Basics of high tunnel economics high tunnel conference 12 2010

Statewid High Tunnel Conference 12/2/10 - Karl Foord

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Basics of High Tunnel Economics

Statewide High Tunnel Conference December 2, 2010

Karl FoordUniversity of Minnesota Extension

Today’s presentation

Advantages of high tunnels reviewed

Business strategy discussion

Concerns reconsidered Financial picture


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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

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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


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 seasonStatewid High Tunnel Conference 12/2/10 - Karl

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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


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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?


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Concerns of High Tunnels

Cost involved Education Planning Management Time


The Trump of Concerns

Costs Pricing Margins Let’s look at each in

turnStatewid High Tunnel Conference 12/2/10 - Karl

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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

Capital costs

Buying and erecting a High Tunnel


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Low High

Site Prep.

Door

$5,535 $196 $5,535 $5,731

114man-hours

$15 per hr. $1,710

2304 sq. ft.

$0.50 to $1.00 $1,152 to $2,304 $ $2,304

Non-kit Materials

$300 $500

Irrigation $200 $400

Misc. $100 $200

Totals $7,845 $9,135

Note

Site specific

Where on the learning curve?

Construction cost range based on above estimates

Cost per tunnel Per sq. ft. basis

High Tunnel Construction Costs (24' x 96')Cost Range

J.R. Johnson

Gothic Frame Kit

Item

DistributorBase

KitUpgrade Options Ship-

ping

Statewide High Tunnel Conference, December 2, 2010 - Karl Foord

Const-ruction

Estimate

Local Labor

Professional Construction

Materials obtained locally for: baseboards, hipboards, rope (may want extra screws and metal banding)

Includes: set up, headers, drip tape

Miscellaneous items not anticipated

J.R. Johnson http://www.hightunnelhub.com/Hightunnel; http://www.farmtek.com; http://www.ledgewoodfarm.com

Operation costs

Tomato budget and assumptions


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Yield (lbs. per plant) 7 10 14 17 20Yield (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 $25Drip 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 $200 LABOR Bed making & laying plastic $50 $50 $50 $50 $50

Transplanting $70 $70 $70 $70 $70Initial staking $60 $60 $60 $60 $60Trellis - Staking, Training $200 $200 $200 $200 $200Weeding $30 $30 $30 $30 $30Ventilation & Monitoring $300 $300 $300 $300 $300Machinery Operation $35 $35 $35 $35 $35Harvest $263 $315 $350 $438 $525Grading/Packing $68 $81 $90 $113 $135Seasonal Cleanup $55 $55 $55 $55 $55Land Preparation* $55 $55 $55 $55 $55

Interest Expense $98 $106 $113 $124 $135

TOTAL 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

$/Tunnel (20' x 96' - 5 rows - 320 plts/tunnel)

TUNNEL CROP BUDGET - TOMATOES


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2,240 $1,8653,200 $2,0114,480 $2,1505,440 $2,3656,400 $2,580

Yield at 10 lbs. per plant =




Labor @ $10 per hour; Transplants @ $.50 ea

Yield (lbs./tunnel)

Variable expenses -

interest

Land area = 1.2 x area of tunnelInterest expense = 7% loan 9 month term on: variable expenses

* assigned a land preparation charge in lieu of machinery and equipment expenses

Planting rate - 64 plants per 96 ft

Tunnel dimensions: 96' by 20'

96 ft x 20 x 5 rows = 320 plants per tunnel


TUNNEL CROP BUDGET - TOMATOES

Assumptions


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YIELD (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 $17.23per pound $1.20 $0.89 $0.67 $0.59 $0.54

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS

Yield Cost Breakeven


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Enterprise Profitability

Profitability analysis (Net Present Value)

Combine capital costs and operational costs


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YEAR 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)


Profitability Scenarios ( 5 year life expectancy of tunnel)

Scenario # 1 - Low Price ($1.50) / Low Yield (7 lbs. per plant)

YEAR


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YEAR 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



Scenario # 2 - Medium Price ($2.50) / Medium Yield (14 lbs. per plant)

YEAR


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YEAR 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

YEAR



Scenario # 3 - High Price ($4.00) / High Yield (20 lbs. per plant)


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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


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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


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Price Sensitivity / Behavior

Price ~ Quality Unique ~ Value Fairness


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What Are We Really Selling?

“Revlon sells chemicals Women buy glamour”

Fruits and vegetables Flowers


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What Are People Really Buying? Health Taste The experience of the

market itself Support of local growers


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Pricing COMPANY VIEW OURGoal OUR COSTS - OUR GOALS ASKING($) PRICE

Profit Profitable Enterprise

WIN - WINEXCHANGE

Total Costs LOSE - WINEXCHANGE

Overhead

Salaries, Etc…

Direct CostsMaterials

Fix

ed

Co

sts

V

ari

ab

le C

os

ts

Pricing Decision Chart


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Pricing Decision ChartOUR CUSTOMER CUSTOMER VIEW

ASKING VALUE SATISFY A NEEDPRICE DETERMINATION Customer's Pricing Goal

Perceived Value > PriceNO

EXCHANGE PERCEIVED VALUEWIN - WIN FOCUS OF MARKETING EFFORTS

EXCHANGEPerception Factors

LOSE - WIN EMOTIONAL ConvenienceEXCHANGE BENEFIT Reference Prices

Other Key Perception Factors:FUNCTIONALITY Quality - Freshness

Access - hoursChoice / Uniqueness Method of production

Employee Attitude

Exceptionally Low Prices can Generate a Low Perceived Value


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Satisfy a Want

Perceived Value > Price

Convenience

Reference Prices

Context - Urgency

Health Benefits

Selection - Uniqueness

Confidence: no frustrations or headaches

Quality - Reputation - Dependability

Philosophical Match - Ecological

COMPANY VIEW

Pricing Goal ($)

Profit

WIN - LOSE Exchange

Functionality

WIN - WIN Exchange

No Exchange

Fix

ed

Co

sts

LOSE - WIN Exchange Perception Factors

Focus of Marketing Efforts

PRICING DECISION CHART

Our Costs - Our Goals

Profitable Enterprise

Customer Value

Determination

CUSTOMER VIEW

Line of Perceived Value

Total Costs

Our Asking Price

Overhead Salaries, Etc…

Direct Costs Materials

Va

ria

ble

Co

sts

J.R. Johnson - September 9, 2010, Karl Foord

Low Perceived Value

Emotional Benefit


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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


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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


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References http://plasticulture.cas.psu.edu http://www.plasticulture.org Minnesota High Tunnel Web Site

http://hightunnels.cfans.umn.edu/ http://hightunnels.org

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/horticulture/M1218.html


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


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Author Karl Foord Ph.D. MBA Regional Educator, Horticulture [email protected] (651) 558-1218

MN High Tunnel Season Extension 12/5/08 - Karl Foord

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Handouts Tomato Budget (2 sided

assumptions on back) Tomato Sensitivity Analysis

(financial) High Tunnel Construction Budget

Basics of high tunnel economics high tunnel conference 12 2010

Technology

high yield

high tunnel construction

high tunnelcompetitors

advantages of high tunnelscont

costs capital costs

concerns of high tunnels

total costs

high demandafter long