Basics of high tunnel economics high tunnel conference feb 7&8,2012

Basics of High Tunnel Economics

Statewide High Tunnel Conference
February 7-8,2012
Prepared by Karl Foord/Presented By:
Prof. Ward Nefstead
University of Minnesota Extension

Statewid High Tunnel Conference 12/2/10 - Karl 1
Foord

Today’s presentation
 Advantages of high tunnels
reviewed
 Business strategy discussion
 Concerns reconsidered
 Financial picture

Foord

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
Foord

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
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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
season
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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
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The Trump of Concerns
 Costs
 Pricing

 Margins

 Let’s look at each in turn

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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

Foord

High Tunnel Construction Costs (24' x 96')
Cost Range
Item
Low High
Site Prep. Site specific
Base Upgrade Options Ship-
Distributor
Gothic Kit Door ping
Frame Kit
J.R. Johnson $5,535 $196 $5,535 $5,731

man- Where on the learning
Local Labor 114 $15 per hr. $1,710
hours curve?
Const-
Professional
ruction Per sq. ft. basis Cost per tunnel 2304 sq. ft.
Construction
Estimate $0.50 to $1.00 $1,152 to $2,304 $ $2,304

Non-kit Materials obtained locally for: baseboards, hipboards, rope (may want extra
$300 $500
Materials screws and metal banding)

Irrigation Includes: set up, headers, drip tape $200 $400

Misc. Miscellaneous items not anticipated $100 $200

Totals Construction cost range based on above estimates $7,845 $9,135
J.R. Johnson http://www.hightunnelhub.com/Hightunnel; http://www.farmtek.com;
Note http://www.ledgewoodfarm.com

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

Foord

Operation costs

 Tomatobudget and
assumptions

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TUNNEL CROP BUDGET - TOMATOES
$/Tunnel (20' x 96' - 5 rows - 320 plts/tunnel)
Yield (lbs. per plant) 7 10 14 17 20
Yield (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 $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 $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 $70
Initial staking $60 $60 $60 $60 $60
Trellis - Staking, 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 $263 $315 $350 $438 $525
Grading/Packing $68 $81 $90 $113 $135
Seasonal Cleanup $55 $55 $55 $55 $55
Land 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 $700
TOTAL FIXED COSTS $730 $730 $730 $730 $730
TOTAL COSTS $2,693 $2,847 $2,993 $3,219 $3,445
Foord

TUNNEL CROP BUDGET - TOMATOES
Assumptions
Planting rate - 64 plants per 96 ft Variable
Yield
Tunnel dimensions: 96' by 20' expenses -
(lbs./tunnel)
96 ft x 20 x 5 rows = 320 plants per tunnel interest
Yield at 7 lbs. per plant = 2,240 $1,865
Land area = 1.2 x area of tunnel
Interest expense = 7% loan 9 month term on: variable expenses
Labor @ $10 per hour; Transplants @ $.50 ea
* assigned a land preparation charge in lieu of machinery and equipment expenses
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HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS
Yield Cost Breakeven
YIELD (lbs. per plant) 7 10 14 17 20
YIELD (lbs. per tunnel) 2,240 3,200 4,480 5,440 6,400
TOTAL VARIABLE COSTS $1,497 $1,651 $1,798 $2,025 $2,252
TOTAL FIXED COSTS $730 $730 $730 $730 $730
TOTAL COSTS $2,693 $2,847 $2,993 $3,219 $3,445
BREAKEVEN PRICE
32# box $38.47 $28.47 $21.38 $18.94 $17.23
per pound $1.20 $0.89 $0.67 $0.59 $0.54

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Enterprise Profitability
 Profitability analysis (Net
Present Value)
 Combine capital costs and
operational costs

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Profitability Scenarios ( 5 year life expectancy of tunnel)
Scenario # 1 - Low Price ($1.50) / Low Yield (7 lbs. per plant)
YEAR
YEAR 0 1 2 3 4 5
AVERAGE YIELD (lbs. per tunnel) 2240 2240 2240 2240 2240
AVERAGE PRICE (per pound) $1.50 $1.50 $1.50 $1.50 $1.50
REVENUES $3,360 $3,360 $3,360 $3,360 $3,360
EXPENSES $2,693 $2,693 $2,693 $2,693 $2,693
PROFIT / CASH FLOW ($8,500) $667 $667 $667 $667 $667
PV OF CASH FLOW @ 7.50 % ($8,500) $620 $577 $537 $499 $465
NPV @ 7.50 % $2,699
($5,801)

Foord

Scenario # 2 - Medium Price ($2.50) / Medium Yield (14 lbs. per plant)
YEAR
YEAR 0 1 2 3 4 5
REVENUES $11,200 $11,200 $11,200 $11,200 $11,200
EXPENSES $2,993 $2,993 $2,993 $2,993 $2,993
PROFIT / CASH FLOW ($8,500) $8,207 $8,207 $8,207 $8,207 $8,207
PV OF CASH FLOW @ 7.50 % ($8,500) $7,634 $7,102 $6,606 $6,145 $5,717
NPV @ 7.50 % $33,205
$24,705

Foord

Scenario # 3 - High Price ($4.00) / High Yield (20 lbs. per plant)
YEAR
YEAR 0 1 2 3 4 5
REVENUES $25,600 $25,600 $25,600 $25,600 $25,600
EXPENSES $3,445 $3,445 $3,445 $3,445 $3,445
PROFIT / CASH FLOW ($8,500) $22,155 $22,155 $22,155 $22,155 $22,155
PV OF CASH FLOW @ 7.50 % ($8,500) $20,609 $19,171 $17,834 $16,590 $15,432
NPV @ 7.50 % $89,637
$81,137

Foord

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

Foord

What Are People Really Buying?
 Health
 Taste
 The experience of the market
itself
 Support of local growers

Foord

Pricing Decision Chart
Pricing COMPANY VIEW OUR
Goal OUR COSTS - OUR GOALS ASKING
($) PRICE
Profit Profitable Enterprise

WIN - WIN
EXCHANGE

Total Costs LOSE - WIN
Fixed Costs

EXCHANGE
Overhead

Salaries, Etc…
Variable Costs

Direct Costs
Materials

Foord

Pricing Decision Chart
OUR CUSTOMER CUSTOMER VIEW
ASKING VALUE SATISFY A NEED
PRICE DETERMINATION Customer's Pricing Goal
Perceived Value > Price
NO
EXCHANGE PERCEIVED VALUE
WIN - WIN FOCUS OF MARKETING EFFORTS
EXCHANGE
Perception Factors
LOSE - WIN EMOTIONAL Convenience
EXCHANGE BENEFIT Reference Prices
Other Key Perception Factors:
FUNCTIONALITY Quality - Freshness
Access - hours
Choice / Uniqueness
Method of production
Employee Attitude

Exceptionally Low Prices can
Generate a Low Perceived Value

Foord

PRICING DECISION CHART
COMPANY VIEW Customer CUSTOMER VIEW
Our Asking
Value Satisfy a Want
Price
Our Costs - Our Goals Determination
Perceived Value > Price
Pricing
Goal ($) No Exchange Line of Perceived Value
Profit
Profitable Enterprise WIN - WIN Exchange
Focus of Marketing Efforts

LOSE - WIN WIN - LOSE
Total Costs Perception Factors
Exchange Exchange
Fixed Costs

Convenience
Reference Prices
Overhead Salaries, Etc…
Context - Urgency
Emotional Health Benefits
Benefit
Selection - Uniqueness
Variable Costs

Confidence: no frustrations or headaches
Quality - Reputation - Dependability
Direct Costs Materials
Philosophical Match - Ecological
Functionality
Low Perceived Value

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

Foord

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

Foord

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

Foord

References
 http://plasticulture.cas.psu.edu
 http://www.plasticulture.org
 Minnesota High Tunnel Web Site
 http://hightunnels.cfans.umn.edu/

 http://hightunnels.org

Foord

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/horti
culture/M1218.html
Foord

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
Foord

Author
 Karl Foord Ph.D. MBA
 Regional Educator, Horticulture
 foord001@umn.edu
 (651) 558-1218

Foord

Handouts
 Tomato Budget (2 sided assumptions on
back)
 Tomato Sensitivity Analysis (financial)
 High Tunnel Construction Budget

MN High Tunnel Season Extension 12/5/08 - 35
Karl Foord

Basics of high tunnel economics high tunnel conference feb 7&8,2012

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Basics of high tunnel economics high tunnel conference feb 7&8,2012