Basic Economics of High Tunnels

MN High Tunnel Season Extension 12/3/09 -Karl Foord

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Basic Economics of High Tunnels

Minnesota Statewide High Tunnel /Season Extension Conference December 3, 2009Alexandria, MinnesotaKarl Foord

© 2009 Regents of the University of Minnesota

Basics Production Irrigation Fertility Economics


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Economic Question Can I make “enough” money

with this enterprise? “Life is at the Margin!”


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Margins & Market Channels Consider the margins Wholesale Retail


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Both costs & price affect margin - ICost side

Tomato budget Breakeven analysis

Cost of construction of high tunnel Profitability analysis (Net Present Value)

Critical factor– People Skills Labor – Managing other people


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Both costs & price affect margin - IIRevenue side

Gross Revenue = price x yield Critical factors – People Skills Managing the customer’s

perception of value


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THE COST SIDE


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Yield (lbs. per plant) 7 10 14 17 20Yield (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400VARIABLE 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 $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 $66Trellis - Staking, Training $110 $110 $110 $110 $110Weeding $25 $25 $25 $25 $25Ventilation & Monitoring $220 $220 $220 $220 $220Machinery 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 $64 $71 $77 $88 $99TOTAL 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 $700TOTAL FIXED COSTS $730 $730 $730 $730 $730

TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863BREAKEVEN 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

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

TUNNEL CROP BUDGET - TOMATOES



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ItemYIELD (lbs. per plant) 7 10 14 17 20YIELD (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400TOTAL VARIABLE COSTS $1,383 $1,536 $1,681 $1,907 $2,133TOTAL FIXED COSTS $730 $730 $730 $730 $730TOTAL COSTS $2,113 $2,266 $2,411 $2,637 $2,863BREAKEVEN PRICE

32# box $30.18 $22.66 $17.22 $15.51 $14.31per pound $0.94 $0.71 $0.54 $0.48 $0.45

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSISYield Cost Breakeven



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High Tunnel Construction Costs (26' x 96')

ItemCost Range

Low High

Site Prep. Site specific

Gothic Frame Kits

Manufacturers Base KitUpgrade Options

Ship-pingRoll-up

Ledgewood Farms, NH* $5,750 $520 $746 $7,016

Farmtek, IO** $4,995 $339 $5,334

Const-ruction***

Local Labor 94 man-hours**** Where on the learning curve? $10 per hr. $940

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

Optional Aluminum U-Channel Extrusions for Plastic Attachment

Item per unit # reqrd cost

Single U-Channel - 8' $7.69 24 $185

Double U-Channel - 8' $15.95 24 $383 $383

TotalsConstruction cost range based on above estimates $7,024 $11,145

Construction estimate from Penn State $2.75 to $3.00 sq. ft. basis $6,864 $7,488

Notes

*Higher gauge pipe 1’900”OD

**1.66" OD pipe. 30'W tunnels use 1.90" OD pipe.

***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


REVENUE SIDE


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lbs./plant lbs./tunnel $1.50 $2.00 $2.50 $3.00 $3.50 $4.007 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

Price per lb. ($)Yield

Price Yield Matrix

Projected Gross Revenue


Evaluate the enterprise Is your money best spent in this

way? Projected profits vs. cost of entry Sensitivity analysis Optimistic, pessimistic, average

scenariosMN High Tunnel Season Extension 12/3/09 -

Karl Foord13



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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 $2,113 $2,113 $2,113 $2,113 $2,113PROFIT / CASH FLOW $1,247 $1,247 $1,247 $1,247 $1,247PV OF CASH FLOW @ 10 % ($7,500) $1,134 $1,031 $937 $852 $774NPV @ 10 % $4,728

($2,772)

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel)

Scenario # 1 - Low Price Low YieldYEAR



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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 $2,411 $2,411 $2,411 $2,411 $2,411PROFIT / CASH FLOW 8,789$ 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

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel)

Scenario # 2 - Medium Price Medium YieldYEAR



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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 $2,863 $2,863 $2,863 $2,863 $2,863PROFIT / CASH FLOW 22,737$ 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

Profitability Scenarios ( 5 year life expectancy of tunnel)Scenario # 3 - High Price High Yield

YEAR

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS


PRICING


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General thoughts on pricing Business vs. Customer

Perspective Behaviors and attitudes Strategic pricing


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PERSPECTIVE

Business vs. customer


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MARGIN

PRICING DECISION CHART

Varia

ble

Cos

ts

Direct Costs Materials

Profitable Enterprise WIN - WIN Exchange

Total Costs LOSE - WIN Exchange

Fixe

d C

osts

Overhead Salaries, Etc…

COMPANY VIEW Our Asking

Price

Pricing Goal ($)

Profit

Our Costs - Our Goals

No Exchange



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Satisfy a WantPerceived Value > Price

Convenience

Philosophical Match - EcologicalHealth Benefits

Quality - Reputation - Dependability

Selection - Uniqueness

Confidence: no frustrations, headaches

Reference PricesContext - Urgency


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



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Exchange Something of Value for an amount of

satisfaction Largely behavioral not mathematical Usually an emotional trigger Buy and justify

Perceived value > price



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What Are We Really Selling?

“Revlon sells chemicalsWomen 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 This experience is the future in

marketing



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Variation among customers Buyers use products in different

ways Product attributes change

rankings Rankings impact value equation Value varies among buyers



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Value perception equation

Value = quality + service + relationship + price


PERCEPTION FACTORS


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Quality - internal Quality Philosophical Match Ecological Organic / Natural

Selection – Uniqueness Context – Urgency Health Benefits


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Service - external Convenience Confidence No frustrations No headaches

Reputation Dependability Reference Prices


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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 MN High Tunnel Season Extension 12/3/09 -

Karl Foord31



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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



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


mailto:[email protected]�


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Handouts Tomato Budget (2 sided assumptions on

back) Tomato Sensitivity Analysis (financial) High Tunnel Construction Budget Pricing Decision Chart



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Satisfy a WantPerceived Value > Price

Convenience

Philosophical Match - EcologicalHealth Benefits

Quality - Reputation - Dependability

Selection - Uniqueness

Confidence: no frustrations, headaches

Reference PricesContext - Urgency

Pricing Goal ($)

Profit

WIN - LOSE Exchange

WIN - WIN Exchange

Our Asking Price

No Exchange

Perception Factors

Focus of Marketing Efforts


Our Costs - Our Goals

Profitable Enterprise

Customer Value

Determination

CUSTOMER VIEW

Line of Perceived Value

Total Costs

COMPANY VIEW

Overhead Salaries, Etc…

Direct Costs Materials

Varia

ble

Cos

ts

High Tunnel Conference - December 2, 2009, Karl Foord

Low Perceived Value

Fixe

d C

osts

LOSE - WIN Exchange

Emotional Benefit

Functionality



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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/


http://www.ledgewoodfarm.com/�

http://www.farmtek.com/farm/supplies/home�

http://plasticulture.cas.psu.edu/�

http://www.plasticulture.org/�

http://www.plasticulture.org/�

http://www.intrinsiccoach.com/english/home/�

http://www.intrinsiccoach.com/english/home/�

Basic Economics of High Tunnels

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