Financial and Practical Considerations of Selecting Zero Runoff Subirrigation Systems

1. Financial and Practical Considerations of Selecting Zero Runoff Subirrigation Systems Wen-fei L. Uva Department of Agricultural, Resource, and Managerial Economics Cornell University Modified by Georgia Agriculture Education Curriculum Office June, 2002

2. What is Zero Runoff Subirrigation Technology?

4. Growers’ Challenges New Technology Horticultural Issues Environmental Issues Economic Issues Sustainable Businesses

5. Common Concerns • High Investment Costs • Insufficient Production and Cultural Information • Potential Disease Problem • Hard to Manage ? • Which System to Adopt?

6. Four Commonly Used Zero Runoff Subirrigation Systems

7. Ebb-and-Flow Rolling Bench System

8. Dutch Movable Tray System

9. Flood Floor System

10. Trough Bench System

11. Growers’ Experience with Zero Runoff Subirrigation Systems:A 1996 Survey

12. Grower Characteristics • 1. More large size operations • -78% with >$500,000 annual gross sales • 2. Mostly wholesale growers • 3. 80% growers had less than 5 years experience • 4. Convert part of the operation only • - 60% converted less than 1/3 of the area • 5. Many planned to convert more greenhouse area

13. Reasons for Adopting Zero Runoff Subirrigation Systems From the Most Important: 1. Improve Product Quality 2. Cut Production Costs 3. Increase Production Efficiency 4. More Control Over Operation 5. Environmental Concerns

14. Systems Adopted: 1. Most commonly used: Ebb-&-Flow Benches 2. Large operations more likely to choose the Flood Floor System 3. Large operations and operations with large zero runoff areas tend to use more than one type of system

15. Benefits Received From Using Zero Runoff Subirrigation Systems From the Most Important: 1. Savings on watering labor 2. Savings on fertilizer 3. Product uniformity & better product appearance 4. Savings on water 5. Increased productivity 6. Higher space utilization efficiency

16. Management Adjustments • Lower fertilizer rate (1/2) • Close monitoring of EC and pH • Adjust irrigation schedule • Adjust cropping schedule • Automation and mechanization • Labor training • Majority (84%) did not treat the solutions • 20% found less disease problem; 78% found no change

17. Financial Aspects

18. Some Important Concepts • Variable Costs: cost items vary with production volume • i.e. plant materials, pots, mix, fertilizer, labor... • Fixed Costs: cost items do not vary with production volume • i.e. rent, interests, manager salary, telephone, depreciation... • Costs & Profit per Square Foot Week (SFW) • Time Value of Money

19. Case Studies:Comparing the profitability of using the 4 zero runoff subirrigation systems to produce 3 crop categories

20. Small potted plants (< 5” pot) 4 1/2” Geranium: an 8-week crop

21. Large potted plants (> 5” pot) • 6” Poinsettia: a 17-week crop

22. Bedding plant plugs and flats • 1204 size Impatiens flats: a 10-week crop Plug Production

23. Flat Production

24. 11 Production Models

25. The Greenhouse Model • A 20,000 sq. ft. model greenhouse facility • Firm’s Marginal Tax Rate: 30% • Inflation Rate: 3% • Average space use efficiency: Ebb&flow benches: 87% Dutch movable trays: 85% Flood floors: 90% Trough benches: 77% • No salvage values

27. Initial Investment Costs Annual Equivalent Costs Adjusted for the Tax Saving from Accounting Depreciation r x (1+r)n c = (C - Ds) x (1+r)n - 1 c = annual equivalent investment cost ($) C = initial investment cost ($) Ds = present value of tax saving from accounting depreciation ($) r = after-tax real discount rate (%) n = lifetime of investment item (yrs)

28. 1+r’ - 1 r = After-tax real discount rate(%): 1+i Assumptions • After-tax Real Cost of Capital: 4.73%. • 50% Borrowed Capital - Cost: 8.5% • 50% Equity Capital - Cost: 14% calculation: Before-tax nominal discount rate (%): R’ = (Pe * re) + (Pb * rb) After-tax nominal discount rate(%): r’ = R’ * (1-t)

30. Assumptions: • Product prices: 4 1/2” Geranium - $1.85/pot 6” Poinsettia - $4.10/pot 1204 Impatiens flat - $6.75/flat • Labor: Head grower: $32,800/year Hourly wage: $9.0/hour Worker’s compensation: 20%

31. Income tax Total before tax return Price Shrinkage Material costs Total before tax costs Overhead costs Profit/pot & Profit/SFW GH floor Labor costs Annual equivalent investment costs adjusted for the tax saving Initial investment costs Tax savings from depreciation

32. Profit/SFW Greenhouse Floor

33. Risk Analysis of Cost Uncertainty Crisis = Risks + Opportunities

34. Risk Analysis Approaches • Sensitivity analysis • “What if”scenarios • Simulation: Sample random values from a probability distribution for each variable • Thegolden rule: each one of these scenarios must be potentially observable in real life • Excel can do all the above

35. Sensitivity Analysis • Answer the question: How will the decision be affected if the cost value changes? • Changes in variables generallydid not affect the profitability rankings among systems

36. Sensitivity Analysis of Labor Costs

37. Sensitivity Analysis of Initial Investment

38. Simulation • VariableProbability Distributions Identify by minimum, most likely and maximum values • Sample Size: • 300 simulations for each production models

39. Results of Simulation

40. Conclusions: • Growers adopted ZRS technology mainly because it improved their operation quality, not environmental concerns • Best system for each crop category • Small Potted Plants: Dutch Movable Trays • Large Potted Plants: Flood Floors (?) • Bedding Crop Flats: Flood Floors

41. Conclusions: • Changes of the major cost variables did not affect the profitability rankings of the alternative investment projects

42. Implications to Growers: • Makemore informed decisions when adopting ZRS technology • Choose the system(s) best suited for the operation and financial goals • Apply the analysis methods to other investment projects in the future • Growers can utilize the existing computer technology for the analysis • Excel was used for this study

43. New Technology Horticultural Issues Economic Issues Environmental Issues Sustainable Horticultural Businesses