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Basics of High Tunnel Economics      Statewide High Tunnel Conference               February 7-8,2012     Prepared by Karl...
Today’s presentation   Advantages of high tunnels    reviewed   Business strategy discussion   Concerns reconsidered  ...
Advantages of High Tunnels   4-8 weeks earlier spring production   2-5 weeks later possible fall    production   Very h...
Advantages of High Tunnels cont.   Crop mix   Grow crops not usually grown in the area   Natural disease control   Usu...
The Trump of Advantages       4 – 8 weeks earlier spring               production   New niche   Customer behavior   Com...
The Trump of Advantages – cont.   Fresh produce in high demand after long    winter   Selling early crops much-needed sp...
Business Strategy Discussion   If you are in the fresh vegetable    business how will you respond to    High Tunnel Compe...
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/...
Costs   Capital costs       Buying and erecting a High Tunnel       Establishing maintenance systems to        monitor ...
Capital costs Buying   and 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 cost...
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    costs m...
Customer perceptions   Exchange – Something of Value for    an amount of satisfaction   The perceived value > the price...
Price Sensitivity / Behavior Price ~ Quality Unique ~ Value Fairness          Statewid High Tunnel Conference 12/2/10 -...
What Are We Really Selling?          “Revlon sells chemicals           Women buy glamour”   Fruits and vegetables   Flow...
What Are People Really Buying?   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 customer experience   Parking & Access   Ease of movement within market   Stall Presentation   Comfort in al...
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 the Web   www.extension.umn.edu   Click on garden   See “ Whats new on the Web”   Or go direct  ...
Other High Tunnel Suppliers   Farmtek   http://www.farmtek.com   1440 Field of Dreams Way, Dyersville, IA    52040   L...
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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Basics of high tunnel economics high tunnel conference feb 7&8,2012

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Basics of high tunnel economics high tunnel conference feb 7&8,2012

  1. 1. Basics of High Tunnel Economics Statewide High Tunnel Conference February 7-8,2012 Prepared by Karl Foord/Presented By: Prof. Ward Nefstead 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 High Tunnels 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 3 Foord
  4. 4. Advantages of High Tunnels cont. 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 6 Foord
  7. 7. Business Strategy Discussion 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 Buying and 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 $81,137 Statewid High Tunnel Conference 12/2/10 - Karl 20 Foord
  21. 21. Pricing Do not be afraid to ask a profitable price for your produce Customers need to be aware that it costs more to produce early crops Highest quality is the only crop you should market Statewid High Tunnel Conference 12/2/10 - Karl 21 Foord
  22. 22. Customer perceptions Exchange – Something of Value for an amount of satisfaction The perceived value > the price Largely behavioral not mathematical Usually an emotional trigger  Buy and justify Statewid High Tunnel Conference 12/2/10 - Karl 22 Foord
  23. 23. Price Sensitivity / Behavior Price ~ Quality Unique ~ Value Fairness Statewid High Tunnel Conference 12/2/10 - Karl 23 Foord
  24. 24. What Are We Really Selling? “Revlon sells chemicals Women buy glamour” Fruits and vegetables Flowers Statewid High Tunnel Conference 12/2/10 - Karl 24 Foord
  25. 25. What Are People Really Buying? Health Taste The experience of the market itself Support of local growers Statewid High Tunnel Conference 12/2/10 - Karl 25 Foord
  26. 26. Pricing Decision Chart Pricing COMPANY VIEW OUR Goal OUR COSTS - OUR GOALS ASKING ($) PRICE Profit Profitable Enterprise WIN - WIN EXCHANGE Total Costs LOSE - WIN Fixed Costs 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 EFFORTS EXCHANGE Perception Factors LOSE - WIN EMOTIONAL Convenience EXCHANGE 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 Perception Factors Exchange Exchange Fixed Costs Convenience 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 customer experience 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 the Web 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 Tunnel Suppliers 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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