Graeber, Kenneth E.

Johnson, Philip N.

Kensing, Robert H.

Texas A&amp;M Repository

®(]={](g~1fAN ECONOMIC ANALYSIS OF PECAN ORCHARDESTABLISHMENT AND MANAGEMENTL-1233Robert H. Kensing, Phillip N. Johnson and Kenneth E. Graeber*Table 1. Estimated per acre costs of daily flow irrigation systemCOSTSEstablishment PeriodDuring the establishment period, in which landis prepared, the irrigation system is installed andtrees are planted, costs required to operate andmaintain the orchard vary depending upon landpreparation required, source of irrigation waterand density of planting.The estimated cost per acre of a controlled dailyflow irrigation system, based upon a design for aforty-acre orchard, is $165 as shown in Table 1.Costs vary with selection of material types, waterfiltration equipment required, density of planting,automated equipment desired and labor costs.$ 62.704.3210.807.925.006.0012.503.002.5020.0030.00$164.74Cost per acre@ $ .05@ $ .04@ $ .30@ $ .12@ $ .20-:- 40 ac.40 ac.-=- 40 ac.-=- 40 ac.1,254'108'3666'25'$240$500$120$100Estimated total per acre costsLateral pipe %"Tree loops 3Ja"EmittersSupply line 1 Y2" PVCSupply line 3" PVCFilterFertili%er injectorControlsMiscellaneous connectionsTrenchingLaboror trickle irrigation) to be an economical methodof water application in areas where water for irri-gation is limited. This analysis assumes the use ofa controlled daily flow irrigation system.Four distinct stages in the life of a planted pecanorchard are: (I) establishment, (2) initial develop-ment, (3) secondary development and (4) produc-tion. The investor must have sufficient capital toacquire land, trees, irrigation system and other re-quirements for establishment. Of particular impor-tance is the time span from establishment to thepoint of economic production. During this period,costs are greater than returns from the sale ofpecans, therefore, operating funds must be availablefrom another source.Fig. 1. Resource areas*Extension area economists-management at San Angelo and FortStockton; Extension economist-real estate, College Station, TheTexas A&M University System.The establishment and management of a pecanorchard requires considerable economic planningdue to the magnitude and the long-term nature ofthe investment. The planning horizon must span15 to 20 years. Few other enterprises require suchlong-range planning.Production levels, costs and returns assumed forthis analysis are estimates based upon past perform-ance records and are not to be interpreted as projec-tions. Actual production levels, costs and pricesvary with management, locality, weather and eco-nomic conditions. Individuals considering invest-ment in pecan orchards should be capable of highlevel management or willing to hire professionalmanagement. Management is the key to a successfulpecan operation.This study was specifically designed for the twoareas shown in figure 1. The distinctions betweenthe areas are based upon irrigation, insect controlrequirements and expected production. These areasrequire supplemental irrigation. Research hasshown controlled daily flow irrigation systems (drip16.13E. teThe estimated establishment cost of $300 peracre as shown in Table 2 is based on a plantingdenstiy of 36 trees per acre. Operational costs forthe two areas vary because of differences in insectcontrol costs. Fixed costs reflect a return on theinvestment in land. Depreciation on well and pumpvaries due to initial cost differences of wells betweenthe areas. Total estimated cost for a well and pumpcapable of serving 40 acres utilizing a daily con-trolled flow irrigation system is $3,000 for Area 1and $1,600 for Area 2. This represents a cost peracre of $75 for Area 1 and $40 for Area 2. Thesystems were assigned twenty-year life expectanciesfor depreciation calculation.Table 2. Estimated establishment costs per acreItem Area 1 Area 2Land preparation $ 10.00 $ 10.00Trees (36 @ $4.00) 144.00 144.00Staking and holes 20.00 20.00Irrigation 10.75 10.75Weed control 7.50 7.50Insecticide and application 7.50Labor 40.00 40.00Maintenance and repair 8.97 8.39Interest on operating capital 9.65 9.93Total operational costs $250.87 $258.07Fixed costsDepreciation:Well and pump $ 3.75 $ 2.00Daily flow system 8.13 8.13Land cost ($400 x .08) 32.00 32.00Total fixed cost $ 43.88 $ 42.13"Estimated total establishment costs $294.75 $300.20Initial Development PeriodThe initial development period is the time spanfrom the establishment year to the year productionis expected to begin. Tables 3 and 4 show esti-mated total annual costs for each area during theinitial development period to be approximately$1l0 per acre. The budgets presented are based onvarieties capable of bearing crops by the fifth seasonafter transplanting. Average annual costs for 4 yearsfollowing establishment include operational costsrequired to maintain tree growth and annual fixedcosts.The largest cost differences between the areasreflect different requirements for zinc and insecti-cide. In Area 1, insecticide requirements are notas great as in Area 2. The zinc cost for Area 1includes the cost of two applications of zinc separatefrom the application of insecticide. In Area 2 itwas assumed that zinc is applied with insecticideapplications; therefore, the cost of applying zinc isincluded in the cost of applying insecticide.Secondary Development PeriodDuring the secondary development period, thefifth through the ninth year, production is expectedto begin and increase as the trees approach matu-rity. Secondary development costs are estimatedat approximately $140 per acre (Tables 3 and 4).Included in the secondary development costs areTable 3. Estimated per acre development and production costs, Area 1Table 4. Estimated per acre development and production costs, Area 2ItemFertilizerZincInsecticide & applicationWeed controlPruningIrrigationAdditional laborMaintenanceInterest on oper. capitalTotal operating costsFixed costsEstimated total annual costsItemFertilizerZincInsecticide & applicationWeed controlPruningIrrigationAdditional laborMaintenanceInterest on oper. capitalTotal operating costsFixed costsEstimated total annual costsInitialdevelopmentYears 1-4$ 2.1611.237.4021.003.6010.755.008.972.80$ 72.91$ 43.88$116.79InitialdevelopmentYears 1-4$ 2.16.7512.5021.003.6010.755.008.372.57$ 66.70$ 42.13$108.83SecondarydevelopmentYears 5-9$ 6.0017.2214.3421.008.0022.005.008.974.10$106.63$ 43.88$150.51SecondarydevelopmentYears 5-9$ 6.001.5025.0021.008.0016.005.008.393.64$ 94.53$ 42.13$136.66Production Productioncosts costsYears 10-15 Years 16-20$ 12.00 $ 15.0023.96 35.9419.13 26.5321.00 21.0010.00 10.0026.50 26.505.00 5.008.97 8.975.06 5.96$131.62 $154.90$ 43.88 $ 43.88$175.50 $198.78Production Productioncosts costsYears 10-15 Years 16-20$ 12.00 $ 15.003.00 4.5040.00 50.0021.00 21.0010.00 10.0019.00 22.005.00 5.008.39 8.395.10 5.44$123.49 $141.33$ 42.13 $ 42.13$165.62 $183.46operational costs required to maintain tree growthand production and annual fixed costs. Harvestcosts are not included due to the variation of.production.Costs for the two areas differ because of differentinsecticide requirements and the need for applica-tion of zinc separate from insecticide in Area 1.The difference in irrigation costs between areas isalso important. During this period the need forsupplemental irrigation in Area 1 is greater becauseof lower annual rainfall and higher evaporativemoisture loss.Production PeriodThe production period is divided into twostages; years 10 through 15 after establishment andyears 16 through 20 after establishment.The estimated production costs for the 10 to15 years after establishment period are shown forboth areas in Tables 3 and 4. Operating costs,approximately 125 per acre, include normal out-of-pocket expenditures. Costs vary between theareas because of cost differences for zinc, insecticideand irrigation. Total annual production cost forthe period is estimated at about $170 per acre.Tables 3 and 4 also show estimates of productioncosts during the 16 to 20 years after establishmentPeriod. Annual operational costs are approximately150 Per acre and total costs are approximately 190Per acre with some cost variation between the areas.RETURNSSecondary Development PeriodThere are precocious (earlier maturing) pecanvarieties with the potential of production levelswhich provide returns exceeding annual costs dur-ing the fifth or sixth year after establishment. Whilethese potentials do exist, production estimates dur-ing the planning stage should be conservative. Oneorchard may yield 1,000 pounds per acre by theseventh year while another may fail to produce acrop by the tenth year due to untimely freezes andhail. Some production will occur during the secon-dary development period (5 to 9 years after estab-lishment) but it will vary with the variety, manage-ment and external conditions such as weather.Tables 5 and 6 show estimated costs and returnsfor the secondary development period for bothareas. As varieties tend to be somewhat moreprecocious in Area 1, production estimates differfor the two areas. Average annual production inArea 1 is estimated as 408 pounds per acre. Thisis equivalent to 12 pounds per tree for 34 trees peracre (2 tree death loss from original 36). Estimatesfor Area 2 are 8 pounds per tree or 272 poundsaverage annual production over the period. Pecanprices are assumed to be 40 cents per pound returnafter harvest costs are paid. Using the secondarydevelopment costs shown earlier, net returns aver-age 12.70 per acre annually over the Period forArea 1 and a net loss of 27.85 per acre for Area 2.Production will be zero or low early in the periodand will increase toward the end of the period.Production Period, Years 10-15For the years 10 through 15 after establishment,average annual production for both areas is esti-mated at 1,280 pounds per acre or 40 pounds pertree for 32 trees (4 tree death loss). The assumedprice of 40 cents per pound after harvesting costsresults in gross returns of $512 per acre annually(Tables 5 and 6). Subtraction of all productioncosts results in a net return per acre of $336 forArea 1 and $346 for Area 2.Table 5. Estimated annual per acre costs and returns, AreaSecondary Production periodsdevelopment ---.;. _Years 5-9 Years 10-15 Years 16-20Estimated totalproduction 408 lb. 1280 lb. 1800 lb.Estimated returnsafter harvesting costs $163.20 $512.00 $720.00Operating costs $106.63 $131.62 $154.90Income aboveoperating costs $ 56.57 $380.38 $565.10Total fixed costs $ 43.88 $ 43.88 $ 43.88Net returns $ 12.69 $336.50 $521.22Table 6. Estimated annual per acre costs and returns, Area 2Secondary Production periodsdevelopment --------.;,----Years 5-9 Years 10-15 Years 16-20Estimated totalproduction 272 lb. 1280 lb. 1800 lb.Estimated returnsafter harvesting costs $108.80 $512.00 $720.00Operating costs $ 94.53 $123.49 $141.33Income aboveoperating costs $ 14.27 $388.51 $578.67Total fixed costs $ 42.13 $ 42.13 $ 42.13Net returns -$ 27.84 $346.38 $536.54Production Period, Years 16-20During this period, average annual productionis estimated at 1,800 pounds per acre (Tables 5 and6) or 60 pounds per tree for 30 trees (6 tree deathloss). Net returns after all costs are $521 for Area 1and $536 for Area 2.ANALYSIS OF THE INVESTMENTOrchard investments are analyzed by two meth-ods. The first is to trace flows of the expenses andreturns of the orchard to determine the number ofyears required to recover cost. The second is todetermine the discounted rate of return over the20-year period.Table 7 analyzes cost recovery for both areasby showing the net cash outlay or the net cashreturns for each year. Investment requirements inthe establishment year include capital outlays forthe purchase of land valued at $400 per acre, theper acre investment in well, pump and distributionsystem and the per ·acre operational cost during theestablishment year. Entries in subsequent years areoperating costs or income above operating costs.These costs reflect the net cash flows of each year.The costs are summed and are reduced each timeannual returns exceed annual operating costs. Oncethe column, Summation of Annual Cash Flows, be-comes positive, all original costs are recovered, andthe positive total represents the sum of the net cashflows through that specific year. The analysis re-veals that cost recovery occurs during the twelfthyear of operation for both areas based on estimatedcosts, production and prices used.The second method of analysis discounts thecash flows shown to determine the discounted re-turn to the investment over the 20-year period.Based upon this method, investments in pecansindicate a discounted rate of return in excess of11 percent, Table 7. However, the prospectve in-vestor must realize that no return on investmentis earned until the twelfth year. Thereafter, netincome generated will result in a positive return onthe investment which has a discounted rate of returnof approximately 11 percent by the twentieth year.In addition, the orchard has value and incomepotential beyond the 20-year period discussed in thisanalysis. Becau e of the variability of these factors,they were omi tted from this analysis.Table 7. Analysis of the investmentArea l'Column 2Column 1 SummationNet annual of annualYea,.t cash flows* cash flows*Establishment -$890.61 $890.611 72.91 963.522 72.91 1036.433 72.91 1109.344 72.91 1182.255 56.57 1125.686 56.57 1069.117 56.57 1012.548 56.57 955.979 56.57 899.4010 380.38 519.0211 380.38 138.6412 380.38 241.7413 380.38 622.1214 360.38 1002.5015 380.38 1382.8816 565.10 1947.9817 565.10 2513.0818 565.10 3078.1819 565.10 3643.2820 565.10 4208.38Market outlook for quality nuts is good withpotential for supplying specialty markets. In addi-tion, the val ue of the pecan orchard increases dur-ing its productive life in excess of development cost.Although long-run returns on the investmentin pecans appear promising, funds are not availablefor debt repayment in early years. Additionallimitations include risks and high managementrequirements.Risks are difficult to quantify and include inthe analysis. Risks include variation in prices,yields, technology and economic conditions. Insti-tutional changes related to government programs,taxes and financing are additional sources of risk.The prospective investor should be aware of allfactors which affect his potential returns. Theeffects of disease, insects and severe weather condi-tions should be considered in projections of yields.The potential loss of trees, their replacement andextended time lags before production should alsobe considered. Since changes in the cost of produc-tion and price levels are impossible to predict, it issuggested that the investor analyze the pecan invest-ment based upon his estimates of production costsand several levels of projected yields and prices.Area 2Column 2Column 1 SummationNet annual of annualcash flows* cash flows*- $862.81 $862.8166.70 929.5166.70 996.2166.70 1062.9166.70 1129.6114.27 1115.3414.27 1101.0714.27 1086.8014.27 1072.5314.27 1058.26388.51 669.75388.51 281.24388.51 107.27388.51 495.78388.51 884.29388.51 1272.80578.67 1851.47578.67 2430.14578.67 3008.81578.67 3587.48578.67 4166.15Discounted rate of return, end of 20th yearArea I 11.6% Area II 11.4%*Outflow -lEstablishment outlays include per acre costs for land, pump and well, daily control system and establishment operational costs. Sub-sequent yearly totals are net operational costs or net returns above operational costs. These tot'Jls represent net cash flows over thetwenty year period.Educational programs conducted by the Texas Agricultural Extension Service serve people of all ages regardless of socio-economiclevels, race, color, sex, religion or national origin.Cooperative Extension Work in Agriculture and Home Economics, The Texas A&M University System and the United StatesDepartment of Agriculture cooperating. Distributed in furtherance of the Acts of Congress of May 8, 1914, as amended, andJune 30, 1914.5M-2-74 AECO 6

An Economic Analysis of Pecan Orchard Establishment and Management.

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An Economic Analysis of Pecan Orchard Establishment and Management.

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An Economic Analysis of Pecan Orchard Establishment and Management.

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