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High Tunnel Economics, 2015

by Karl Foord, Extension Educator, University of Minnesota.

Presented at the 2015 Minnesota State High Tunnel Conference, Beginning Grower Workshop.

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High Tunnel Economics, 2015

  1. 1. High Tunnel Economics Beginning Grower Workshop: Getting Started in High Tunnel Production Wednesday, February 17, 2015 Brainerd, Minnesota Karl Foord
  2. 2. Basics • Production • Pest Management • Irrigation • Fertility • Economics
  3. 3. Economic Question • Can I make “enough” money with this enterprise? • “Life is at the Margin!”
  4. 4. Margins & Market Channels Consider the margins •Wholesale •Retail
  5. 5. 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
  6. 6. Costs & price affect margin - II Revenue side • Gross Revenue = price x yield • Critical factors – People Skills –Managing the customer’s perception of value
  7. 7. THE COST SIDE
  8. 8. Yield (lbs. per plant) 7 10 14 17 20 Yield (lbs. per tunnel) 3,136 4,480 6,272 7,616 8,960 VARIABLECOSTS 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 Bees for Pollination $100 $100 $100 $100 $100 Fuel (Tractor & Propane) $75 $75 $75 $75 $75 Transplant Materials $157 $157 $157 $157 $157 Packaging - Boxes (@$1.50) $147 $210 $294 $357 $420 Marketing (3% of ave. revenue) $50 $75 $100 $150 $200 LABOR Bed making & laying plastic $225 $225 $225 $225 $225 Transplanting $150 $150 $150 $150 $150 Trellis - 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 $300 $600 $900 $1,200 $1,500 Grading/Packing $68 $81 $90 $113 $135 Seasonal Cleanup $55 $55 $55 $55 $55 Land Preparation* $55 $55 $55 $55 $55 Interest Expense $80 $96 $112 $128 $145 TOTAL VARIABLE COSTS $2,216 $2,643 $3,087 $3,550 $4,012 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 $2,946 $3,373 $3,817 $4,280 $4,742 BREAKEVEN PRICE 32# box $30.07 $24.10 $19.48 $17.98 $16.94 per pound $0.94 $0.75 $0.61 $0.56 $0.53 TUNNEL CROP BUDGET - TOMATOES $/Tunnel (30' x 96' - 7 rows - 448 plts/tunnel)
  9. 9. 3,136 $2,136 4,480 $2,548 6,272 $2,976 7,616 $3,421 8,960 $3,867 Labor @ $15 per hour; Transplants @ $.35 ea * assigned a land preparation charge in lieu of machinery and equipment Yield at 15 lbs. per plant = Yield at 20 lbs. per plant = Yield at 25 lbs. per plant = Yield at 30 lbs. per plant = Land area = 1.2 x area of tunnel Interest expense = 5% loan 9 month term on: variable expenses Planting rate - 64 plants per 96 ft. row Yield (lbs./tu nnel) Variable expenses - interest Tunnel dimensions: 96' by 30' 96 ft x 30 x 7 rows = 448 plants per tunnel Yield at 10 lbs. per plant = TUNNEL CROP BUDGET - TOMATOES Assumptions
  10. 10. Low High Site Prep. Kit $6,239 $7,579 120 man- hours $15 per hr. $1,800 2,880 sq.ft. $0.50 to $1.00 $1,440 to $2,880 $2,880 Non-kit Materials $300 $500 Irrigation $300 $500 Misc. $150 $300 Totals $8,789 $11,759 High Tunnel Conference - 2/17/2015, Karl Foord Obtained locally: baseboards, hipboards, rope, extra screws, metal banding set up, headers, drip tape Miscellaneouse items not anticipated Construction cost range based on above estimates Cost per tunnelConstruction Cost Range High Tunnel Construction Costs (30' x 96') excluding site preparation and shipping per sq. ft. basisProfessional Construction Estimate Note: www.farmtek.com; one of a number of suppliers Item site specific FarmTek - Economy vs. Premium Round Style High Local Labor
  11. 11. REVENUE SIDE
  12. 12. Projected Gross Revenue lbs./plant lbs./tunnel $1.50 $2.00 $2.50 $3.00 $3.50 $4.00 7 3136 1,758 3,326 4,894 6,462 8,030 9,598 10 4480 3,347 5,587 7,827 10,067 12,307 14,547 14 6272 5,591 8,727 11,863 14,999 18,135 21,271 17 7616 7,144 10,952 14,760 18,568 22,376 26,184 20 8960 8,698 13,178 17,658 22,138 26,618 31,098 Price per lb. ($)Yield Price Yield Matrix - Net Revenue
  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
  14. 14. YEAR 0 1 2 3 4 5 6 7 8 9 10 AVERAGE YIELD (lbs. per tunnel) 3136 3136 3136 3136 3136 3136 3136 3136 3136 3136 AVERAGE PRICE (per pound) $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 REVENUES $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 EXPENSES $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 PROFIT / CASH FLOW ($11,000) $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 Taxible income $658 $658 $658 $658 $658 $658 $658 $658 $658 $658 Determine tax 30% $197 $197 $197 $197 $197 $197 $197 $197 $197 $197 Subtract tax $460 $460 $460 $460 $460 $460 $460 $460 $460 $460 Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 Net revenue after tax $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 PV OF CASH FLOW @ 5.0 % ($11,000) $1,486 $1,415 $1,348 $1,284 $1,223 $1,164 $1,109 $1,056 $1,006 $958 NPV @ 5.0 % $11,302 ($1,000) $302 HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS - TOMATOES Profitability Scenarios (10 year life expectancy of tunnel) Scenario # 1 - Low Price ($1.50) / Low Yield (7 lbs. per plant) YEAR *Note: $1000 of expenses added in year 6 to replace plastic and account for other repairs needed for 10 year life of tunnel
  15. 15. YEAR 0 1 2 3 4 5 6 7 8 9 10 AVERAGE YIELD (lbs. per tunnel) 6272 6272 6272 6272 6272 6272 6272 6272 6272 6272 AVERAGE PRICE (per pound) $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 REVENUES $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 EXPENSES $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 PROFIT / CASH FLOW ($11,000) $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 Taxible income $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 Determine tax 30% $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 Subtract tax $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 Net revenue after tax $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 PV OF CASH FLOW @ 5.0 % ($11,000) $8,223 $7,831 $7,458 $7,103 $6,765 $6,443 $6,136 $5,844 $5,565 $5,300 NPV @ 5.0 % $65,922 ($1,000) $54,922 HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS - TOMATOES Profitability Scenarios (10 year life expectancy of tunnel) Scenario # 2 - Medium Price ($2.50) / Medium Yield (14 lbs. per plant) YEAR *Note: $1000 of expenses added in year 6 to replace plastic and account for other repairs needed for 10 year life of tunnel
  16. 16. YEAR 0 1 2 3 4 5 6 7 8 9 10 AVERAGE YIELD (lbs. per tunnel) 8960 8960 8960 8960 8960 8960 8960 8960 8960 8960 AVERAGE PRICE (per pound) $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 REVENUES $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 EXPENSES $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 PROFIT / CASH FLOW ($11,000) $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 Taxible income $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 Determine tax 30% $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 Subtract tax $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 Net revenue after tax $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 PV OF CASH FLOW @ 5.0 % ($11,000) $18,060 $17,200 $16,381 $15,601 $14,858 $14,150 $13,476 $12,835 $12,224 $11,641 NPV @ 5.0 % $145,679 ($1,000) $134,679 YEAR *Note: $1000 of expenses added in year 6 to replace plastic and account for other repairs needed for 10 year life of tunnel HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS - TOMATOES Profitability Scenarios (10 year life expectancy of tunnel) Scenario # 3 - High Price ($3.50) / High Yield (20 lbs. per plant)
  17. 17. Scenario Cucumbers Grape tomatoes Peppers Strawberries Tomatoes Low ($8,256) $26,715 ($3,705) ($8,757) $302 Med $30,561 $98,492 $30,298 $13,353 $54,922 High $91,685 $184,479 $83,654 $44,301 $134,679 Higher $135,710 $75,634 Comparison of NPV Scenarios
  18. 18. PRICING
  19. 19. Pricing - general thoughts • Business vs. Customer Perspective • Behaviors and attitudes • Strategic pricing
  20. 20. PERSPECTIVE Business vs. customer
  21. 21. MARGIN PRICING DECISION CHART VariableCosts Direct Costs Materials Profitable Enterprise WIN - WIN Exchange Total Costs LOSE - WIN Exchange FixedCosts Overhead Salaries, Etc… COMPANY VIEW Our Asking Price Pricing Goal ($) Profit Our Costs - Our Goals No Exchange
  22. 22. Satisfy a Want Perceived Value > Price Convenience Philosophical Match - Ecological Health Benefits Quality - Reputation - Dependability Selection - Uniqueness Confidence: no frustrations, headaches Reference Prices Context - Urgency PRICING DECISION CHART WIN - WIN Exchange Price Window Functionality Low Perceived Value Focus of Marketing Efforts Emotional Benefit Perception Factors Customer Value Determination CUSTOMER VIEW WIN - LOSE or No Exchange Line of Perceived Value
  23. 23. Exchange • Something of Value for an amount of satisfaction • Largely behavioral not mathematical • Usually an emotional trigger –Buy and justify • Perceived value > price
  24. 24. What Are We Really Selling? “Revlon sells chemicals Women buy glamour” • Fruits & vegetables • Flowers
  25. 25. What Are People Really Buying? • Health • Taste • Support of local growers • The experience of the market itself • This experience is the future in marketing
  26. 26. Variation among customers • Buyers use products in different ways • Product attributes change rankings • Rankings impact value equation • Value varies among buyers
  27. 27. Value perception equation • Value = quality + service + relationship + price
  28. 28. PERCEPTION FACTORS
  29. 29. Quality - internal • Quality • Philosophical Match –Ecological –Organic / Natural • Selection – Uniqueness • Context – Urgency • Health Benefits
  30. 30. Service - external • Convenience • Confidence –No frustrations –No headaches • Reputation • Dependability • Reference Prices
  31. 31. 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
  32. 32. 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
  33. 33. 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
  34. 34. EQIP (Environmental Quality Incentives Program) • Financial assistance is limited to a maximum size of 2,178 square feet of land under the high tunnel per USDA identified agricultural operation. • The NRCS payment rate will be $1.89 per square foot. • $1.89 per ft. x 2178 feet = $4,116.42
  35. 35. Google NRCS funding for high tunnels • NRCS High Tunnel Cost Share Update • http://swroc.cfans.umn.edu/prod/groups/cfan s/@pub/@cfans/@swroc/documents/asset/cf ans_asset_330313.pdf
  36. 36. Author and References • Karl Foord Ph.D. MBA • Regional Educator, Horticulture • foord001@umn.edu
  37. 37. Handouts • Tomato Budget (2 sided assumptions on back) • Tomato Sensitivity Analysis (financial) • High Tunnel Construction Budget • Pricing Decision Chart
  38. 38. 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/home/

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