Economics Hightunnels09 100107135747 Phpapp01

Basic Economics of High Tunnels
Minnesota Statewide High Tunnel / Season Extension Conference December 3, 2009 Alexandria, Minnesota Karl Foord
2009 Regents of the University of Minnesota
MN High Tunnel Season Extension 12/3/09 Karl Foord
Basics
Production 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
Both costs & price affect margin - I
Cost side Tomato budget
Breakeven analysis Profitability analysis (Net Present Value) Labor Managing other people
MN High Tunnel Season Extension 12/3/09 Karl Foord 5
Cost of construction of high tunnel
Critical factor People Skills
Both costs & price affect margin - II Revenue side

Gross Revenue = price x yield Critical factors People Skills Managing the customers perception of value
THE COST SIDE
TUNNEL CROP BUDGET - TOMATOES

$/Tunnel (20' x 96' - 5 rows - 320 plts/tunnel) Yield (lbs. per plant) Yield (lbs. per tunnel) VARIABLE COSTS Fertilizer Pest Control Black Plastic Mulch IRRIGATION Dripline Drip Irrigation Operation Plant Maintenance (Stakes, Twine) Fuel Transplant Materials Packaging - Boxes (@$1.50) Marketing (3% of ave. revenue) LABOR Transplanting Trellis - Staking, Training Weeding Ventilation & Monitoring Machinery Operation Harvest Grading/Packing Seasonal Cleanup Land Preparation* Interest Expense 7 2,240 $40 $50 $20 $25 $25 $30 $30 $48 $105 $50 $66 $110 $25 $220 $35 $263 $68 $55 $55 $64 $1,383 $30 $700 $730 10 3,200 $50 $50 $20 $25 $25 $30 $30 $48 $150 $75 $66 $110 $25 $220 $35 $315 $81 $55 $55 $71 $1,536 $30 $700 $730 14 4,480 $60 $50 $20 $25 $25 $30 $30 $48 $210 $100 $66 $110 $25 $220 $35 $350 $90 $55 $55 $77 $1,681 $30 $700 $730 17 5,440 $70 $50 $20 $25 $25 $30 $30 $48 $255 $150 $66 $110 $25 $220 $35 $438 $113 $55 $55 $88 $1,907 $30 $700 $730 20 6,400 $80 $50 $20 $25 $25 $30 $30 $48 $300 $200 $66 $110 $25 $220 $35 $525 $135 $55 $55 $99 $2,133 $30 $700 $730
TOTAL VARIABLE COSTS FIXED COSTS

Land (rent of .2 ac at $150 per acre) Depreciation TOTAL FIXED COSTS
TOTAL COSTS
BREAKEVEN PRICE 32# box per pound
$2,113 $2,266 $2,411 $2,637 $2,863

$30.18 $0.94 $22.66 $0.71 $17.22 $0.54 $15.51 $0.48 $14.31 $0.45
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Item

YIELD (lbs. per plant) YIELD (lbs. per tunnel) TOTAL VARIABLE COSTS TOTAL FIXED COSTS TOTAL COSTS BREAKEVEN PRICE 32# box per pound 7 2,240 $1,383 $730 $2,113 $30.18 $0.94
Yield Cost Breakeven

10 3,200 $1,536 $730 $2,266 $22.66 $0.71 14 4,480 $1,681 $730 $2,411 $17.22 $0.54 17 5,440 $1,907 $730 $2,637 $15.51 $0.48 20 6,400 $2,133 $730 $2,863 $14.31 $0.45
High Tunnel Construction Costs (26' x 96')

Cost Range Item Low
Site Prep.
High
Site specific Manufacturers Base Kit Roll-up Upgrade Options Ship-ping
Gothic Frame Kits
Ledgewood Farms, NH* Farmtek, IO**
$5,750 $4,995
$520
$746 $339 $5,334
$7,016
Local Labor Const-ruction*** Professional Construction Ledgewood est.
94
man-hours****
Where on the learning curve?
$10
per hr.
$940
Per sq. ft. basis $0.50 to $1.00
Cost per tunnel $1,248 to
2496 $2,496
sq. ft. $ $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. Item per unit $7.69 $15.95 # reqrd 24 24 cost $185 $383
$500
$750
Optional
Aluminum U-Channel Extrusions for Plastic Attachment
Single U-Channel - 8' Double U-Channel - 8'
$383
Construction cost range based on above estimates Totals Construction estimate from Penn State
*Higher gauge pipe 1900OD
$7,024
$3.00 sq. ft. basis
$11,145 $7,488
$2.75
to
$6,864
Notes
**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
10
REVENUE SIDE
11
Projected Gross Revenue

Price Yield Matrix Yield
lbs./plant lbs./tunnel
Price per lb. ($) $1.50

$3,360 $4,800 $6,720 $8,160 $9,600
$2.00
$4,480 $6,400 $8,960 $10,880 $12,800
$2.50
$5,600 $8,000 $11,200 $13,600 $16,000
$3.00
$6,720 $9,600 $13,440 $16,320 $19,200
$3.50
$7,840 $11,200 $15,680 $19,040 $22,400
$4.00
$8,960 $12,800 $17,920 $21,760 $25,600
7 10 14 17 20
2240 3200 4480 5440 6400
12
Evaluate the enterprise

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

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 1 - Low Price Low Yield YEAR YEAR 0 1 2 3 AVERAGE YIELD (lbs. per tunnel) 2240 2240 2240 AVERAGE PRICE (per pound) $1.50 $1.50 $1.50 REVENUES $3,360 $3,360 $3,360 EXPENSES $2,113 $2,113 $2,113 PROFIT / CASH FLOW $1,247 $1,247 $1,247 PV OF CASH FLOW @ 10 % ($7,500) $1,134 $1,031 $937 NPV @ 10 % $4,728
4 2240 $1.50 $3,360 $2,113 $1,247 $852
5 2240 $1.50 $3,360 $2,113 $1,247 $774
($2,772)
14
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 2 - Medium Price Medium Yield YEAR YEAR 0 1 2 3 AVERAGE YIELD (lbs. per tunnel) 4480 4480 4480 AVERAGE PRICE (per pound) $2.50 $2.50 $2.50 REVENUES $11,200 $11,200 $11,200 EXPENSES $2,411 $2,411 $2,411 PROFIT / CASH FLOW $ 8,789 $ 8,789 $ 8,789 PV OF CASH FLOW @ 10 % ($7,500) $ 7,990 $ 7,263 $ 6,603 NPV @ 10 % $33,315
4 4480 $2.50 $11,200 $2,411 $ 8,789 $ 6,003
5 4480 $2.50 $11,200 $2,411 $ 8,789 $ 5,457
$25,815
15
HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Profitability Scenarios ( 5 year life expectancy of tunnel) Scenario # 3 - High Price High Yield YEAR YEAR 0 1 2 3 AVERAGE YIELD (lbs. per tunnel) 6400 6400 6400 AVERAGE PRICE (per pound) $4.00 $4.00 $4.00 REVENUES $25,600 $25,600 $25,600 EXPENSES $2,863 $2,863 $2,863 PROFIT / CASH FLOW $22,737 $22,737 $22,737 PV OF CASH FLOW @ 10 % ($7,500) $20,670 $18,791 $17,083 NPV @ 10 % $86,192
4 6400 $4.00 $25,600 $2,863 $ 22,737 $ 15,530
5 6400 $4.00 $25,600 $2,863 $ 22,737 $ 14,118
$78,692
16
PRICING
17
General thoughts on pricing

Business vs. Customer Perspective Behaviors and attitudes Strategic pricing
18
PERSPECTIVE Business vs. customer
19
PRICING DECISION CHART

COMPANY VIEW
Our Asking Price
Pricing Goal ($) Profit
Our Costs - Our Goals No Exchange WIN - WIN Exchange

LOSE - WIN Exchange
Profitable Enterprise
MARGIN
Total Costs
Fixed Costs Variable Costs
Overhead Salaries, Etc
Direct Costs Materials
20

Customer Value Determination
CUSTOMER VIEW
Satisfy a Want Perceived Value > Price
Line of Perceived Value Focus of Marketing Efforts
Price Window
WIN - LOSE or No Exchange
WIN - WIN Exchange
Perception Factors
Convenience Philosophical Match - Ecological
Emotional Benefit
Health Benefits Quality - Reputation - Dependability Selection - Uniqueness Confidence: no frustrations, headaches Reference Prices Context - Urgency
Functionality
Low Perceived Value

21
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 and vegetables Flowers

What Are People Really Buying?

Health Taste The experience of the market itself Support of local growers 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
26
PERCEPTION FACTORS
27
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
Author and References

Karl Foord Ph.D. MBA Regional Educator, Horticulture foord001@umn.edu (651) 558-1218
33
Handouts
Tomato Budget (2 sided assumptions on back) Tomato Sensitivity Analysis (financial) High Tunnel Construction Budget Pricing Decision Chart
34

COMPANY VIEW
Our Costs - Our Goals Customer Our Asking Value Price Determination No Exchange Profitable Enterprise
WIN - LOSE Exchange
CUSTOMER VIEW
Satisfy a Want Perceived Value > Price
Line of Perceived Value Focus of Marketing Efforts
Pricing Goal ($) Profit
WIN - WIN Exchange
Total Costs
Fixed Costs
Overhead Salaries, Etc
LOSE - WIN Exchange
Perception Factors
Convenience Philosophical Match - Ecological
Emotional Benefit
Health Benefits Quality - Reputation - Dependability Selection - Uniqueness Confidence: no frustrations, headaches
Variable Costs
Direct Costs Materials Functionality

High Tunnel Conference - December 2, 2009, Karl Foord
Reference Prices Context - Urgency Low Perceived Value
35
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/
36

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Basic Economics of High Tunnels

2009 Regents of the University of Minnesota

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

2009 Regents of the University of Minnesota

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

2009 Regents of the University of Minnesota

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

Margins & Market Channels

Consider the margins Wholesale Retail

2009 Regents of the University of Minnesota

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

Both costs & price affect margin - I

Cost side Tomato budget

Cost of construction of high tunnel

Critical factor People Skills

Both costs & price affect margin - II Revenue side

2009 Regents of the University of Minnesota

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

THE COST SIDE

2009 Regents of the University of Minnesota

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

TUNNEL CROP BUDGET - TOMATOES

TOTAL VARIABLE COSTS FIXED COSTS

$2,113 $2,266 $2,411 $2,637 $2,863

2009 Regents of the University of Minnesota

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

HIGH TUNNEL PRODUCTION SYSTEM - SENSITIVITY ANALYSIS Item

Yield Cost Breakeven

2009 Regents of the University of Minnesota

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

High Tunnel Construction Costs (26' x 96')

Site specific Manufacturers Base Kit Roll-up Upgrade Options Ship-ping

Gothic Frame Kits

Ledgewood Farms, NH* Farmtek, IO**

$746 $339 $5,334

Local Labor Const-ruction*** Professional Construction Ledgewood est.

Where on the learning curve?

Per sq. ft. basis $0.50 to $1.00

Cost per tunnel $1,248 to

sq. ft. $ $2,496

Aluminum U-Channel Extrusions for Plastic Attachment

Single U-Channel - 8' Double U-Channel - 8'

2009 Regents of the University of Minnesota

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

2009 Regents of the University of Minnesota

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

Projected Gross Revenue

Price per lb. ($) $1.50

2240 3200 4480 5440 6400

2009 Regents of the University of Minnesota

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

Evaluate the enterprise

Optimistic, pessimistic, average scenarios

4 2240 $1.50 $3,360 $2,113 $1,247 $852

5 2240 $1.50 $3,360 $2,113 $1,247 $774

2009 Regents of the University of Minnesota

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

4 4480 $2.50 $11,200 $2,411 $ 8,789 $ 6,003

5 4480 $2.50 $11,200 $2,411 $ 8,789 $ 5,457

2009 Regents of the University of Minnesota

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

4 6400 $4.00 $25,600 $2,863 $ 22,737 $ 15,530

5 6400 $4.00 $25,600 $2,863 $ 22,737 $ 14,118

2009 Regents of the University of Minnesota