Estimating Production Costs - Example of a Raspberry Planting
by Tim Clymer
Our bramble planting in its first year — Threefold Farm
To calculate annual costs we’ll use the example of a raspberry planting calculated on a per-row basis.
The numbers will work as well for apples, peaches, pears, or other fruit as long as you can provide good estimates for each cost.
Some context before we begin:
Our raspberry rows are each 180 feet long and are grown on a T style trellis (one lower bar and one upper) with 4 wires total. We use woven black plastic for weed control that was applied in two overlapping 3’ wide strips. Our plant spacing within the row for this example is 3’. Posts were pounded every 30’ in the row for 7 posts total. We’ve installed orchard tubing with pre-installed emitters every 12” for irrigation beneath the plastic groundcover.
One more note before we get started: it is important to use the correct financial terms so that you can communicate with financial advisers, banks or other lending institutions. It is also helpful to get into the practice of using these terms as you make financial decisions for your farm.
Cost Component #1 — Annualized Establishment Costs
Threefold Farm’s orchard in its second year, 2017 — Threefold Farm
Annualized Establishment Costs are the costs to put the planting in the ground plus the costs of bringing the plants to fruiting maturity spread over the reasonable life of the planting.
Establishment Cost-Per-Row Breakdown
Plant Cost = $3 x 60 plants = $180
Trellis (Posts, Wire, Tensioners, Cross Members) = $157
Groundcover Fabric & Staples = $63
Irrigation (Tubing + Connector) = $22
Fertilizer = $10
Labor (Plant, Trellis, Weeding) = $288
Miscellaneous = $30
Total = $750
Let’s assume it costs $750 in plants, materials, labor, and equipment to put in a 180’ row of raspberries. Let’s also assume that it takes approximately two unproductive years to bring the raspberries into full production. These are years where I’m doing nearly all the same work that I would be doing on a mature planting but not benefitting from it. Let’s assume my annual costs are around $250. Let’s also assume that I can get 10 years total lifespan out of a raspberry planting before major renovation work needs to be done.
Annualized Establishment Costs = (Establishment Costs + Two-Year Cost of Bringing Planting into Production) / Useful Life of Planting in Years
Annualized Establishment Costs = ($750 + ($250 x 2)) / (10 - 2) = $156.25 per row
Cost Component #2 - Asset Costs
Our small tractor being used to help clear a fence line in the early years of the farm — Threefold Farm
Asset costs are the costs of owning, operating, and maintaining the portion of your assets (think tractors, mowers, sprayers, walk-in coolers, etc.) that are directly used to maintain a planting. These are very difficult to precisely and accurately estimate but shouldn’t be neglected. Eventually you’ll need to plan to replace your equipment and infrastructure; making sure that cost has been figured into your production will allow you to plan for that eventuality. Asset costs for equipment like tractors, sprayers, mowers, and other mechanized equipment should be specified at a per-hour or per-use rate since those figures are more readily available and it’s straightforward to do calculations based on that metric.
Costs for your equipment should be spread out over the useful life of the equipment and should factor in things like operating costs (fuel, electricity, regular maintenance) and repairs (you should assume things will break over time) in addition to the purchase price (depreciation and interest).
Asset Cost Per Row Breakdown
If you spend 2 hours per year on each row on your tractor and 1 hour per year mowing that row, your asset costs for that year are:
Asset Costs = ($25 x 2) + ($15 x 1) = $65 per row
For the sake of simplicity, let’s assume you calculate the hourly cost of your small tractor to be $25. Larger tractors, in general, will be more capable but have a greater per-hour cost. Let’s also assume your mower will cost you $15 per hour. Remember, this is the cost of operating and maintaining–this does not include labor.
This example excludes items like walk-in coolers, packing sheds, sprayers, or other necessary items. For items like these, spreading out its cost over its expected useful life, then assigning some portion of that cost to the crop by overall revenue percentage, a per-acre basis, or some relevant metric can help so that these costs aren’t ignored.
Resources for Calculating Asset Costs
University of Arkansas has a good informational sheet on the operating costs of a tractor per hour:
https://www.uaex.uada.edu/publications/PDF/fsa-21.pdf
Iowa State has a similarly good way of calculating equipment costs:
https://www.extension.iastate.edu/agdm/crops/html/a3-29.html
And yet another calculator for farm machinery:
https://www.agric.gov.ab.ca/app24/costcalculators/machinery/getmachimpls.jsp
Cost Component #3 - Annual Labor and Supplies
In general, annual labor and supplies will be your largest annual cost by percentage. It’s also a pretty difficult cost to get an accurate handle on until you’ve worked in the orchard over the course of a few seasons.
Annual labor includes things like pruning, trellising, fertilizing, mowing, weeding, planning, scouting, spraying, and the material costs associated with those activities. Annual supplies include things like trellising ties, spray materials, and fertilizer. In my cost calculations, I also like to include the cost of the land at an average rental rate for the area, even if I’m not renting it (though this could be included in the asset costs section too) because it helps me to account for the cost of purchasing the land. If I were to expand and needed to rent, inserting the going rate for rented land helps me to understand the feasibility of expanding into rented property.
For the sake of simplicity, let’s assume that the raspberries cost me $250 per row in annual labor and supplies.
Annual Labor and Supplies Per Row Breakdown
Labor (Winter & Summer Pruning, Trellising, Fertilizing, Mowing, Weeding, Spraying) = $201.60
Electricity for Cooling (Walk-In Cooler Utility Cost Estimate) = $10
Spray Materials = $20
Land Cost = $8.68 = Each Row Occupies 0.058 acres @ $150 per acre rent
Fertilizer = $10
Annual Labor and Supplies = $250 per row
Brambles like blackberries require significant labor each year to keep them pruned and trellised properly — Threefold Farm
Cost Component #3 - Harvest Costs
Harvest costs are those costs associated with the labor and supplies needed to pick, sort, and pack your fruit. You could lump them in with your annual labor costs, but we choose to separate them for two reasons. First, it makes it more difficult to calculate the cost of bringing a planting into maturity if harvest costs are included since there’s fairly little harvest during the establishment years. Second, the harvest costs are generally significant enough that they deserve separate consideration.
I usually think of harvest costs in terms of per unit of sold product rather than per-row. So for raspberries, my costs are calculated per pint, then multiplied by the number of pints I expect per row.
Harvest Cost Per Row Breakdown
Harvest Costs Per Row = Labor Harvest Cost + Harvest Container Cost + Sorting Cost
Harvest Costs Per Row = ($1.20 x 180) + ($0.23 x 180) = $257.40 per row
If my labor costs are $14.40 per hour, and my workers can pick 12 pints per hour, then my harvest labor is $1.20 per pint. My picking container costs $0.23 per pint (berry container plus flat box), bringing my total harvest cost to $1.43 per pint. If I estimate that I’ll harvest 180 pints per row (one pint per linear row foot), my total harvest cost is $257.40.
In this instance, the sorting is primarily done in the field during picking, so no sorting cost is included. For typical orchard operations, some or most sorting, grading, and packing is done post-harvest and should be included.
Total Annual Costs of Raspberry Planting
My total costs for my raspberry planting (in this case a row) are the sum of each of the individual annual components: annualized establishment costs + asset costs + annual labor and supplies + harvest costs
Total Annual Costs =
$156.25 (Establishment)
+ $65 (Assets)
+ $250 (Labor & Supplies)
+ $257.40 (Harvest)
= $728.65 per row
Unit Cost for Raspberries
It’s helpful as well to figure out your costs per unit of fruit produce, in this case pints. If we assume 180 pints per row of saleable fruit we have:
$728.65 / 180 pints = $4.05 per pint
How does this help? It gives you an overall cost per unit of production. In very practical terms, if I sell my berries for anything less than $4.05 per pint, I’m losing money. Some fruit growers may consider only this year’s production costs so one pint would cost $2.82 to produce in annual production costs. If one pint is sold retail for $3.50 the grower is losing $.55 on every pint sold. Following the practice of only considering the annual production costs is short-sighted. The farm business will not be sustainable over the long term. How costs are calculated is key to staying in business and being able to grow fruit into the future.
Other Factors Impacting Production Costs
Other Factors - Risk
Damaged pawpaw bloom from a late frost — Threefold Farm
One item that we neglected to calculate is the risk associated with your crop. With some fruiting crops, extraordinary weather events or even ordinary weather patterns can mean the difference between having a crop some years but having little to none in others. Where we grow in Pennsylvania, annual harvest of sweet cherries and apricots is undependable. Peaches on the other hand normally produce fruit reliably on a yearly basis but the crop can be reduced or lost one out of five years. There is a risk each year that early spring frost will reduce or eliminate the crop. In these instances, the annual costs will remain relatively the same as a productive year while the harvest labor will decrease and there will be reduced or nonexistent income for that year.
In this case the grower must decide if it is a wise business decision to include a crop that bears fruit inconsistently year to year. There may be other factors to consider: perhaps these fruits are available to market early and stimulate early season sales so their value is greater than only the amount and value of the fruit that is for sale. This is when knowing all the costs of production will help the grower to make the best business decisions for the long term viability of the orchard and farm.
One way to factor in risk would be to treat those years as if they are establishment years. If I expect that for 10 out of 20 years of the life of my apricot trees I expect to have no crop, then my establishment costs need to be spread out over the productive life of the planting and I still need to account for the annual costs associated with a lost year of harvest.
Other Factors - Pack Out Rate and Planting Maturity
Pack out rate refers to the percentage of fruit that’s of a given quantity. For a crop like apples, the best quality fruit is sold as fresh fruit, with the remainder being sold for either processing or culls. An organic apple farmer would generally be pleased with a 70% fresh fruit pack out with 20% for cider or processing and 10% culls (unusable apples). Percentages like these can be used when estimating revenue in the next section.
Planting maturity refers to the fact that trees don’t move directly from not bearing to bearing a full crop. They generally progress in stages where production increases over a number of years until the planting reaches full bearing maturity. It’s important to factor this in, especially in the early years of a planting. This ramp-up in yield can be found by further investigation into the crop you’re planning to grow.
Other Factors - Overhead
Overhead costs are those costs not directly linked to crop production. They run the gamut from utilities to building maintenance to various tools and supplies. We’re including it here because these costs also need to be factored in when determining your total costs and therefore your product pricing. Overhead costs will vary from operation to operation. For the berry portion of our operation, I opted to add 20% to all of our other costs. If you’ve been tracking your orchard’s financials for a number of years, you can begin to fine-tune this number to your operation and apportion a realistic percentage to the crop you’re growing. Just don’t neglect factoring in overhead.
Estimating Revenue - Yields and Value of Fruit Sold
Revenue estimates are the income you expect to receive on selling your fruit. We like to estimate our revenue based on our different sales avenues: wholesale versus retail and any other way you divide up your product.
Per-Row Bramble Revenue Estimate
Potential Revenue Per Row
= 90 x $7/pint + 90 x $6/pint
= $1,170 per row
Let’s continue the raspberry planting example and estimate that we can produce 180 pints per row of marketable fruit. We can use historical data or simply use estimates for the proportions of the crop that you expect to sell at various price points. Once again for the sake of simplicity let’s estimate that we sell half of those pints (90) at retail for $7/pint, and half (90) at wholesale at $6/pint.
Once again, a spreadsheet is handy in order to get a handle on various scenarios. Wholesale sales will earn you less per unit sold, but at the benefit of selling more produce in a less labor-intensive way than retail sales. Retail sales will earn you more per unit sold, but often at the added expense of additional labor. A spreadsheet will help you to consider various scenarios and determine not only the price points at which you could sell your fruit, but also your preferred sales avenues.
Putting it All Together - Ways to Assess Profitability
Gross Margin or Expense Ratio
Gross Margin % = (Income - Costs) / Income OR 100% - Expense Ratio %
Expense Ratio % = Costs / Income
<<Insert graphic illustrating this concept>>
Gross Margin and Expense Ratio are expressed in percentages and are different ways of looking at the same coin: they explain how costs are related to income. As the expense ratio moves toward 100% or the gross margin moves toward 0%, the cost of growing your crop is approaching the price you’re selling it for. That means there is far less wiggle room for unforeseen expenses and crop failure. This also means that your profit per row, block, acre, or however you choose to calculate it is smaller, meaning more acres are needed to achieve additional profit. On limited acreage, this is the difference between a crop that’s financially viable or not.
A negative gross margin or an expense ratio over 100% means you’re losing money on the crop. This situation isn’t sustainable. Either your prices need to be increased and/or your costs need to come down. If neither is possible, then consider whether this crop is worth growing and losing money on.
In the above raspberry example, the example is as follows:
Expense Ratio = $728.65 / $1,170 = 62.3%
Gross Margin = 100% - 62.3% = 37.7%
Profit Per Row/Planting/Acre
A blackberry planting in its second year — Threefold Farm
In the vegetable world, profitability is often measured per row foot of bed space per unit of time. In the world of perennial fruits, it’s helpful to think of profit in terms of per row, per planting, and ultimately per acre. Margins and expense ratios are key, but a profit per X can provide perspective. Let’s follow the example of raspberries:
Profit Calculations for Raspberries
Yearly Profit Per Row = Income - Costs = $1,170 - $728.65 = $441.35
Yearly Profit Per Plant = Profit Per Row / Plants Per Row = $441.35 / 60 = $7.36
Yearly Profit of Planting = Profit Per Row x Number of Rows = $441.35 x 5 = $2,206.75
Portion of Acreage Per Row = 180 x 14 / 43,560 (sq ft per acre) = 0.0579 = 5.79% of an acre
Yearly Profit Per Acre = Profit Per Row / Portion of Acre Per Row = $441.35 / 0.0579 = $7,629.05
The question for the fruit grower becomes this: is $7,629.05 enough profit per acre of land to sustain the orchard business? How does this compare to other fruits that I could be growing? What are the growers expectations for farm profitability?
Putting real-life measurements behind the numbers provides perspective and allows for comparison to alternative crops. We could run the same metrics but use apples or peaches instead to see if they work out better from a margin and profit per acre perspective.
Do raspberries deserve space in our orchard?
There are many factors to consider beyond the simple profitability of a crop. Things like cash flow, seasonal labor needs, and personal preferences help to determine which crops to pursue.
At Threefold Farm we likely won’t expand our existing raspberry planting. There are other crops that satisfy our niche market at a higher potential profit per acre on our limited acreage. Still, raspberries help with cash flow at a time of year when little else is bringing in money. They allow us to retain labor through the summer months to help maintain our higher margin fall-fruiting plantings. While their expense ratio is high, they help to introduce families to our farm and help to introduce some of our customers to our unusual fruits. Therefore the “should I plant it?” question isn’t one with a straightforward answer. Many considerations go into that assessment and you need to weigh the pros and cons of each.
How to Use Cost & Revenue Estimates
So why take the time to calculate all these numbers? Estimating costs and revenue and calculating the resulting profit metrics is worthwhile in a variety of ways. Here are a few:
Operational Efficiency: Going through this exercise provides a clearer picture of your operation and where you’re spending your time (and money). You will better see the “low hanging fruit” and know where to make the most lucrative operational improvements. If organic production is new to your operation, this exercise will help to familiarize you with unique organic inputs you may have not originally considered.
Fruit Pricing: Instead of guessing how to price your fruit, calculated estimates provide real numbers that you can plug into a spreadsheet and run through various scenarios. Can you afford to sell your fruit at a lower price but at a higher volume to someone who really likes your product? Will the organic certification help your bottom line? Are you losing more money on labor or equipment? Without hard numbers, you’re only guessing at an answer. You won’t know until you run the numbers.
Assessing Opportunity: How do you identify the crop with the greatest potential for profit? You won’t know unless you can pin down both your production costs and your revenue potential.
Decision-Making: Financial decisions around the farm are made more straightforward by this type of estimating. Realistic numbers counterbalance emotional or personal desires of what should or shouldn’t be grown if the goal is to make a profit. These types of estimates also reveal the true cost of following organic standards, which could be more than expected… or could be less. It's hard to argue with numbers. Run the numbers and compare different crops against each other.