High Tunnel Economics

Beginning Grower Workshop:Getting Started in High Tunnel Production

Wednesday, February 17, 2015Brainerd, Minnesota

Karl Foord

Basics

• Production

• Pest Management

• Irrigation

• Fertility

• Economics

Economic Question

• Can I make “enough” money with this enterprise?

• “Life is at the Margin!”

Margins & Market Channels

Consider the margins•Wholesale

•Retail

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

Costs & price affect margin - II

Revenue side• Gross Revenue = price x yield

• Critical factors – People Skills

–Managing the customer’s perception of value

THE COST SIDE

Yield (lbs. per plant) 7 10 14 17 20Yield (lbs. per tunnel) 3,136 4,480 6,272 7,616 8,960

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 $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 $150Trellis - Training $200 $200 $200 $200 $200Weeding $30 $30 $30 $30 $30Ventilation & Monitoring $300 $300 $300 $300 $300Machinery Operation $35 $35 $35 $35 $35Harvest $300 $600 $900 $1,200 $1,500Grading/Packing $68 $81 $90 $113 $135Seasonal Cleanup $55 $55 $55 $55 $55Land 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 $4,742BREAKEVEN 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)

3,136 $2,1364,480 $2,5486,272 $2,9767,616 $3,4218,960 $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 tunnelInterest expense = 5% loan 9 month term on: variable expenses

Planting rate - 64 plants per 96 ft. row Yield (lbs./tunnel)

Variable expenses -

interestTunnel 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

Low High

Site Prep.

Kit $6,239 $7,579

120man-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

REVENUE SIDE

Projected Gross Revenue

lbs./plant lbs./tunnel $1.50 $2.00 $2.50 $3.00 $3.50 $4.007 3136 1,758 3,326 4,894 6,462 8,030 9,59810 4480 3,347 5,587 7,827 10,067 12,307 14,54714 6272 5,591 8,727 11,863 14,999 18,135 21,27117 7616 7,144 10,952 14,760 18,568 22,376 26,18420 8960 8,698 13,178 17,658 22,138 26,618 31,098

Price per lb. ($)Yield

Price Yield Matrix - Net Revenue

Evaluate the enterprise

• Is your money best spent in this way?• Projected profits vs. cost of entry• Sensitivity analysis–Optimistic, pessimistic, average

scenarios

YEAR 0 1 2 3 4 5 6 7 8 9 10AVERAGE YIELD (lbs. per tunnel) 3136 3136 3136 3136 3136 3136 3136 3136 3136 3136AVERAGE PRICE (per pound) $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50 $1.50REVENUES $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704 $4,704EXPENSES $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946 $2,946PROFIT / CASH FLOW ($11,000) $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758 $1,758Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Taxible income $658 $658 $658 $658 $658 $658 $658 $658 $658 $658Determine tax 30% $197 $197 $197 $197 $197 $197 $197 $197 $197 $197Subtract tax $460 $460 $460 $460 $460 $460 $460 $460 $460 $460Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Net revenue after tax $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560 $1,560PV 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 $958NPV @ 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

YEAR 0 1 2 3 4 5 6 7 8 9 10AVERAGE YIELD (lbs. per tunnel) 6272 6272 6272 6272 6272 6272 6272 6272 6272 6272AVERAGE PRICE (per pound) $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50 $2.50REVENUES $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680 $15,680EXPENSES $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817 $3,817PROFIT / CASH FLOW ($11,000) $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863 $11,863Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Taxible income $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763 $10,763Determine tax 30% $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229 $3,229Subtract tax $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534 $7,534Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Net revenue after tax $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634 $8,634PV 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 $5,300NPV @ 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

YEAR 0 1 2 3 4 5 6 7 8 9 10AVERAGE YIELD (lbs. per tunnel) 8960 8960 8960 8960 8960 8960 8960 8960 8960 8960AVERAGE PRICE (per pound) $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50 $3.50REVENUES $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360 $31,360EXPENSES $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742 $4,742PROFIT / CASH FLOW ($11,000) $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618 $26,618Depreciation (straight line) $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Taxible income $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518 $25,518Determine tax 30% $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655 $7,655Subtract tax $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863 $17,863Add depreciation back $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100 $1,100Net revenue after tax $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963 $18,963PV 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 $11,641NPV @ 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)

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

PRICING

Pricing - general thoughts

• Business vs. Customer Perspective

• Behaviors and attitudes

• Strategic pricing

PERSPECTIVE

Business vs. customer

MARGIN

PRICING DECISION CHART

Va

ria

ble

Co

sts

Direct Costs Materials

Profitable Enterprise WIN - WIN Exchange

Total Costs LOSE - WIN Exchange

Fix

ed

Co

sts

Overhead Salaries, Etc…

COMPANY VIEW Our Asking

Price

Pricing Goal ($)

Profit

Our Costs - Our Goals

No Exchange

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

FunctionalityLow Perceived Value

Focus of Marketing Efforts

Emotional Benefit

Perception Factors

Customer Value

Determination

CUSTOMER VIEW

WIN - LOSE or No Exchange

Line of Perceived Value

Exchange• Something of Value for an amount

of satisfaction

• Largely behavioral not mathematical

• Usually an emotional trigger

–Buy and justify

• Perceived value > price

What Are We Really Selling?

“Revlon sells chemicals

Women buy glamour”

• Fruits & vegetables

• Flowers

What Are People Really Buying?

• Health• Taste• Support of local growers• The experience of the market

itself• This experience is the future in

marketing

Variation among customers

• Buyers use products in different ways

• Product attributes change rankings

• Rankings impact value equation • Value varies among buyers

Value perception equation

• Value = quality + service + relationship + price

PERCEPTION FACTORS

Quality - internal • Quality

• Philosophical Match

–Ecological –Organic / Natural

• Selection – Uniqueness

• Context – Urgency

• Health Benefits

Service - external • Convenience

• Confidence

–No frustrations–No headaches

• Reputation

• Dependability

• Reference Prices

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

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

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

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

Google NRCS funding for high tunnels

• NRCS High Tunnel Cost Share Update

• http://swroc.cfans.umn.edu/prod/groups/cfans/@pub/@cfans/@swroc/documents/asset/cfans_asset_330313.pdf

Author and References

• Karl Foord Ph.D. MBA

• Regional Educator, Horticulture

• foord001@umn.edu

Handouts

• Tomato Budget (2 sided assumptions on back)

• Tomato Sensitivity Analysis (financial)

• High Tunnel Construction Budget

• Pricing Decision Chart

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/