The Economics of Greenhouse Vegetables 1

The Economics of Greenhouse Vegetables 1 Raymond Joe Schatzer, Ahmed Al-Abdulkader and Harry P. Mapp Department of Agricultural Economics Oklahoma State University Today, we report on a study Ahmed completed two years ago that examined the economic feasibility of greenhouse vegetable production in Oklahoma. Our study concentrated on the production of greenhouse tomatoes and cucumbers using two common production systems. We analyzed the bed culture production system and the bag culture option of the production system. There are other production systems including many options for the hydroponic system. Greenhouse owners can produce other vegetables and plants in the greenhouse. Our study concentrated on four greenhouse production systems: 1. Tomato production in the Spring and Fall using bed culture 2. Tomato production in the Spring and Fall using bag culture 3. Cucumber production in the Spring and Fall using bed culture 4. Cucumber production in the Spring and Fall using bag culture Our study was an attempt to answer the following questions for each production system: 1. What are the expected total investment costs? 2. What are the expected annual costs, returns, and cash flows? 3. What is the economic feasibility under conditions of yield and price variability? To answer these questions for each production system, we use an enterprise budget, an income statement, a cash flow budget, and a capital budgeting analysis. We divide the costs into two 1 Paper AE-9432 of the Department of Agricultural Economics, Oklahoma State University, presented at the Greenhouse Vegetable Growers Seminar, John Kirkpatrick Horticulture Center, Oklahoma City, Oklahoma, July 28,1994. Revision of AE-9386.

2 categories, fixed costs and variable costs. Fixed costs are those costs over which you have no control once you make the investment in the greenhouse. These fixed costs include depreciation, interest on the investment, property taxes, and property insurance. The production of crops will require additional costs that we label variable costs. These costs will depend upon the number of plants used, the type of crop grown, the kind of system used, and the way the product is sold. These costs include seed, fertilizer, water, electricity, natural gas, twine, clips, pots, labor, management, etc. The economic and financial feasibility of greenhouse production of vegetables depends upon the type of greenhouse operation and the results obtained. Since each producer's operation will likely differ, we attempted to develop a realistic greenhouse setup for Oklahoma. You can adjust our assumptions to fit your expected operation. We assumed the greenhouse module consists of three 30'x96' polyethylene film houses with a total of 8,640 square feet of greenhouse space for growing plants. This size greenhouse module would require about one-half acre of land. We located the greenhouse in an urban area so the land costs are high. Everything except the growing medium, we assumed had no salvage value. We used 50 percent of the purchase value as the salvage value of the growing medium. Every two years, we assumed the replacement of the external cover, growing medium, and battery used for backup. We assumed the evaporating cooling pad system and solenoid values are replaced every five years. Every ten years, we assumed the thermostats, growing beds, watering system, and minor tools and equipment are replaced. These replacement lives were used to calculate depreciation. We estimated the interest cost at 8.75 percent of the average investment, property taxes at 1.6 percent of the initial investment, and property insurance at 0.8 percent of the average investment. A summary of the greenhouse investment costs are provided

3 in Table 1. We estimated the bed culture system would require an investment of $51,929 and the bag culture system would require $51,098. Our estimate of total annual fixed costs for the bed culture system is $8,334 and for the bag culture system is $7,604. The bed culture system has higher fixed costs because it requires a higher investment in growing medium every two years. The bag culture system has a higher requirement in the watering system every ten years. We assumed that the utilities, amount of twine used, clips used, insecticides used, medium used for growing the transplants, and the management charge would not vary by crop or culture system. The costs of these inputs, which amount to $11,625 per year, are provided in Table 2. We assumed the rest of the variable inputs would vary by either production system or crop. In Tables 3 and 4 we summarize our assumptions about the schedule of operations and planning assumptions for the four production systems. We assume the Fall yield of tomatoes per plant per week is one-half the Spring yield and the bag culture yield in 12.5 percent higher than the bed culture yield. We assume the Fall yield of cucumbers per plant per week is twice the Spring yield and the bag culture yield is 27.8 percent higher than the bed culture yield. Table 5 summarizes the variable costs of producing a Fall and Spring crop of tomatoes and cucumbers using the bed culture system and Table 6 summarizes them for the bag culture system. The total variable costs for producing tomatoes with the bed culture system is $22,530 and with the bag culture system is $23,397. For producing cucumbers, the total variable costs with the bed culture system is $26,603 and with the bag culture system is $28,746. An income statement for each production system is provide in Table 7 along with the break-even price per pound. At the assumed base yield and prices, the expected return to risk for tomatoes for the bed culture system is $15,544 and for the bag culture system is $20,922. The return to risk is the

4 residual income left after paying all resources an opportunity return including all labor and management. We estimate the total costs of producing tomatoes with the bed culture system as 70.1 cents per pound. With the bag culture system, we estimate the total costs of producing tomatoes as 63.2 cents per pound. The expected return to risk for cucumbers under the bed culture system is $11,719 and for the bag culture system is $23,266. The total costs of producing cucumbers with the bed culture system is 71.9 cents per pound and with the bag culture system is 58.5 cents per pound. From an annual expected profit and lost statement it appears that greenhouse production of tomatoes and cucumbers is feasible. Tables 8, 9, 10, and 11 present for the four production systems the annual cash flows for the assumed twenty year life of the greenhouse structure and an estimate of the present value of each years net cash flow. We calculated the present value using a twelve percent discount rate. The expected net present value of growing tomatoes with the bed culture system is $91,493. For the bag culture system, the net present value is $139,723. The expected net present value of growing cucumbers with the bed culture system is $63,332. For the bag culture system, the net present value is $154,969. The net present value is greater than zero after five years for growing tomatoes with the bed culture system and after four years with the bag culture system. For growing cucumbers, the net present value is greater than zero after six years with the bed culture system and after four years with the bag culture system. The bag culture systems have the higher net present value because less growing medium has to be purchased every two years. Another measure of the long term feasibility of the investment is the internal rate of return. The internal rate of return is the discount rate that makes the net present value zero. The internal rate of return is 38.76 percent for bed culture tomatoes, 52.29 percent for bag culture tomatoes, 30.93 percent for bed culture cucumbers, and 56.45 percent for bag culture cucumbers. Table 12 shows

5 the net present value for alternative discount rates for each production system. We examined the sensitivity of the net present value to changes in the yield and the product price. Results of this analysis are provided in Tables 13 and 14. Since part of the costs are a function of the yield, the net present value is more sensitive to changes in prices than changes in yields. Price (less than 20 percent) and yield (less than 25 percent) can change the least amount for cucumbers with the bed culture system before the net present value goes negative, while price and yield can drop more than 30 percent before tomatoes and cucumbers with the bag culture system. The bag culture system is less risky than the bed culture system from an long term investment viewpoint. Greenhouse production of tomatoes or cucumbers can provide a producer with a positive net return in Oklahoma. Potential greenhouse producers must recognize that the potential income is very sensitive to the prices and yields that they receive. The potential greenhouse producer must have a market that can take his or her production at a price higher than that received for field grown imports from other regions. Reference Al-Abdulkader, Ahmed. Economic Feasibility of Greenhouse Vegetable Production in Oklahoma, M.S. Thesis, Oklahoma State University, May, 1992, 139 pp. Schatzer, Raymond Joe, Ahmed Al-Abdulkader, and Harry P. Mapp. Economics of Greenhouse and Cucumber Growing. Paper AE-9386 of the Department of Agricultural Economics, Okalhoma State University, Stillwater, July 1993, 17 pp.

6 Table 1. Green House Module Investment Assumptions. Item Bed Culture Bag Culture Dollars Dollars Land 5,500 5,500 Structure and external cover 14,025 14,025 Heating, cooling, and ventilating system 19,067 19,067 Tools and equipment 2,795 2,795 Growing medium, beds, and watering system 10,542 9,711 Total investment 51,929 51,098 Table 2. Summary of Variable Cost Not Influenced by Crop or System. Item Spring Fall Annual Dollars Dollars Dollars Water 61 44 105 Natural Gas 1,620 810 2,430 Electricity 1,170 1,064 2,234 Clips 549 549 1,098 Twine 202 202 404 Medium for growing transplants 214 214 428 Insecticides 180 126 306 Management 2,695 1,925 4,620 Total 6,691 4,934 11,625

7 Table 3. Schedule of Labor Operations with a Spring Crop From Early-December to Mid-July and a Fall Crop From Early-August to Late-December for Greenhouse Production of Tomatoes and Cucumbers. Operation Tomatoes Cucumbers Plant seeds for Spring Dec 1-7 Dec 1-7 Transplant to pots Dec 8-31 Dec 8-31 Transplant to beds Feb 1-7 Feb 1-7 Stringing and pruning Feb 22-May 21 Feb 22-May 21 Pollination Mar 1-May 21 Not needed Harvest Apr 15-July 7 Mar 22-July 7 Clean up July 1-7 July 1-7 Plant seeds for fall Aug 1-7 Aug 1-7 Transplant to pots Aug 8-31 Aug 8-31 Transplant to beds Sep 8-14 Sep 8-14 String and pruning Oct 1-Nov 14 Oct 1-Nov 14 Pollination Oct 8-Nov 14 Not needed Harvest Nov 22-Dec 31 Nov 1-Dec 31 Clean up Dec 22-31 Dec 22-31

8 Table 4. Number of Plants, Harvest Assumptions, Price, and Yield Assumptions for Tomatoes and Cucumbers for Each Culture System. Tomatoes Cucumbers Item Bed Bag Bed Bag Number of Plants 2,160 2,160 1,440 1,440 Weeks of Harvest in Spring 11 11 14 14 Weeks of Harvest in Fall 6 6 8 8 Percent Grade One 90 90 100 100 Market Price Grade One $/lb 1.10 1.10 0.96 0.96 Market Price Grade Two $/lb 0.65 0.65 Spring Yield lbs/plant 16 18 15.75 20.125 Fall Yield lbs/plant 4.36 4.91 18 23 Spring Yield lbs/week 3,142 3,534 1,620 2,070 Fall Yield lbs/week 1,571 1,767 3,240 4,140

9 Table 5. Variable Cost for Tomatoes and Cucumbers Produced with the Bed Culture System. Tomatoes Cucumber Item Spring Fall Annual Spring Fall Annual Dollars Dollars Dollars Dollars Dollars Dollars Constant a 6,691 4,934 11,625 6,691 4,934 11,625 Fertilizer 303 152 455 132 264 396 Seeds 205 205 410 648 648 1,296 Pots 130 129 259 86 87 173 Labor 4,692 2,293 6,985 3,447 2,843 6,290 Boxes and Wrap b 1,513 413 1,926 2,767 3,162 5,929 Delivery 121 66 187 154 88 242 Repairs 271 272 543 271 272 543 Interest 57 83 140 42 67 109 Total 13,983 8,547 22,530 14,238 12,365 26,603 a These items are detailed in Table 2. b Wrap is used on cucumbers only.

10 Table 6. Variable Cost for Tomatoes and Cucumbers Produced with the Bag Culture System. Tomatoes Cucumber Item Spring Fall Annual Spring Fall Annual Dollars Dollars Dollars Dollars Dollars Dollars Constant a 6,691 4,934 11,625 6,691 4,934 11,625 Fertilizer 303 152 455 132 264 396 Seeds 205 205 410 648 648 1,296 Pots 130 129 259 86 87 173 Bags 194 195 389 130 129 259 Labor 4,782 2,383 7,165 3,537 2,933 6,470 Boxes and Wrap b 1,702 464 2,166 3,535 4,041 7,576 Delivery 121 66 187 154 88 242 Repairs 298 298 596 298 298 596 Interest 63 82 145 44 69 113 Total 14,489 8,908 23,397 15,255 13,491 28,746 a These items are detailed in Table 2. b Wrap is used on cucumbers only.

11 Table 7. Annual Income Statement for the Greenhouse Module and per Pound for Two Culture Systems for Tomatoes and Cucumbers. Tomatoes Cucumbers Item Bed Culture Bag Culture Bed Culture Bag Culture $/module $/module $/module $/module Total Revenue 46,408 52,194 46,656 59,616 Variable Costs 22,530 23,397 26,603 28,746 Gross Margin 23,878 28,797 20,053 30,870 Fixed Costs 8,334 7,604 8,334 7,604 Returns to Risk 15,544 21,193 11,719 23,266 $/pound $/pound $/pound $/pound Revenue 1.055 1.055 0.960 0.960 Variable Cost 0.512 0.473 0.547 0.463 Fixed Cost 0.189 0.154 0.172 0.122 Total Cost 0.701 0.627 0.719 0.585

12 Table 8. Flows, Present Values, and Internal Rate of Return over Twenty s for Bed Culture Greenhouse Tomatoes. Outflow for Capital Purchases Outflow for Operating and Maintenance Annual Outflow Annual Inflow Annual Net Flow Present Value of Net Flow Internal Rate of Return to Net Present Value to 0 51,929 0 51,929 0 (51,929) (51,929) -100.00% (51,929) 1 0 22,933 22,933 46,407 23,474 20,959-54.80% (30,970) 2 7,030 22,933 29,963 46,407 16,444 13,109-16.75% (17,860) 3 0 22,933 22,933 46,407 23,474 16,709 10.70% (1,152) 4 7,030 22,933 29,963 46,407 16,444 10,451 20.60% 9,299 5 2,604 22,933 25,537 46,407 20,870 11,842 27.84% 21,141 6 7,030 22,933 29,963 46,407 16,444 8,331 31.25% 29,472 7 0 22,933 22,933 46,407 23,474 10,619 34.27% 40,091 8 7,030 22,933 29,963 46,407 16,444 6,642 35.62% 46,733 9 0 22,933 22,933 46,407 23,474 8,465 36.89% 55,198 10 17,872 22,933 40,805 46,407 5,602 1,804 37.10% 57,002 11 0 22,933 22,933 46,407 23,474 6,748 37.70% 63,750 12 7,030 22,933 29,963 46,407 16,444 4,221 37.99% 67,971 13 0 22,933 22,933 46,407 23,474 5,380 38.28% 73,350 14 7,030 22,933 29,963 46,407 16,444 3,365 38.42% 76,715 15 2,604 22,933 25,537 46,407 20,870 3,813 38.55% 80,528 16 7,030 22,933 29,963 46,407 16,444 2,682 38.62% 83,211 17 0 22,933 22,933 46,407 23,474 3,419 38.69% 86,630 18 7,030 22,933 29,963 46,407 16,444 2,138 38.73% 88,768 19 0 22,933 22,933 46,407 23,474 2,726 38.76% 91,493 Total 131,249 435,727 566,976 881,739 314,764 91,493

13 Table 9. Flows, Present Values, and Internal Rate of Return over Twenty s for Bag Culture Greenhouse Tomatoes. Outflows for Capital Purchases Outflows for Operating and Maintenance Annual Outflows Annual Inflows Annual Net Flow Present Value of Net Flow Internal Rate of Return to Net Present Value to 0 51,098 0 51,098 0 (51,098) (51,098) -100.00% (51,098) 1 0 23,787 23,787 52,197 28,410 25,366-44.40% (25,732) 2 3,550 23,787 27,337 52,197 24,860 19,818 2.89% (5,913) 3 0 23,787 23,787 52,197 28,410 20,222 27.75% 14,308 4 3,550 23,787 27,337 52,197 24,860 15,799 38.27% 30,108 5 2,604 23,787 26,391 52,197 25,806 14,643 44.10% 44,751 6 3,550 23,787 27,337 52,197 24,860 12,595 47.27% 57,346 7 0 23,787 23,787 52,197 28,410 12,851 49.38% 70,197 8 3,550 23,787 27,337 52,197 24,860 10,041 50.48% 80,238 9 0 23,787 23,787 52,197 28,410 10,245 51.26% 90,483 10 17,057 23,787 40,844 52,197 11,353 3,655 51.46% 94,138 11 0 23,787 23,787 52,197 28,410 8,167 51.78% 102,305 12 3,550 23,787 27,337 52,197 24,860 6,381 51.96% 108,686 13 0 23,787 23,787 52,197 28,410 6,511 52.09% 115,197 14 3,550 23,787 27,337 52,197 24,860 5,087 52.16% 120,284 15 2,604 23,787 26,391 52,197 25,806 4,715 52.21% 124,999 16 3,550 23,787 27,337 52,197 24,860 4,055 52.24% 129,054 17 0 23,787 23,787 52,197 28,410 4,138 52.27% 133,192 18 3,550 23,787 27,337 52,197 24,860 3,233 52.28% 136,424 19 0 23,787 23,787 52,197 28,410 3,299 52.29% 139,723 Total 101,763 451,953 553,716 991,746 438,030 139,723

14 Table 10. Flows, Present Values, and Internal Rate of Return over Twenty s for Bed Culture Greenhouse Cucumbers. Outflow for Capital Purchases Outflow for Operating and Maintenance Annual Outflow Annual Inflow Annual Net Flow Present Value of Net Flow Internal Rate of Return to Net Present Value to 0 51,929 0 51,929 0 (51,929) (51,929) -100.00% (51,929) 1 0 27,005 27,005 46,656 19,651 17,546-62.16% (34,383) 2 7,030 27,005 34,035 46,656 12,621 10,061-28.27% (24,322) 3 0 27,005 27,005 46,656 19,651 13,987-0.01% (10,335) 4 7,030 27,005 34,035 46,656 12,621 8,021 9.77% (2,314) 5 2,604 27,005 29,609 46,656 17,047 9,673 17.75% 7,359 6 7,030 27,005 34,035 46,656 12,621 6,394 21.42% 13,753 7 0 27,005 27,005 46,656 19,651 8,889 25.09% 22,642 8 7,030 27,005 34,035 46,656 12,621 5,097 26.64% 27,740 9 0 27,005 27,005 46,656 19,651 7,086 28.29% 34,826 10 17,872 27,005 44,877 46,656 1,779 573 28.40% 35,399 11 0 27,005 27,005 46,656 19,651 5,649 29.27% 41,048 12 7,030 27,005 34,035 46,656 12,621 3,239 29.67% 44,287 13 0 27,005 27,005 46,656 19,651 4,504 30.12% 48,791 14 7,030 27,005 34,035 46,656 12,621 2,583 30.33% 51,374 15 2,604 27,005 29,609 46,656 17,047 3,114 30.54% 54,488 16 7,030 27,005 34,035 46,656 12,621 2,059 30.66% 56,547 17 0 27,005 27,005 46,656 19,651 2,862 30.79% 59,409 18 7,030 27,005 34,035 46,656 12,621 1,641 30.86% 61,050 19 0 27,005 27,005 46,656 19,651 2,282 30.93% 63,332 Total 131,249 513,095 644,344 886,464 242,120 63,332

15 Table 11. Flows, Present Values, and Internal Rate of Return over Twenty s for Bag Culture Greenhouse Cucumbers. Outflow for Capital Purchases Outflow for Operating and Maintenance Annual Outflow Annual Inflow Annual Net Flow Present Value of Net Flow Internal Rate of Return to Net Present Value to 0 51,098 0 51,098 0 (51,098) (51,098) -100.00% (51,098) 1 0 29,136 29,136 59,616 30,480 27,214-40.35% (23,884) 2 3,550 29,136 32,686 59,616 26,930 21,468 8.31% (2,415) 3 0 29,136 29,136 59,616 30,480 21,695 33.00% 19,280 4 3,550 29,136 32,686 59,616 26,930 17,115 43.34% 36,394 5 2,604 29,136 31,740 59,616 27,876 15,818 48.95% 52,212 6 3,550 29,136 32,686 59,616 26,930 13,644 51.94% 65,855 7 0 29,136 29,136 59,616 30,480 13,788 53.88% 79,643 8 3,550 29,136 32,686 59,616 26,930 10,877 54.89% 90,520 9 0 29,136 29,136 59,616 30,480 10,991 55.58% 101,511 10 17,057 29,136 46,193 59,616 13,423 4,322 55.77% 105,833 11 0 29,136 29,136 59,616 30,480 8,762 56.04% 114,595 12 3,550 29,136 32,686 59,616 26,930 6,912 56.19% 121,507 13 0 29,136 29,136 59,616 30,480 6,985 56.29% 128,493 14 3,550 29,136 32,686 59,616 26,930 5,510 56.35% 134,003 15 2,604 29,136 31,740 59,616 27,876 5,093 56.39% 139,096 16 3,550 29,136 32,686 59,616 26,930 4,393 56.42% 143,489 17 0 29,136 29,136 59,616 30,480 4,439 56.43% 147,928 18 3,550 29,136 32,686 59,616 26,930 3,502 56.44% 151,430 19 0 29,136 29,136 59,616 30,480 3,539 56.45% 154,969 Total 101,763 553,584 655,347 1,132,704 477,357 154,969

16 Table 12. Net Present Values for Alternative Discount Rates for Each Crop for Each Culture System. Tomato Cucumber Discount Rate Bed Culture Bag Culture Bed Culture Bag Culture Percent Dollars Dollars Dollars Dollars 9% 121,731 180,192 87,512 198,717 12% 91,493 139,723 63,332 154,969 15% 69,239 109,923 45,541 122,752 18% 52,434 87,414 32,108 98,418 21% 39,443 70,009 21,723 79,602 24% 29,181 56,261 13,518 64,741 27% 20,918 45,192 6,908 52,776 30% 14,147 36,124 1,490 42,976 33% 8,513 28,580 (3,021) 34,825 36% 3,760 22,219 (6,830) 27,951 39% (299) 16,788 (10,084) 22,085

Table 13. Net Present Values for Alternative Yield Levels for Each Crop for Each Culture System. Tomato Cucumber Yield Bed Culture Bag Culture Bed Culture Bag Culture % of Base Dollars Dollars Dollars Dollars 105% 107,097 157,430 77,543 173,347 100% 91,493 139,723 63,332 154,969 95% 75,890 122,016 49,120 136,591 90% 60,287 104,309 34,909 118,214 85% 44,684 86,602 20,698 99,836 80% 29,081 68,895 6,487 81,458 75% 13,478 51,188 (7,724) 63,081 70% (2,125) 33,481 (21,935) 44,703 17 Table 14. Net Present Values for Alternative Price Levels for Each Crop for Each Culture System. Tomato Cucumber Price Bed Culture Bag Culture Bed Culture Bag Culture % of Base Dollars Dollars Dollars Dollars 105% 108,585 158,947 80,514 176,925 100% 91,493 139,723 63,332 154,969 95% 74,402 120,499 46,149 133,013 90% 57,311 101,276 28,966 111,057 85% 40,220 82,052 11,783 89,101 80% 23,128 62,828 (5,400) 67,145 75% 6,037 43,605 (22,583) 45,189 70% (11,054) 24,381 (39,766) 23,233