Basic Economics of High Tunnels

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Presentation by University of Minnesota's Karl Foord at the 2009 Minnesota Statewide High Tunnel Conference in Alexandria, MN on Dec. 2-3, 2009.

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Basic Economics of High Tunnels

  1. 1. 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
  2. 2. Basics  Production  Irrigation  Fertility  Economics MN High Tunnel Season Extension 12/3/09 - 2 Karl Foord © 2009 Regents of the University of Minnesota
  3. 3. Economic Question  Can I make “enough” money with this enterprise?  “Life is at the Margin!” MN High Tunnel Season Extension 12/3/09 - 3 Karl Foord © 2009 Regents of the University of Minnesota
  4. 4. Margins & Market Channels  Consider the margins  Wholesale  Retail MN High Tunnel Season Extension 12/3/09 - 4 Karl Foord © 2009 Regents of the University of Minnesota
  5. 5. 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 MN High Tunnel Season Extension 12/3/09 - 5 Karl Foord © 2009 Regents of the University of Minnesota
  6. 6. Both costs & price affect margin - II Revenue side  Gross Revenue = price x yield  Critical factors – People Skills  Managing the customer’s perception of value MN High Tunnel Season Extension 12/3/09 - 6 Karl Foord © 2009 Regents of the University of Minnesota
  7. 7. THE COST SIDE MN High Tunnel Season Extension 12/3/09 - 7 Karl Foord © 2009 Regents of the University of Minnesota
  8. 8. 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 MN High Tunnel Season Extension 12/3/09 - 8 Karl Foord © 2009 Regents of the University of Minnesota
  9. 9. 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 MN High Tunnel Season Extension 12/3/09 - 9 Karl Foord © 2009 Regents of the University of Minnesota
  10. 10. 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 $7,488 *Higher gauge pipe 1’900”OD **1.66" OD pipe. 30'W tunnels use 1.90" OD pipe. Notes ***Includes setting up metal frame, installing hip & baseboards, building end walls, & covering frame w polyethylene ****Ledgewood estimate Minnesota Statewide High Tunnel/Season Extension Conference, December 2, 3, 2009, Alexandria, Minnesota; Economics - Karl Foord MN High Tunnel Season Extension 12/3/09 - 10 Karl Foord © 2009 Regents of the University of Minnesota
  11. 11. REVENUE SIDE MN High Tunnel Season Extension 12/3/09 - 11 Karl Foord © 2009 Regents of the University of Minnesota
  12. 12. Projected Gross Revenue Price Yield Matrix Yield Price per lb. ($) 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 MN High Tunnel Season Extension 12/3/09 - 12 Karl Foord © 2009 Regents of the University of Minnesota
  13. 13. Evaluate the enterprise  Is your money best spent in this way?  Projected profits vs. cost of entry  Sensitivity analysis  Optimistic, pessimistic, average scenarios MN High Tunnel Season Extension 12/3/09 - 13 Karl Foord © 2009 Regents of the University of Minnesota
  14. 14. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS 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) MN High Tunnel Season Extension 12/3/09 - 14 Karl Foord © 2009 Regents of the University of Minnesota
  15. 15. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 2 - Medium Price Medium Yield YEAR YEAR 0 1 2 3 4 5 AVERAGE YIELD (lbs. per tunnel) 4480 4480 4480 4480 4480 AVERAGE PRICE (per pound) $2.50 $2.50 $2.50 $2.50 $2.50 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 MN High Tunnel Season Extension 12/3/09 - 15 Karl Foord © 2009 Regents of the University of Minnesota
  16. 16. HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 3 - High Price High Yield YEAR YEAR 0 1 2 3 4 5 AVERAGE YIELD (lbs. per tunnel) 6400 6400 6400 6400 6400 AVERAGE PRICE (per pound) $4.00 $4.00 $4.00 $4.00 $4.00 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 $78,692 MN High Tunnel Season Extension 12/3/09 - 16 Karl Foord © 2009 Regents of the University of Minnesota
  17. 17. PRICING MN High Tunnel Season Extension 12/3/09 - 17 Karl Foord © 2009 Regents of the University of Minnesota
  18. 18. General thoughts on pricing  Business vs. Customer Perspective  Behaviors and attitudes  Strategic pricing MN High Tunnel Season Extension 12/3/09 - 18 Karl Foord © 2009 Regents of the University of Minnesota
  19. 19. PERSPECTIVE Business vs. customer MN High Tunnel Season Extension 12/3/09 - 19 Karl Foord © 2009 Regents of the University of Minnesota
  20. 20. PRICING DECISION CHART COMPANY VIEW Our Asking Price Our Costs - Our Goals Pricing Goal No ($) Exchange Profit WIN - WIN Profitable Enterprise Exchange MARGIN Total Costs LOSE - WIN Exchange Fixed Costs Overhead Salaries, Etc… Variable Costs Direct Costs Materials MN High Tunnel Season Extension 12/3/09 - 20 Karl Foord © 2009 Regents of the University of Minnesota
  21. 21. PRICING DECISION CHART 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 MN High Tunnel Season Extension 12/3/09 - 21 Karl Foord © 2009 Regents of the University of Minnesota
  22. 22. Exchange  Something of Value for an amount of satisfaction  Largely behavioral not mathematical  Usually an emotional trigger  Buy and justify  Perceived value > price MN High Tunnel Season Extension 12/3/09 - 22 Karl Foord © 2009 Regents of the University of Minnesota
  23. 23. What Are We Really Selling? “Revlon sells chemicals Women buy glamour”  Fruits and vegetables  Flowers MN High Tunnel Season Extension 12/3/09 - 23 Karl Foord © 2009 Regents of the University of Minnesota
  24. 24. What Are People Really Buying?  Health  Taste  The experience of the market itself  Support of local growers  This experience is the future in marketing MN High Tunnel Season Extension 12/3/09 - 24 Karl Foord © 2009 Regents of the University of Minnesota
  25. 25. Variation among customers  Buyers use products in different ways  Product attributes change rankings  Rankings impact value equation  Value varies among buyers MN High Tunnel Season Extension 12/3/09 - 25 Karl Foord © 2009 Regents of the University of Minnesota
  26. 26. Value perception equation  Value = quality + service + relationship + price MN High Tunnel Season Extension 12/3/09 - 26 Karl Foord © 2009 Regents of the University of Minnesota
  27. 27. PERCEPTION FACTORS MN High Tunnel Season Extension 12/3/09 - 27 Karl Foord © 2009 Regents of the University of Minnesota
  28. 28. Quality - internal  Quality  Philosophical Match  Ecological  Organic / Natural  Selection – Uniqueness  Context – Urgency  Health Benefits MN High Tunnel Season Extension 12/3/09 - 28 Karl Foord © 2009 Regents of the University of Minnesota
  29. 29. Service - external  Convenience  Confidence  No frustrations  No headaches  Reputation  Dependability  Reference Prices MN High Tunnel Season Extension 12/3/09 - 29 Karl Foord © 2009 Regents of the University of Minnesota
  30. 30. 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 MN High Tunnel Season Extension 12/3/09 - 30 Karl Foord © 2009 Regents of the University of Minnesota
  31. 31. 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 MN High Tunnel Season Extension 12/3/09 - 31 Karl Foord © 2009 Regents of the University of Minnesota
  32. 32. 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 MN High Tunnel Season Extension 12/3/09 - 32 Karl Foord © 2009 Regents of the University of Minnesota
  33. 33. Author and References  Karl Foord Ph.D. MBA  Regional Educator, Horticulture  foord001@umn.edu  (651) 558-1218 MN High Tunnel Season Extension 12/3/09 - 33 Karl Foord © 2009 Regents of the University of Minnesota
  34. 34. Handouts  Tomato Budget (2 sided assumptions on back)  Tomato Sensitivity Analysis (financial)  High Tunnel Construction Budget  Pricing Decision Chart MN High Tunnel Season Extension 12/3/09 - 34 Karl Foord © 2009 Regents of the University of Minnesota
  35. 35. PRICING DECISION CHART 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 MN High Tunnel Season Extension 12/3/09 - 35 Karl Foord © 2009 Regents of the University of Minnesota
  36. 36. 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/ MN High Tunnel Season Extension 12/3/09 - 36 Karl Foord © 2009 Regents of the University of Minnesota

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