Analysing an OrchardEnterprise

Orevn,State UniversityNovember 1971

Cooperative Extension work in Agriculture and Home Economics, Lee Kolmer, director. OregonState University and the United States Department of Agriculture cooperating. Printed and dis-

tributed in furtherance of the Acts of Congress of May 8 and June 30, 1914.

ANALYZING THE ORCHARD ENTERPRISE

Samuel M. Doran and A. Gene Nelson

No two orchard enterprises are alike. They differ in topography, location,and climatic conditions. Horticulturally, they differ because of the natureof the crop, the varieties involved, tree age and spacing, and problems withsoil, water, and pests. They also differ because of the availability of laborand the market for which the crop is being produced. Each of these many fac-tors has an effect on the operation and management of an orchard, its costs,and the annual income.

Orchards are also changed from time to time. Old trees are replaced withdifferent types of fruit or newer varieties. Many orchards are being en-larged. New machinery and different production practices are developed andadopted. As a result, orchardists periodically need to determine the effectof such changes.

Analyzing an orchard operation is more difficult than analyzing an annual crop-ping operation, but it may also be more important. Many years are required tobring an orchard into profitable production. Practices carried out during theestablishment of an orchard may affect that orchard for the next 20 years ormore. Therefore, the manager needs to determine the effect of current andprevious operational practices on each block, or enterprise, that makes upthe total orchard.

The-purpose of this handbook is to provide a step-by-step procedure for analyz-1/ing orchard operations using a computerized analysis program.— This program

can be used to analyze the entire orchard, or the orchard can be divided intovarious fruit and nut enterprises for separate analysis. Also, bearing andnon-bearing orchard blocks can be analyzed as separate enterprises.

Normally a group leader, such as a Cooperative Extension Service county agent,assembles several growers with similar orchards to study the costs and returnsof their orchard enterprises. The participants indicate the physical and

Authors: Samuel M. Doran is Extension Economist, Washington State Univer-sity, Pullman, and A. Gene Nelson is Extension Farm Management Specialist,Oregon State University, Corvallis.

The authors acknowledge the leadership of Manning Becker, Extension FarmManagement Specialist, Oregon State University, in the development of thisprogram, and also the helpful comments of several orchard growers and countyextension agents.

1/The services of this program are available through Extension Farm Management,Department of Agricultural Economics, Oregon State University, Corvallis,97331.

financial information for each enterprise they want to analyze. The informa-tion is recorded on the Orchard Analysis Input Form (see pages 3-4). Data fromsimilar operations are forwarded for simultaneous processing. As a result,each grower gets a report (see pages 12-13) that has an analysis of his opera-tion and average data for the participating orchardists in his group.

The two-page analysis report for each enterprise summarizes the capital invested,annual production costs, annual income, and net returns. It allows the growerto compare the figures for his operation with average figures for similar opera-tions. Comparisons of the physical and financial factors are possible on a peracre basis and on a per unit of production basis.

The comparisons help the grower diagnose his production and management problemsby revealing the strong points of the enterprise and those weak points needingattention. By analyzing his variation from the average, the grower has a betterbasis for deciding about changes needed in his operation. The grower can alsocompare the various orchard enterprises which comprise his business and make

year-to-year comparisons.

Individual data from the cooperating orchardists are identified only by an or-chard number and appear only on the report received by that grower. This pro-

cedure maintains the confidential aspects of data from individual orchards.

The first section of this handbook provides detailed instructions for completingthe input forms. Suggestions about interpreting and using the resultant analy-sis report are provided in the second section of the handbook.

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11111114 0 0

1-5 $

1-7 $

2-1 $

2-3 $

2-5 $

2-7 $

3-1 $

3-3 $

3-5 $

3-7 $

3-8 $

Hired Labor

Hell/ Di

3 7

18 a 1 s 01 0

0

/i7 5

0 0

0

ORCHARD ANALYSIS

Orchard number cD,0 B Name JOHN GROWER

OuTE S Address

TRee-rowN, OR 9700o

Land in orchard

Number of trees

Percent of maximum.bearing capacity*

INPUT FORM

Date 19 71 CRoPrE AR Enterprise APPLE ORCHARD Variety Pet DE LAC...1014S Group EyAMPLe ZATA

(Enter whole numbers)1-1 acres

1-2

0104 trees

1-3

Total Labor Costs by Activity

Operator LaborPruning and planting 1-4 $

Frost control 1-6 $

Spraying 1-8 $

Tillage and mowing 2-2 $

Thinning 2-4 $

Propping and trellising 2-6 $

Irrigation 2-8 $

Picking 3-2 $

Other harvest 3-4 $

Miscellaneous 3-6 $

Additional labor costs (not allocated above)

Costs of Chemicals and Spray Materials

Insect and disease control materials

Weed control materials

Hormone chemicals (thinning, stop-drop, etc.)

Other chemicals (nutrition, pest control, etc.)

13.5 0

0 0

010

0

If all the trees in the orchard are at the age of maximum production, thiswould be 100 percent. This index is used to describe the present productivecapacity of the orchard.

S5

5/19

0

9

.3 00

Fertilizer

Frost control fuels

Fuel, oil, and grease

Irrigation water

Field supplies

Operating overhead

4-8 $

5-1 $

5-2 $

5-3 $

5-4 $

5-5 $

Orchard number a. O 8

Rental Charges

Bee rental

Land and building rental

Machine rental

4-5 $

4-6 $

4-7 $

I a 5

Other Purchases

Repair Costs

Building repairs 5-6 $ BasMachinery and equipment repairs 5-7 $ 010

Taxes

Land taxes

5-8 $

1 I9I0fDiBuilding taxes

5-1'$

I 0Personal property taxes

6-2 $ T i01

Depreciation

Tree depreciation

Building depreciation

Machinery and equipment depreciation

Investment

6-3 $

6-4 $

6-5 3

I 13101010isolo

LiLl_al 0

Land investment

Tree investment

Building investment

Machinery, equipment, and supplies investment

Production and Receipts

Hundredweight of crop produced (field we ght)

Total value

6-6 $ F-L

-7 $

010 1 0 of

6 0'

oOLO 0

7 S 0

r

INSTRUCTIONS FOR COMPLETING THE INPUT FORM

The orchard number will be filled in by the group leader. The enterprise,variety, and group_ will be determined by the growers participating in theanalysis.

An enterprise might be apples, pears, cherries, walnuts, etc., or some combi-nation of crops. The group may also want to separate their orchards by varietyor rootstock size to provide more meaningful comparisons. For example, Full-Dwarf Red Delicious apples, Italian prunes, Lambert cherries, etc., might bedesignated. The group may indicate the location of growers participating ina particular study, or some other differentiating factor.

Land in orchard (1-1)

Each orchardist reports the acreage of the orchard enterprise to be analyzed,as defined above. Designate to the nearest acre, omitting sizeable non-orchardareas. In most cases it is better to separate bearing orchard blocks from thosewhich are non-bearing and handle each as separate enterprises. This providesfor more meaningful analyses and comparisons.

Number of trees (1-2)

Enter the total number of trees (bearing and non-bearing) for the particularenterprise being studied. Include non-bearing replacements; but do not countnon-bearing interplants in the block.

Percent of maximum bearing capacity (1-3)

Enter the estimated current production potential of the orchard block as deter-mined by the number of bearing trees and their age. If all the trees in theorchard are at the age of maximum production, this index would be 100 percent.This estimate is used to describe the present productive capability of theenterprise.

Total Labor Costs by Activity

Note: All the remaining cost and return items represent total amounts for theenterprise defined above, rather than per acre costs and returns. All entries,except the tons of production, are rounded to the nearest dollar. Interestcharges for operating capital and investment are calculated automatically bythe computer, so they are not listed on the input form.

Labor costs are separated according to activity and whether the labor is paid(hired) or unpaid (operator and family). Family labor that was paid a wageshould be reported as hired labor. Operator and family labor should be chargedat the cost that would have been paid to obtain equivalent quality of labor (notmanagement). If possible, the labor costs should include the value of perqui-sites (housing, boarding, recruiting, transporting, training, Workman's

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Compensation, Social Security, etc., less any rental income from labor housing)by labor activities. Charges for hired supervision of labor should also beallocated to the individual activities. The labor costs for each activity maybe determined from time card records, or estimated. Those perquisites that can-not be separated according to activities are entered as Additional labor costs(3-8).

Some growers prefer to hire custom operators to perform certain activities, suchas spraying, pruning, and harvesting. Where the custom operation includes somelabor input, the custom charge (excluding materials cost) should be separatedinto hired labor and machine rental and entered under the appropriate categories.

Pruning and planting (1-4, 1-5)

Enter the total labor charges for the enterprise due to routine planting ofreplacement trees, annual pruning and training, and for brush disposal as appro-priate. The costs of trees for replacement are to be entered under Field sup-plies (5-4).

Frost control (1-6, 1-7)

Enter the labor charges for setting orchard heaters in the spring, igniting,extinguishing, refueling, patrolling, and removing heaters after the frost sea-son. Labor costs associated with other methods of frost protection, such asuse of wind machines, misting or fogging operations should also be included.

Spraying (1-8, 2-1)

Enter the labor charges associated with all spraying operations. If sprayingis custom hired, include the labor as a hired labor expense. Spray materialsand machine rental are entered below.

Tillage and mowing (2-2, 2-3)

Enter all labor charges for mechanical weed control and care of orchard floor,such as discing, mowing sod, leveling, hand weeding, etc.

Thinning (2-4, 2-5)

Enter all charges for labor involved in mechanical or hand thinning, includingrecruiting, transporting, housing, and boarding the thinners, etc. Chemicalthinning labor should be charged to Spraying (1-8, 2-1).

Propping and trellising (2-6, 2-7)

Enter labor charges associated with acquiring, repairing, distributing, install-ing and removing props. Also include labor for maintaining orchard trellises

and tying branches.

Irrigation (2-8, 3-1)

Enter labor charges for utilizing the irrigation system, corrugating or ditch-ing, and normal irrigating activities.

-6-

Picking (3-2, 3-3)

Enter only those labor charges for people actually involved in picking.

Other harvest (3-4, 3-5)

Enter all charges for labor involved in supervising and checking during pick-ing. Also include that used in spreading field boxes or bins and ladders;swamping, loading, and hauling to packing shed or processing plant; and fallcleanup of boxes, ladders, and other harvest equipment.

Miscellaneous (3-6, 3-7)

Enter all labor charges for field and office activities not listed above.Examples include labor costs for applying non-spray forms of fertilizer, or-chard maintenance, record keeping, and other general labor activities.

Additional labor costs (3-8)

Enter the value of those perquisites that cannot be allocated to specific laboractivities. Include only those items not previously allocated.

Costs of Chemicals and Spray Materials

Insect and disease control materials (4-1)

Enter only the cost of materials for controlling insects and diseases. Customapplication costs (excluding materials) should be entered under hired labor forspraying and machine rental. Labor costs and machine rental for custom applica-tion should be entered under Spraying (2-1) and under Machine rental (4-7); onlythe material costs are entered here.

Weed control materials (4-2)

Enter only the cost of materials used for controlling weeds.

Hormone chemicals (4-3)

Enter the cost of chemicals used to regulate fruit set, size, color, or matu-rity. Custom application costs should be entered under Spraying (2-1) andMachine rental (4-7).

Other chemicals (4-4)

Enter the costs of other chemical materials, such as nutrient sprays, materialsfor rodent and bird control, etc.

- 7

Rental Charges

Bee rental (4-5)

Enter the enterprise's share of costs for renting and moving hives and theirmaintenance while in the orchard. If the grower owns the hives, all bee costsincurred during the year should be entered.

Land rental (4-6)

Enter all the annual costs (either cash or share) due to renting orchard landand buildings now owned by the grower.

Machine rental (4-7)

Enter the charges for machinery and equipment rented or custom hired for produc-ing and harvesting the crop, such as aerial spraying, bin or box rental, treetopping or shaking, vehicles for hauling laborers, supplies and produce, etc.

Other Purchases

Fertilizer (4-8)

Enter the enterprise's share of costs for fertilizer materials which are appliedthrough a fertilizer spreader or the irrigation system. Nutrient sprays shouldbe entered as Other chemicals (4-5).

Frost control fuels (5-1)

Enter charges for all fuels associated with the frost protection operations.Where irrigation sprinklers are used for frost protection, include charges forpumping and operating the system during the frost season.

Fuel, oil, and grease (5-2)

Enter the fuel, oil, and grease costs of operating machinery for this enterprise,

including the hauling of crop to packing shed or processing plant.

Irrigation water (5-3)

Enter all the annual irrigation water charges except drainage assessments. Thedrainage assessments are entered under Land taxes (5-8). Include the irrigationdistrict charges for repayment of construction. Also include electrical chargesfor pumping and for operating a sprinkler system, except when used for frostprotection purposes. Costs for owning and repairing irrigation equipment are

entered below.

Field supplies (5-4)

Enter such costs as seed for cover crops, props, trees for routine replacement,hand tools, and other supplies normally charged as current expenses.

- 8 -

Operating overhead (5-5)

Enter overhead charges for office supplies; bookkeeping: utilities, businesstravel: crop, fire (include buildings and equipment), liability, accident, andhealth insurance; professional fees, vehicle licenses; etc. Exclude familyshare of utilities, travel, insurance, and license fees.

Repair Costs

Building repairs (5-6)

Enter the enterprise's share of labor and material costs for repairing and main-taining the buildings associated with this business enterprise.

Machinery and equipment repairs (5-7)

Enter the materials and service costs for repairing field machinery and equip-ment, vehicles, irrigation equipment, trellises, bins, boxes, ladders, heaters,etc.

Taxes

Land taxes (5-8)

Enter the annual land taxes for this enterprise plus fire, weed, and drainagedistrict assessments. Also include taxes on trees where applicable.

Building taxes (6-1)

Enter that share of the annual taxes on buildings chargeable to the enterprise:exclude the owner's residence.

Personal property taxes (6-2)

Enter the annual taxes on machinery and equipment for this enterprise, includingtaxes on irrigation equipment. Exclude taxes on family and non-orchard items.

Annual Depreciation Costs

Tree depreciation (6-3)

Enter the annual depreciation charge for the investment in trees. Table 1 pro-vides some guidelines for establishing the normal life of trees. The deprecia-tion can be determined by dividing the present Tree investment (6-7) by the ex-pected remaining years of life.

Building depreciation (6-4)

Enter the enterprise's share of the annual depreciation on buildings, based oncurrent value and remaining life; exclude owner's residence.

- 9

Table 1. Normal Tree Life Guidelines.

Fruit or nut

Years of life Fruit or nut

Years of life

Apples ApricotsCherriesFilberts

20-40 Peaches15-35 Pears 15-30 Prunes 15-30 Walnuts

10-2015-4015-3020-40

Machinery and equipment depreciation (6-5)

Enter the enterprise's share of the annual depreciation on such machinery andequipment as sprayers, boxes, ladders, trailers, tractors, trucks, orchard trel-lises, irrigation equipment, frost control devices, etc.

The Orchard Investment

Land investment (6-6)

Enter the net market value (for agricultural use) of owned land without treesbut including irrigation mainlines and lined ditches. The value of sprinklersystem pumps and lateral lines is to be entered below under Machinery, equip-ment, and supplies investment (7-1).

Tree investment (6-7)

Enter only the estimated market value 1/of the trees according to their age, vari-

ety, type of rootstock, density, etc.-

Building investment (6-8)

Enter the orchard enterprise's share of the average net market value of build-ings used; exclude owner's residence.

Machinery, equipment, and supplies investment (7-1)

Enter the enterprise's share of the average net market value of machinery,equipment, and field supplies on inventory.

One procedure for determining tree investment is to takeland and trees and subtract the value of comparable landexample, if land and trees are valued at $2,000 per acreis worth $500 per acre, the value of the planting would b

the total value ofwithout trees. Forand comparable lande $1,500 per acre.

- 10 -

Production and Receipts

Hundredweight of crop produced (7-2)

Enter the total hundredweight (field weight) of fruits and nuts produced by thisenterprise. Average box weights can be used to convert production measured inboxes to hundredweight of production.

Total value of crop produced (7-3)

Enter the estimated value of the crop as delivered to the packing shed or pro-cessing plant. This value is used to maintain consistency between enterprisesand between farms.

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INTERPRETING THE ANALYSIS REPORT

The analysis report is divided into two sections: the Orchard EnterpriseAnalysis (page 1) and the Orchard Cost Analysis (page 2). Each section pro-vides individual data for the enterprise, and compares that data with theaverage for the group. The comparisons are on the basis of an acre and onthe basis of a thousand pounds of production. The information at the top ofeach section identifies the orchard number, enterprise, variety, and locationof the study. The number of orchard enterprises included in the group averageis shown at the bottom of page 2.

Orchard Enterprise Analysis

Page 1 of the analysis report summarizes the enterprise data by physical pro-duction, capital investment, annual receipts, cash and non-cash expenses, andthe annual returns for managing the enterprise.

Total production

Production of the orchard enterprise is reported on 1000-pound units for thetotal enterprise, as well as on a per acre basis. The acres of land in theenterprise, the number of trees, and their bearing capacity measured as a per-cent of maximum, is also presented. This information provides an indicationof the size and normal productivity of the enterprise. Variations from thegroup average might be due to age, tree density, variety, location, or manage-ment.

Total capital investment

The total capital investment is separated in the amounts due to land, trees,buildings, machinery and equipment. Investments in land will vary with loca-tion, climate, soil fertility, and topography. Comparative tree investmentsneed to be evaluated on the basis of tree age, density, varietal obsolescence,tree vigor, and training. Investments in machines and equipment may reflectthe manager's desire to mechanize his operation to reduce labor costs.

Total enterprise receipts

The crop value was based on field weights as delivered to the packing shed orprocessing plant. Therefore, the enterprise receipts obtained in this analysismay not compare with data commonly reported for the industry. Receipts per1000 pounds of produce will depend on the market prices and the size and qual-ity of the produce.

Total cash expenses

The cash expenses are the usual out-of-pocket operating costs. They includehired labor, chemicals and spray materials, interest on operating capital,taxes, and other production expenses. The other production expenses are rentalcharges, purchases, supplies, repairs, overhead, etc. Interest on operating

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capital is automatically calculated by the computer for the average length oftime the funds are normally committed, at an annual interest rate of eightpercent. This interest charge would actually be a non-cash expense if theorchardist does not borrow money for this purpose.

Net cash income

The net cash income indicates the cash available to repay debts, replace capi-tal assets, invest, pay income taxes, and use for family living or savings.Net cash income alone is not a good measure of the profitability of an orchardenterprise.

Total non-cash expenses

Non-cash charges include an estimate of the annual contribution to the businessby unpaid labor and the total amount of capital invested in the enterprise.The interest on the total capital investment was charged at seven percent; itis calculated by the computer. These charges reflect income the owner couldnormally expect if he invested this capital in an alternative manner. A por-tion of the interest charge would actually be a cash outlay for those ownerspaying interest on land and equipment loans.

Depreciation represents a measure of the annual decrease in the value of theinvestments during the year. This decrease may be due to age, use, or obsoles-cence.

Total enterprise cost

The total orchard enterprise cost is the sum of the cash and non-cash expensesPreviously indicated. It does not, however, include a charge for the operator'smanagement of the enterprise. Under normal conditions an enterprise shouldgenerate sufficient receipts to offset the total orchard cost and provide somecompensation for management of the operation.

Return to management

The return to management is the difference between total orchard receipts andtotal orchard costs. It is a residual payment for management of the enterprise.

Two other measures of profitability of the enterprise are also given. The re-turn to the operator's labor (and unpaid family labor) and management shows thesum available for the contribution of unpaid labor and management. The totalreturn to the capital investment and the operator's management is expressed asa percentage of the total capital investment.

Orchard Cost Analysis

The second page of the report summarizes and classifies the annual costs asso-ciated with the orchard enterprise. All the costs, cash and non-cash, operatingand overhead, are included. The enterprise costs are presented for the group

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average and the individual operation on a total basis. They are also reportedon a per acre basis and by 1000 pounds of production.

Total enterprise cost

This is the summation of the annual cost estimates for the enterprise as submit-ted for analysis. No charge for management is included.

Land and trees

The annual cost for land and trees includes interest on the investment in landand trees, depreciation of trees, land taxes, and land rental charges. It doesnot, however, include the annual cost of buying and planting trees for replace-ment. The annual cost for land and trees should, under normal conditions, re-flect the productive value of the orchard.

Machines and equipment

The annual machinery and equipment charges (including irrigation equipment)consists of depreciation, interest on investment, taxes, repairs, fuel, oil,grease, and machine rental. It does not include labor costs for operating themachinery. When comparing machinery and equipment costs with the group average,consideration should be given to the relationship between the labor costs andthe machinery and equipment costs. High machinery and equipment costs may beoffset by reduced labor costs, and vice versa.

Total labor

Labor costs are shown by major enterprise operations. Both hired and operatorlabor are included in each category. When evaluating labor costs, one shouldconsider such factors as the productivity of the workers, wage rates, super-vision, mechanization, etc. Pruning, spraying, and thinning labor costs shouldhe analyzed in relation to the resultant production and prices.

Chemicals and sprays

This is the cost of chemicals and spray materials applied to control insects,diseases, and weeds; and for thinning, nutrition, and influencing fruit set,development, and maturity. Fertilizer materials spread by machinery or appliedthrough the irrigation system are not included here. In evaluating pest controlcosts, such factors as type of material, time, and method of application may beas important as the cost of the materials.

Other materials

Fertilizer cost is for materials applied with a spreader or through the irriga-tion system. The cost of frost control includes all those fuels associatedwith frost protection operations. Irrigation costs include the water and powercharges to the enterprise. Field supplies consist of cover crop seed, props,trees for replacement, small hand tools, etc. Fuel, oil, grease, and overheadcosts are included in the charges for machinery and equipment.

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Buildings

Building costs include annual charges for depreciation, interest on investment,repairs, and taxes.

Miscellaneous

The miscellaneous cost category includes bee rental, the annual interest chargeon operating capital, and such annual operating overhead costs as utilities,office supplies, bookkeeping, business travel, insurance, etc.