Alternative Prairie Orchard Model Comparisons

 
 
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 Introduction | Definitions | Overall Project Assumptions | Orchard Model Comparisons | Model 0: Start Up | Model 1: Going Concern | Model 2: Going Concern - Co-operative | Model 3: Crop Share – 2/3:1/3 (2/3 to Renter) | Model 4: Crop Share – 2/3:1/3 (1/3 to Owner) | Model 5: Crop Share – Renter using own equipment | Model 6: Crop Share – Renter renting Equipment from Owner | Model 7: Rejuvenated Orchard – Owner Operated | Model 8: Rejuvenated Orchard – Custom Operated | Model 9: Rejuvenated Orchard – Hired Manager | Project Summary | Acknowledgements

Introduction

The information in the following document presents economic comparisons and considerations for several business models of mature prairie orchards, as well as a Start Up Saskatoon Orchard. The basis for comparison is a Going Concern Model of a Prairie Orchard with a Start Up Saskatoon Orchard to provide additional information. Comparisons are based on Saskatoon berries; however, by changing some assumptions, the information contained within this document could be used for other berry types. Other business orchard models considered include a Cooperative Model, various Crop Sharing models (Renter’s perspective; Owner’s perspective; Renter owning equipment; Renter renting equipment from owner), and various models of a Rejuvenated Orchard (Owner Operated; Custom Operated; Hired Manager). The following report was completed using a variety of different industry revenue and expense structures from a ten year period. The data represented within this document should be used only as a general guideline and interested investors are encouraged to research their own revenue and expenses pertinent to the specific prairie orchard operation they are considering.

Definitions

  • Rejuvenation – the process of removing all vegetation of an established/overgrown orchard to the ground, allowing new plant growth to occur and the orchard to return to full, healthy productivity
  • Going Concern – the assumption that an orchard is actively producing and will remain productive for the foreseeable future
  • Gross Revenue – income derived from the sale of fruit
  • Production Expenses – any cost associated with production of fruit, for example, fertilizer, pesticides, and custom work
  • Operating Expenses – any cost associated with operating an orchard, for example, fuel, repairs and maintenance, and utilities
  • Labour Expenses – paid employee wages and estimated unpaid employee wages
  • Total Variable Expenses – Includes all Production, Operating and Labour Expenses
  • Contribution Margin – Amount remaining after Total Variable Expenses to cover Fixed Expenses: Gross Revenue less Total Variable Expenses (Total Production + Total Operating + Total Labour)
  • Operating Interest – Interest charged on a Farm Operating Loan
  • Fixed Expenses – Includes Operating Interest, Depreciation of Buildings and Machinery
  • Gross Margin – Indicates funds remaining to cover unallocated fixed expenses, unpaid labour and return to operator’s equity. Gross Revenue - Production Expenses - Operating Expenses - Paid Labour - Operating Interest
Overall Project Assumptions
  • Yields are based on historical Cost of Production data which include at least one significant loss due to weather related events in any 10 year period.
  • Prices are based on historical Cost of Production data and industry price surveys. Prices would vary depending on which market channel, wholesale or direct market, is chosen. Direct market channels, like U-picks and Farmer’s Markets, tend to bring higher prices. Wholesale prices to processors or other buyers will typically vary depending on the amount of post-harvest handling that has taken place prior to final delivery (e.g. sorting, grading, etc.), as processors will not tend to absorb them, in most cases.
  • The costs of pruning in an orchard can vary significantly. Intensive pruning to remove larger branches, diseased material and to ensure that an orchard remains young and productive, can remove between 10 and 25 percent of plant material on an annual basis. The 10% used in the models assumes a high level of management with low levels of disease and average canopy growth. The amount of pruning will vary with location, variety of crop and other factors.
  • Production, Operating and Labour expenses are based on historical Cost of Production data and as well as current information provided through interviews with growers.
  • Fixed expenses are based on previous Saskatoon Berry Cost of Production studies and current information provided through interviews.
  • Revenue and Expenses are on a per acre basis.
  • Start Up Orchard is assumed to be 0-10 years of age while other models in this comparison are over 10 years of age.
  • Additional Assumptions are provided with each specific model scenario
    • Model 0: Start Up Orchard
    • Model 1: Going Concern
    • Model 2: Going Concern – Cooperative
    • Model 3: Crop Share – 2/3:1/3 (2/3 to Renter)
    • Model 4: Crop Share – 2/3:1/3 (1/3 to Owner)
    • Model 5: Crop Share – Renter using own equipment
    • Model 6: Crop Share – Renter renting Equipment from Owner
    • Model 7: Rejuvenated Orchard – Owner Operated
    • Model 8: Rejuvenated Orchard – Custom Operated
    • Model 9: Rejuvenated Orchard – Hired Manager
Orchard Model Comparisons

Model 0: Start Up Model

The Start Up Model is utilized to see the approximate cost of starting an orchard and using this as an additional information source when analyzing the Going Concern, Crop Share and Rejuvenation Models to determine if they are economically feasible. This model uses information gathered from previous Cost of Production studies. It is assumed that the orchard has been planted and is less than 10 years old.

Model Assumptions:
  • Orchard is in its first 10 years of production and considered a Start Up Orchard
  • Orchard is equipped with necessary machinery, equipment and buildings for operation
  • Orchard is routinely maintained with no major pest pressure
  • Intensive pruning may occur on up to 10% of the orchard size on any given year, however pruning requirements may be higher depending on a range of factors. 10% pruning assumes a high level of orchard management and health with average growth.
  • Pruning cost is calculated on hours per acre. Based on information gathered, it takes approximately 20 hours to prune 1 acre ($15/hour wage)
  • Yields will range from 575 – 3000 lbs. per acre with a 10 year average yield of 1355 lbs
Model Analysis: Table 0 provides the data for a Start Up Orchard. The Start Up Orchard will be used as a source of information when analyzing other models within this study. Readers will be able to use this as a guideline to compare their actual expenses to and/or review potential expenses of investing in an established orchard versus starting a new orchard. Table 0a shows the 10 year averages for the major categories from Table 0.

Table 0a: Summary Data of Table 0
Start Up Model (per acre)
Yield (lbs.)
1355
Revenue
$ 2710
Production Expenses
$ 745
Operating Expenses
$ 670
Labour Expenses
$ 498
Total Variable Expenses
$ 1913
Fixed Expenses
$ 1741
Contribution Margin
$ 797
Gross Margin
$ 1000

Model 1: Going Concern Model

The Going Concern Model is used as a baseline to compare to the other alternative mature orchard models. This model uses information gathered from previous Cost of Production studies. In this model, it is assumed that the orchard is currently in full production and does not require rejuvenation, only regular maintenance.

Model Assumptions:
  • Orchard is equipped with necessary machinery, equipment and buildings for operation
  • Orchard is routinely maintained with no major pest pressure
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning cost is calculated based on hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
  • Yields will range from 1500 – 4000 lbs. per acre with a 10 year average yield of 2650 lbs
Model Analysis: Table 1 provides the data for a Going Concern Orchard. This model will be used as a baseline (average) comparison for all other models of mature orchards. Readers will be able to use this as a guideline to compare their actual expenses to and/or review potential expenses of investing in an orchard. Table 1a shows the Going Concern Orchard 10 year averages for the major categories from Table 1.

Table 1a: Summary Data of Table 1
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
2650
1355
Revenue
$ 5300
$ 2710
Production Expenses
$ 600
$ 745
Operating Expenses
$ 770
$ 670
Labour Expenses
$ 485
$ 498
Total Variable Expenses
$ 1855
$ 1913
Fixed Expenses
$ 1739
$ 1741
Contribution Margin
$ 3445
$ 797
Gross Margin
$ 3592
$ 1000

Model 2: Going Concern - Cooperative Model

The Going Concern-Cooperative Model is to be used for those orchards sharing a harvester between three orchards. All other machinery required for the orchard is very hard to share, so it is assumed that each orchard will have all other equipment, buildings and cooler space for harvesting, sorting and storing the fruit. In this model, revenue and expenses will remain similar to that of the Going Concern model, with the exception of the expenses associated with the harvester. Since the orchard is a Going Concern, regular maintenance of the orchard is required.

Model Assumptions:
  • Each orchardist will be required to have their own cooler/freezer space for storage
  • Each orchardist will market fruit at their own discretion
  • Rejuvenation of orchard is not required as is considered a “Going Concern”
  • Regular Maintenance of Orchard is up to date with no major pest pressure
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health, with average growth. However, pruning requirements may be higher depending on a range of factors
  • Pruning cost is calculated on hours per acre. Based on information gathered, it takes approximately 20 hours to prune 1 acre ($15/hour wage)
  • Harvesting equipment will be shared between three (3) orchardists
Model Analysis: Table 2 provides data on a Going Concern and Going Concern-Cooperative Model. The spreadsheet shows the breakdown of revenue and expenses per acre for sharing harvesting equipment. It may be beneficial for the cooperative orchards to be growing different fruit varieties to try to take advantage of different maturing times to minimize conflict with harvesting times.so that harvesting would commence at different times. This minimizes the issue of who gets the machine first. Table 2a provides comparative numbers on a Cooperative model vs. Going Concern.

Table 2a: Summary Data of Table 2
Cooperative Model (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
2650
2650
1355
Revenue
$ 5300
$ 5300
$ 2710
Production Expenses
$ 600
$ 600
$ 745
Operating Expenses
$ 754
$ 770
$ 670
Labour Expenses
$ 485
$ 485
$ 498
Total Variable Expenses
$ 1839
$ 1855
$ 1913
Fixed Expenses
$ 1416
$ 1739
$ 1741
Contribution Margin
$ 3461
$ 3445
$ 797
Gross Margin
$ 3608
$ 3592
$ 1000

With a Going Concern-Cooperative Model that shares a harvester between 3 orchards, there is little change to the numbers compared with a Going Concern orchard. However, there are some small differences:
  • Operating and Total Variable Expenses are lower due to the sharing of repairs and maintenance between the 3 cooperative members
  • Fixed Expenses decrease due to harvesting equipment being shared 1/3 per orchard
  • Contribution and Gross Margin increase slightly due to the sharing of harvesting equipment depreciation and the decrease in repairs and maintenance
Model 3: Crop Share Model – 2/3 to Renter

This Crop Share Model – 2/3 to Renter is used for those considering renting an orchard that is a Going Concern. The renter has equipment, buildings and cooler space for harvesting, sorting and storing the fruit. Since the orchard has been a Going Concern, regular maintenance of the orchard is required. In this model, 2/3 of the revenue and expenses will be to the account of the renter.

Model Assumptions:
  • Each orchardist will be required to have their own cooler/freezer space for storage
  • Each orchardist will market fruit at their own discretion
  • Rejuvenation of orchard is not required as it is considered a “Going Concern”
  • Regular Maintenance of Orchard is up to date with no pest issues noticeable
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning is calculated based on labour hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
Model Analysis: Table 3 provides data on a 2/3 crop share model for the renter. The spreadsheet shows the breakdown of revenue and expenses for the renter so that they are able to approximate orchard profit/loss. Table 3a provides comparative numbers on the 2/3 share of the Renter vs. Going Concern.

Table 3a: Summary Data of Table 3
Crop Share – 2/3 Renter (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
1767
2650
1355
Revenue
$ 3533
$ 5300
$ 2710
Production Expenses
$ 400
$ 600
$ 745
Operating Expenses
$ 513
$ 770
$ 670
Labour Expenses
$ 323
$ 485
$ 498
Total Variable Expenses
$ 1237
$ 1855
$ 1913
Fixed Expenses
$ 1673
$ 1739
$ 1741
Contribution Margin
$ 2297
$ 3445
$ 797
Gross Margin
$ 2395
$ 3592
$ 1000

Comparing these numbers to a Going Concern Orchard, revenue is decreased by 1/3 paid to the owner, as well as some expenses are decreased by the 1/3 share paid by the owner of the orchard. The following are some points for consideration:
  • All Revenue and Variable Expenses (Production, Operating & Labour) are 2/3 of what a Going Concern orchard’s numbers
  • Fixed Expenses – Operating Interest is 2/3 of a Going Concern Model
  • Fixed Expenses – Equipment and Building Depreciation is full amount as each orchard has a full line of equipment
  • Contribution and Gross Margin are reduced by 1/3 due to the portion being received by the orchard owner
Model 4: Crop Share Model – 1/3 to Owner

The Crop Share Model – 1/3 to Owner is used for those considering renting out an orchard that is a Going Concern, to someone already in operation separately whom is looking to expand. The owner of the orchard and the renter each have equipment, buildings and cooler space for harvesting, sorting and storing their portion of the fruit. Since the orchard has been a Going Concern, regular maintenance of the orchard is required. This model is similar to the Crop Share – 2/3 to Renter, but the economic analysis is from the perspective of the owner, with 1/3 of the revenue and expenses to the account of the owner.

Model Assumptions:
  • Each orchardist will be required to have their own cooler/freezer space for storage
  • Each orchardist will market fruit at their own discretion
  • Rejuvenation of orchard is not required as is considered a “Going Concern”
  • Regular Maintenance of Orchard is up to date with no pest issues noticeable
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health, with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning is calculated based on hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
Model Analysis: Table 4 provides data on a 1/3 crop share model for the owner. The spreadsheet shows the breakdown of revenue and expenses for the owner so that they are able to approximate orchard profit/loss. Table 4a provides comparative numbers on the Owner’s 1/3 vs a Going Concern.

Table 4a: Summary Data of Table 4
Crop Share – 1/3 Owner (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
883
2650
1355
Revenue
$ 1767
$ 5300
$ 2710
Production Expenses
$ 200
$ 600
$ 745
Operating Expenses
$ 257
$ 770
$ 670
Labour Expenses
$ 162
$ 485
$ 498
Total Variable Expenses
$ 618
$ 1855
$ 1913
Fixed Expenses
$ 1606
$ 1739
$ 1741
Contribution Margin
$ 1148
$ 3445
$ 797
Gross Margin
$ 1197
$ 3592
$ 1000

Comparing these numbers to a Going Concern Orchard, revenue and some expenses are decreased by the Renter’s share of 2/3. The following are some points for consideration:
  • All Revenue and Variable Expenses (Production, Operating & Labour) are 1/3 of what a Going Concern orchard’s numbers
  • Fixed Expenses – Operating Interest is 1/3 of a Going Concern Model
  • Fixed Expenses – Equipment and Building Depreciation is full amount as each orchard has a full line of equipment
  • Contribution and Gross Margin are decreased by 2/3 due to the portion being received by the renter
Model 5: Crop Share Model – Renter Renting Equipment from Owner

The Crop Share Model – Renter Renting Equipment from Owner is used for those considering renting a Going Concern orchard; however, the Renter has no equipment or buildings. The owner who is renting out the orchard has equipment, buildings and cooler space for harvesting, sorting and storing the fruit. Since the orchard has been a Going Concern, regular maintenance of the orchard is required. In this model, revenue and expenses will be shared equally between the orchard owner and the renter.

Model Assumptions:
  • Renter will rent the orchard owner’s equipment, buildings and cooler/freezer space for storage
  • Each orchardist will market fruit at their own discretion
  • Rejuvenation of orchard is not required as is considered a “Going Concern”
  • Regular Maintenance of Orchard is up to date with no pest issues noticeable
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health, with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning is calculated based on hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
Model Analysis: Table 5 provides data on a 50% crop share model for the Renter. The spreadsheet shows the breakdown of revenue and expenses for the renter so that they are able to approximate orchard profit/loss. Table 5a provides comparative numbers on the Renter’s Crop Share vs a Going Concern.

Table 5a: Summary Data of Table 5
Crop Share – 50% Renter (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
1325
2650
1355
Revenue
$ 2650
$ 5300
$ 2710
Production Expenses
$ 300
$ 600
$ 745
Operating Expenses
$ 1154
$ 770
$ 670
Labour Expenses
$ 243
$ 485
$ 498
Total Variable Expenses
$ 1697
$ 1855
$ 1913
Fixed Expenses
$ 102
$ 1739
$ 1741
Contribution Margin
$ 954
$ 3445
$ 797
Gross Margin
$ 1027
$ 3592
$ 1000

Comparing these numbers to a Going Concern Orchard, revenue and some expenses are decreased by the Owner’s share. The following are some points for consideration:
  • Yield and Revenue are of a Going Concern orchard to aid in covering rental cost of buildings and equipment
  • Production expenses are split 50/50 between owner and renter
  • Operating Expenses are higher due to the cost of renting Equipment and Buildings
  • Labour Expenses are split 50/50 between owner and renter
  • Total Variable Expenses are lower than a Going Concern orchard
  • Fixed Expenses – Operating Interest is included. Equipment and Building depreciation is removed as the renter is paying the owner for using these assets.
  • Contribution and Gross Margin decrease significantly ($954 and $1027 per acre respectively) due to the rental cost of equipment and buildings and 50/50 sharing of fruit
Model 6: Crop Share Model – Owner Renting Equipment to Renter

This model is used for those owners considering renting out their Going Concern orchard and the equipment. The Renter has no equipment or buildings and the owner will rent all equipment, buildings and cooler space to the Renter. Since the orchard has been a Going Concern, regular maintenance of the orchard is required. In this model, 50% of the revenue and cost will be to the account of the Owner.

Model Assumptions:
  • Owner will rent the equipment, buildings and cooler/freezer space for storage
  • Each orchardist will market fruit at their own discretion
  • Rejuvenation of orchard is not required as is considered a “Going Concern”
  • Regular Maintenance of Orchard is up to date with no pest issues noticeable
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health, with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning is calculated based on hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
Model Analysis: Table 6 provides data on a 50% crop share model for the owner. The spreadsheet shows the breakdown of revenue and expenses for the owner so that they are able to approximate orchard profit/loss. Table 6a provides comparative numbers on the Owner’s Crop Share vs a Going Concern:

Table 6a: Summary Data of Table 6
Crop Share – 50% Owner (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
1325
2650
1355
Revenue
$ 3419
$ 5300
$ 2710
Production Expenses
$ 300
$ 600
$ 745
Operating Expenses
$ 385
$ 770
$ 670
Labour Expenses
$ 243
$ 485
$ 498
Total Variable Expenses
$ 928
$ 1855
$ 1913
Fixed Expenses
$ 1640
$ 1739
$ 1741
Contribution Margin
$ 2492
$ 3445
$ 797
Gross Margin
$ 2565
$ 3592
$ 1000

Comparing these numbers to a Going Concern Orchard, revenue and some expenses are decreased by the renter’s share. The following are some points for consideration:
  • Revenue is reduced by Renter’s 50 % share. However, there is revenue recaptured from rental of buildings and equipment
  • Total Variable Expenses (Production, Operating & Labour) are 1/2 of a Going Concern orchard’s numbers
  • Fixed Expenses – Operating Interest is shared 50/50 between owner and renter
  • Fixed Expenses – Equipment and Building Depreciation is full amount as the orchard owner retains ownership of buildings and equipment
  • Contribution and Gross Margin are decreased by 50% due to crop share; however, this is offset by rental income revenue from equipment and buildings
Model 7: Rejuvenated Orchard – Owner Operated

The Rejuvenated Orchard – Owner Operated model is used for those owners purchasing an old, overgrown or diseased orchard. The new owner will operate the orchard him/herself and will have all equipment and buildings necessary for running the orchard. Year 0 will be the year of rejuvenation and there will be no income for Year 1 and Year 2. Revenue and expenses are adjusted as production increases after rejuvenation. Each operation considering purchasing should complete a full due diligence as to the revenue and expense stream.

Model Assumptions:
  • Owner will purchase the equipment, buildings and cooler/freezer either with the orchard or independently from the orchard
  • Rejuvenation of orchard is required due to neglect or pests
  • Rejuvenation occurs in the dormant season
  • Rejuvenation is calculated on rental brush clearing equipment and labour hours for brush removal, straw shredding and burning
  • Intensive pruning will occur starting in Year 2 for training bushes
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health, with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning is calculated based on hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
Model Analysis: Table 7 provides data on an owner operated orchard that has undergone rejuvenation. The spreadsheet shows the breakdown of yearly revenue and expenses for the owner so that they are able to approximate orchard profit/loss. Table 7a provides comparative numbers on an Owner Operated Rejuvenated Orchard vs a Going Concern and a Start Up:

Table 7a: Summary Data of Table 7
Rejuvenated Orchard – Owner Operated (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
2049
2650
1355
Revenue
$ 4098
$ 5300
$ 2710
Production Expenses
$ 610
$ 600
$ 745
Operating Expenses
$ 722
$ 770
$ 670
Labour Expenses
$ 466
$ 485
$ 498
Total Variable Expenses
$ 1798
$ 1855
$ 1913
Fixed Expenses
$ 1741
$ 1739
$ 1741
Contribution Margin
$ 2300
$ 3445
$ 797
Gross Margin
$ 2447
$ 3592
$ 1000

Comparing these numbers to a Going Concern Orchard, the effect of rejuvenating an orchard on orchard profitability can be seen. The following are some points for consideration:
  • No revenue for Year 1 and 2
  • A positive cumulative Contribution Margin will not be obtained until Year 4
  • A positive cumulative Gross Margin will not be obtained until Year 4
  • Cash Reserve and/or Operating lines or credit will be required for orchard operation until cumulative Contribution and Gross Margin becomes positive in Year 4
  • Production Yield and Revenue decreased due to no yield in Year 1 and Year 2 plus accounting for a major adverse weather event that is likely to occur at least once in every 10 years
  • Production, Operating and Labour Expenses remain relatively unchanged even though rejuvenation has been completed; some production and operating expenses, such as fertilizer, trucking, repairs and maintenance and fuel, are reduced until production returns to normal levels
  • Total Variable Expenses drop slightly due to savings from production and operating expenses not required during the rejuvenation period
  • Contribution and Gross Margin decrease significantly due to rejuvenation cost and decreased fruit production during this time
Model 8: Rejuvenated Orchard – Custom Operated

The Rejuvenated Orchard – Custom Operated model is used for those investors purchasing an old overgrown or diseased orchard with the intentions of having it custom operated. The new owner will hire out the mowing, spraying, harvesting, rejuvenation and pruning; however, the orchard will have all equipment and buildings necessary for sorting and cooling the fruit. Year 0 will be the year of rejuvenation and there will be no income for Year 1 and 2. Revenue and expenses are adjusted as production increases after rejuvenation. Each investor considering purchasing an orchard requiring rejuvenation should complete a full due diligence as to the revenue and expense stream.

Model Assumptions:
  • No revenue for Year 1 and 2
  • Owner will purchase the orchard and buildings; but, will have all mowing, spraying, harvesting, pruning and rejuvenation completed by a custom operators.
  • Rejuvenation of orchard is required due to neglect or pests
  • Rejuvenation is calculated on rental brush clearing equipment and labour hours for brush removal, straw shredding and burning
  • Intensive pruning will occur starting in Year 2 for training bushes
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health, with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning is calculated based on hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
Model Analysis: Table 8 provides data on an orchard that has undergone rejuvenation but has mowing, spraying, harvesting, pruning and rejuvenation completed through custom operators. The spreadsheet shows the breakdown of yearly revenue and expenses for the owner so that they are able to approximate orchard profit/loss. Table 8a provides comparative numbers on a Custom Operated Rejuvenation vs a Going Concern and comparing the cost of a Start Up Orchard:

Table 8a: Summary Data of Table 8
Rejuvenated Orchard – Custom Operated (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
2049
2650
1355
Revenue
$ 4098
$ 5300
$ 2710
Production Expenses
$ 1460
$ 600
$ 745
Operating Expenses
$ 722
$ 770
$ 670
Labour Expenses
$ 296
$ 485
$ 498
Total Variable Expenses
$ 2478
$ 1855
$ 1913
Fixed Expenses
$ 1026
$ 1739
$ 1741
Contribution Margin
$ 1620
$ 3445
$ 797
Gross Margin
$ 1659
$ 3592
$ 1000

Comparing these numbers to a Going Concern Orchard, the effect of rejuvenating an orchard on orchard profitability can be seen. The following are some points for consideration:
  • No revenue for Year 1 and 2
  • A positive cumulative Contribution Margin will not be obtained until Year 4
  • A positive cumulative Gross Margin will not be obtained until Year 4
  • Cash Reserve and/or Operating lines or credit will be required for orchard operations until margins turn positive in Year 4
  • Production Yield and Revenue decreased due to no yield in Year 1 and Year 2 plus accounting for a major adverse weather event that is likely to occur at least once in every 10 years
  • Production expenses increase dramatically due to most work being completed by custom operators
  • Operating Expenses remain relatively unchanged
  • Labour expenses decrease significantly due to custom operations
  • Total Variable Expenses increase significantly due to the cost of rejuvenation and cost of custom work
  • Contribution and Gross Margin decrease significantly due to rejuvenation cost, decreased fruit production but mostly due to the increased cost of custom work
Model 9: Rejuvenated Orchard – Operated by Hired Manager

This model is used for those investors purchasing an old overgrown or diseased orchard with the intentions of having a hired manager run the orchard on their behalf. The manager will oversee all aspects of the orchard such as: mowing, spraying, harvesting, rejuvenation, pruning, harvesting, sorting and selling of product. The orchard will have all equipment and buildings necessary for sorting and cooling the fruit. Year 0 will be the year of rejuvenation and there will be no income for Year 1 and Year 2. Revenue and expenses are adjusted as production increases after rejuvenation.

Model Assumptions:
  • New owner will purchase the orchard and buildings and will purchase all equipment necessary to run the orchard
  • Rejuvenation of orchard is required due to neglect or pests
  • Intensive pruning will occur starting in Year 2 for training bushes
  • Intensive pruning may occur on up to 10% of the orchard size on any given year; 10% pruning assumes a high level of orchard management and health, with average growth. However, pruning requirements may be higher depending on a range of factors.
  • Pruning is calculated based on hours per acre. Based on information gathered it takes approximately 20 hours to prune 1 acre ($15/hour wage)
  • Rejuvenation is calculated on rental brush clearing equipment and labour hours for brush removal, straw shredding and burning
Model Analysis: Table 9 provides data on an orchard that has undergone rejuvenation with all major work being completed at the discretion of a hired manager. The spreadsheet shows the breakdown of yearly revenue and expenses for the owner so that they are able to approximate orchard profit/loss. Table 9a provides comparative numbers on Rejuvenated Orchard with a Hired Manager vs a Going Concern and comparing the cost of a Start Up Orchard:

Table 9a: Summary Data of Table 9
Rejuvenated Orchard – Hired Manager (per acre)
Going Concern Model (per acre)
Start Up Model (per acre)
Yield (lbs.)
2049
2650
1355
Revenue
$ 4098
$ 5300
$ 2710
Production Expenses
$ 610
$ 600
$ 745
Operating Expenses
$ 703
$ 770
$ 670
Labour Expenses
$ 1493
$ 485
$ 498
Total Variable Expenses
$ 2806
$ 1855
$ 1913
Fixed Expenses
$ 1741
$ 1739
$ 1741
Contribution Margin
$ 1292
$ 3445
$ 797
Gross Margin
$ 1248
$ 3592
$ 1000

Comparing these numbers to a Going Concern Orchard, the effect of rejuvenating an orchard can be seen on orchard profitability. The following are some points for consideration:
  • No revenue for Year 1 and Year 2 after rejuvenation
  • A positive cumulative Contribution Margin will not be obtained until Year 5
  • A positive cumulative Gross Margin will not be obtained until Year 5
  • Cash Reserve and/or Operating lines or credit will be required for orchard operations until margins turn positive in Year 5
  • Production Yield and Revenue decreased due to no yield in Year 1 and Year 2 plus accounting for a major adverse weather event that is likely to occur at least once in every 10 years
  • Production and Operating Expenses remain relatively unchanged
  • Labour expenses increase dramatically due to hiring a manager to conduct day to day activities
  • Total Variable Expenses increase significantly due to the cost of a hired manager
  • Contribution and Gross Margin decrease significantly due to rejuvenation cost, decreased fruit production but mostly due to the increased cost of a hired manager
Project Summary

Table 10 is a summary of the major revenue and expense totals from Tables 1-9. To determine if it makes economic sense to purchase an orchard, reviewing Table 10 will help. Each farm is different, these numbers are only intended to serve as a guideline; current numbers for the specific operation under consideration should be reviewed before any decision is made to purchase.

Table 10: Summary Data of All Orchard Models
Start-Up
Going Concern
Going Concern Cooper-ative
Crop Share 2/3 Renter
Crop Share 1/3 Owner
Crop Share Rent Equip. Renter
Crop Share Rent Equip. Owner
Rejuven-ated Owner Operated
Rejuven-ated Custom Operated
Rejuven-ated Hired Manager
Yield (lbs.)
1355
2650
2650
1767
883
1325
1325
2049
2049
2049
Revenue
$ 2710
$ 5300
$ 5300
$ 3533
$ 1767
$ 2650
$ 3419
$ 4098
$ 4098
$ 4098
Production Expenses
$ 745
$ 600
$ 600
$ 400
$ 200
$ 300
$ 300
$ 610
$ 1460
$ 610
Operating Expenses
$ 670
$ 770
$ 754
$ 513
$ 257
$ 1154
$ 385
$ 722
$ 722
$ 703
Labour Expenses
$ 498
$ 485
$ 485
$ 323
$ 162
$ 243
$ 243
$ 466
$ 296
$ 1493
Total Variable Expenses
$ 1913
$ 1855
$ 1839
$ 1237
$ 618
$ 1697
$ 928
$ 1798
$ 2478
$ 2806
Fixed Expenses
$ 1741
$ 1739
$ 1416
$ 1673
$ 1606
$ 102
$ 1640
$ 1741
$ 1026
$ 1741
Contribution Margin
$ 797
$ 3445
$ 3461
$ 2297
$ 1148
$ 954
$ 2492
$ 2300
$ 1620
$ 1292
Gross Margin
$ 1000
$ 3592
$ 3608
$ 2395
$ 1197
$ 1027
$ 2565
$ 2447
$ 1659
$ 1248

Start Up: This model has the lowest Contribution and Gross Margin as it is a new orchard which requires special treatment while being planted and it takes those plants until Year 4 to start producing fruit. This serves as additional information when investors are looking at purchasing a Going Concern Orchard vs. a Rejuvenated Orchard. It allows the investor to determine if it is more economically beneficial to start a new orchard rather than purchasing an older orchard.

Going Concern – Cooperative: This model has the highest Contribution and Gross Margin as the harvester is being shared. This does come with some potential scheduling problems if fruit is ready for harvest at the same time in all three orchards. A further drawback is all an orchard’s fruit will likely be harvested at the same time requiring enough sorting and storage capacity for the entire crop. If each orchard had their own equipment, harvesting could be completed in stages, maintaining fruit quality.

Crop Share Models: These alternative models were considered for those orchards who wish to expand but, may not have the capital available for expansion. These models also provide the ability for an orchard owner to exit the day to day operation of an orchard, without having to sell his/her entire orchard.

Crop Share (2/3 Renter: 1/3 Owner): If the Renter and Owner each have their own equipment and buildings, this could be a good option. By splitting both production and expenses, this provides flexibility for both renter and owner to monitor their expenses and also to look for markets to maximize their revenue.

Crop Share (Renter rents equipment from Owner): The Renter has a lower Contribution and Gross Margin; however, they do not have depreciation which increases the amount they will be able to put towards their equity.

The Owner may be very happy with this option as Contribution Margin and Gross Margin is higher than other options. However, the Owner has all the Depreciation and could be left with damaged equipment with no residual value after the rental period. The Owner should be careful to ensure that equipment is looked after. With 100% of the depreciation being the owner’s, the amount of money to return to the owner’s equity will be lower.

Rejuvenated Orchards: Rejuvenation is expensive and it is in the owner’s best interest to prune on an annual basis and promptly manage all disease concerns to minimize the need for rejuvenation. If an orchard must be rejuvenated, an owner operated model is the best. Having all operations completed by custom operators or hiring a manager is expensive and has a significant effect on Contribution and Gross Margin – taking until Year 4 or 5, respectively to breakeven. Even an owner operator will take till Year 4 to breakeven. Cash reserves and/or operating line of credit will be required to ensure the orchard can operate until margins turn positive again.

With any of these models, it is important that the potential investor completes their due diligence to ensure success. Here are some points to consider:
  • Review literature from Alberta Agriculture and Forestry and discuss options with their knowledgeable staff members
  • Visit the farm – Look for orchard maintenance and disease presence to determine what expenses are needed to operate the orchard
  • Review documentation – Review orchard financial/production records to determine yield, revenue and expenses. This will be a start to put numbers together to ensure that purchasing the orchard makes sense
  • Plan – Put together a business plan which will aid in discussions with banks and/or partners
  • Financial Institutions – Review with the bank to ensure that they are aware of orchard needs and will be able to work with the new owner to ensure financial success
Acknowledgements

Special appreciation to a number of individuals who aided this project with a wealth of information regarding production, marketing and economics of orchard production. The cooperation from these individuals were beneficial in providing a variety of alternative models for investors to consider if purchasing or leasing an orchard.

Major contributors include Dean Dyck, Marsha Gelowitz and Robert Spencer.

Prepared by: Rod Turner
Fenceline Enterprises Ltd.

“Funding for this work was provided by Growing Forward 2: A Federal/Provincial/Territorial Initiative”
 
 
 
 
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For more information about the content of this document, contact Robert Spencer.
This information published to the web on March 22, 2018.