basic economics of high tunnels
DESCRIPTION
Presentation by University of Minnesota's Karl Foord at the 2009 Minnesota Statewide High Tunnel Conference in Alexandria, MN on Dec. 2-3, 2009.TRANSCRIPT
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
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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
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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
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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 -
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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
$78,692
Profitability Scenarios ( 5 year life expectancy of tunnel)Scenario # 3 - High Price High Yield
YEAR
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS
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PRICING
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General thoughts on pricing Business vs. Customer
Perspective Behaviors and attitudes Strategic pricing
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PERSPECTIVE
Business vs. customer
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MARGIN
PRICING DECISION CHART
Varia
ble
Cos
ts
Direct Costs Materials
Profitable Enterprise WIN - WIN Exchange
Total Costs LOSE - WIN Exchange
Fixe
d C
osts
Overhead Salaries, Etc…
COMPANY VIEW Our Asking
Price
Pricing Goal ($)
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
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
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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
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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
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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 -
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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
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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
PRICING DECISION CHART
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/
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