tomatobudget and assumptions Statewid High Tunnel Conference 12/2/10 - Karl 13 Foord
    14. 14. 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 $20IRRIGATION Dripline $25 $25 $25 $25 $25 Drip Irrigation Operation $25 $25 $25 $25 $25 Plant Maintenance (Stakes, Twine) $30 $30 $30 $30 $30Bees for Pollination $100 $100 $100 $100 $100 Fuel (Tractor & Propane) $75 $75 $75 $75 $75 Transplant Materials $160 $160 $160 $160 $160 Packaging - Boxes (@$1.50) $105 $150 $210 $255 $300 Marketing (3% of ave. revenue) $50 $75 $100 $150 $200LABOR Bed making & laying plastic $50 $50 $50 $50 $50 Transplanting $70 $70 $70 $70 $70 Initial staking $60 $60 $60 $60 $60 Trellis - Staking, Training $200 $200 $200 $200 $200 Weeding $30 $30 $30 $30 $30 Ventilation & Monitoring $300 $300 $300 $300 $300 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 $55Interest Expense $98 $106 $113 $124 $135TOTAL VARIABLE COSTS $1,963 $2,117 $2,263 $2,489 $2,715 FIXED COSTS Land (rent of .2 ac at $150 per acre) $30 $30 $30 $30 $30 Depreciation $700 $700 $700 $700 $700TOTAL FIXED COSTS $730 $730 $730 $730 $730 TOTAL COSTS $2,693 $2,847 $2,993 $3,219 $3,445 Statewid High Tunnel Conference 12/2/10 - Karl 14 Foord
    15. 15. TUNNEL CROP BUDGET - TOMATOES AssumptionsPlanting rate - 64 plants per 96 ft Variable YieldTunnel dimensions: 96 by 20 expenses - (lbs./tunnel)96 ft x 20 x 5 rows = 320 plants per tunnel interestYield at 7 lbs. per plant = 2,240 $1,865Yield at 10 lbs. per plant = 3,200 $2,011Yield at 14 lbs. per plant = 4,480 $2,150Yield at 17 lbs. per plant = 5,440 $2,365Yield at 20 lbs. per plant = 6,400 $2,580Land area = 1.2 x area of tunnelInterest expense = 7% loan 9 month term on: variable expensesLabor @ $10 per hour; Transplants @ $.50 ea* assigned a land preparation charge in lieu of machinery and equipment expenses Statewid High Tunnel Conference 12/2/10 - Karl 15 Foord
    16. 16. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Yield Cost BreakevenYIELD (lbs. per plant) 7 10 14 17 20YIELD (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400TOTAL VARIABLE COSTS $1,497 $1,651 $1,798 $2,025 $2,252TOTAL FIXED COSTS $730 $730 $730 $730 $730TOTAL COSTS $2,693 $2,847 $2,993 $3,219 $3,445BREAKEVEN PRICE 32# box $38.47 $28.47 $21.38 $18.94 $17.23 per pound $1.20 $0.89 $0.67 $0.59 $0.54 Statewid High Tunnel Conference 12/2/10 - Karl 16 Foord
    17. 17. Enterprise Profitability Profitability analysis (Net Present Value ) Combine capital costs and operational costs Statewid High Tunnel Conference 12/2/10 - Karl 17 Foord
    18. 18. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 1 - Low Price ($1.50) / Low Yield (7 lbs. per plant) YEARYEAR 0 1 2 3 4 5AVERAGE YIELD (lbs. per tunnel) 2240 2240 2240 2240 2240AVERAGE PRICE (per pound) $1.50 $1.50 $1.50 $1.50 $1.50REVENUES $3,360 $3,360 $3,360 $3,360 $3,360EXPENSES $2,693 $2,693 $2,693 $2,693 $2,693PROFIT / CASH FLOW ($8,500) $667 $667 $667 $667 $667PV OF CASH FLOW @ 7.50 % ($8,500) $620 $577 $537 $499 $465NPV @ 7.50 % $2,699 ($5,801) Statewid High Tunnel Conference 12/2/10 - Karl 18 Foord
    19. 19. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 2 - Medium Price ($2.50) / Medium Yield (14 lbs. per plant) YEARYEAR 0 1 2 3 4 5AVERAGE YIELD (lbs. per tunnel) 4480 4480 4480 4480 4480AVERAGE PRICE (per pound) $2.50 $2.50 $2.50 $2.50 $2.50REVENUES $11,200 $11,200 $11,200 $11,200 $11,200EXPENSES $2,993 $2,993 $2,993 $2,993 $2,993PROFIT / CASH FLOW ($8,500) $8,207 $8,207 $8,207 $8,207 $8,207PV OF CASH FLOW @ 7.50 % ($8,500) $7,634 $7,102 $6,606 $6,145 $5,717NPV @ 7.50 % $33,205 $24,705 Statewid High Tunnel Conference 12/2/10 - Karl 19 Foord
    20. 20. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 3 - High Price ($4.00) / High Yield (20 lbs. per plant) YEARYEAR 0 1 2 3 4 5AVERAGE YIELD (lbs. per tunnel) 6400 6400 6400 6400 6400AVERAGE PRICE (per pound) $4.00 $4.00 $4.00 $4.00 $4.00REVENUES $25,600 $25,600 $25,600 $25,600 $25,600EXPENSES $3,445 $3,445 $3,445 $3,445 $3,445PROFIT / CASH FLOW ($8,500) $22,155 $22,155 $22,155 $22,155 $22,155PV OF CASH FLOW @ 7.50 % ($8,500) $20,609 $19,171 $17,834 $16,590 $15,432NPV @ 7.50 % $89,637 $81,137 Statewid High Tunnel Conference 12/2/10 - Karl 20 Foord
    21. 21. Pricing Do not be afraid to ask a profitable price for your produce Customers need to be aware that it costs more to produce early crops Highest quality is the only crop you should market Statewid High Tunnel Conference 12/2/10 - Karl Foord 21
    22. 22. Customer perceptions Exchange – Something of Value for an amount of satisfaction The perceived value > the price Largely behavioral not mathematical Usually an emotional trigger Statewid High Tunnel Conference 12/2/10 - Karl Foord 22
    23. 23. Price Sensitivity /Behavior Price ~ Quality Unique ~ Value Fairness Statewid High Tunnel Conference 12/2/10 - Karl 23 Foord
    24. 24. What Are We Really Selling? “Revlon sells chemicals Women buy glamour” Fruits and vegetables Flowers Statewid High Tunnel Conference 12/2/10 - Karl 24 Foord
    25. 25. What Are People ReallyBuying? Health Taste The experience of the market itself Support of local growers Statewid High Tunnel Conference 12/2/10 - Karl 25 Foord
    26. 26. Pricing Decision Chart Pricing COMPANY VIEW OUR Goal OUR COSTS - OUR GOALS ASKING ($) PRICE Profit Profitable Enterprise WIN - WIN EXCHANGE Fixed Costs Total Costs LOSE - WIN EXCHANGE Overhead Salaries, Etc… Variable Costs Direct Costs Materials Statewid High Tunnel Conference 12/2/10 - Karl 26 Foord
    27. 27. Pricing Decision Chart OUR CUSTOMER CUSTOMER VIEW ASKING VALUE SATISFY A NEED PRICE DETERMINATION Customers Pricing Goal Perceived Value > Price NO EXCHANGE PERCEIVED VALUE WIN - WIN FOCUS OF MARKETING EFFORTSEXCHANGE Perception FactorsLOSE - WIN EMOTIONAL ConvenienceEXCHANGE BENEFIT Reference Prices Other Key Perception Factors: FUNCTIONALITY Quality - Freshness Access - hours Choice / Uniqueness Method of production Employee Attitude Exceptionally Low Prices can Generate a Low Perceived Value Statewid High Tunnel Conference 12/2/10 - Karl 27 Foord
    28. 28. PRICING DECISION CHART COMPANY VIEW Customer CUSTOMER VIEW Our Asking Value Satisfy a Want Price Our Costs - Our Goals Determination Perceived Value > PricePricingGoal ($) No Exchange Line of Perceived Value Profit Profitable Enterprise WIN - WIN Exchange Focus of Marketing Efforts LOSE - WIN WIN - LOSE Total Costs Exchange Exchange Perception Factors Convenience Fixed Costs Reference Prices Overhead Salaries, Etc… Context - Urgency Emotional Health Benefits Benefit Selection - Uniqueness Variable Costs Confidence: no frustrations or headaches Quality - Reputation - Dependability Direct Costs Materials Philosophical Match - Ecological Functionality Low Perceived Value J.R. Johnson - September 9, 2010, Karl Foord Statewid High Tunnel Conference 12/2/10 - Karl 28 Foord
    29. 29. Improving customerexperience Parking & Access Ease of movement within market Stall Presentation Comfort in all weather 5 Sense your market  Taste, touch, smell, sight, sound Statewid High Tunnel Conference 12/2/10 - Karl 29 Foord
    30. 30. Understand Key customer perception factors Product use & impact of attributes on value Value varies among buyers Manage customer perception proactively Expand gap between value received and price paid Statewid High Tunnel Conference 12/2/10 - Karl 30 Foord
    31. 31. References http://plasticulture.cas.psu.edu http://www.plasticulture.org Minnesota High Tunnel Web Site  http://hightunnels.cfans.umn.edu/  http:// hightunnels.org Statewid High Tunnel Conference 12/2/10 - Karl 31 Foord
    32. 32. High Tunnel Manual on theWeb www.extension.umn.edu Click on garden See “ Whats new on the Web” Or go direct www.extension.umn.edu/distribution/horti culture/M1218.html Statewid High Tunnel Conference 12/2/10 - Karl 32 Foord
    33. 33. Other High TunnelSuppliers Farmtek http://www.farmtek.com 1440 Field of Dreams Way, Dyersville, IA 52040 Ledgewood Farm http://www.ledgewoodfarm.com 132 Old Mountain RD, Moultonborough, NH 03254 Statewid High Tunnel Conference 12/2/10 - Karl 33 Foord
    34. 34. Author Karl Foord Ph.D. MBA Regional Educator, Horticulture foord001@umn.edu (651) 558-1218 Statewid High Tunnel Conference 12/2/10 - Karl 34 Foord
    35. 35. Handouts Tomato Budget (2 sided assumptions on back) Tomato Sensitivity Analysis (financial) High Tunnel Construction Budget MN High Tunnel Season Extension 12/5/08 - 35 Karl Foord
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