economics of avocado growing - new zealand...

Avocado Growers Manual Economics of Avocado Growing

Economics of

Avocado Growing

© Copyright NZ Avocado Growers Association October 2004 PG 1 of 14

Main Points

� Production can vary by 40% to 50% betweenseasons irrespective of average yield.

� Profitability in mature avocados is verysensitive to yield, packout and price.

� High average yields and a high export pack-out percentage are required for an orchardto maintain a reasonable net income.

� Net returns after direct orchard expenditureexceeding $20,000 per canopy hectare areachievable into the future as long as averageannual yields exceed 16.5 tonnes per hectare(3,000 tray equivalents).

� Growing avocados for sustainable profitcannot be treated lightly. Excellentmanagement and high but controlled inputsare needed to generate above average yields.

This chapter is based around a Production, Costs and

Profit Model developed as part of the MAF Regional

Best Practice Sustainable Farming Grant. This model

grew out of the recognition that no matter what

"sustainable best practice" orchard practices were

adopted avocado growing first has to be sustainably

profitable.

The purpose of the model is

� to provide a standard industry framework to calculate

direct activity costs associated with avocado

production

� to provide a management tool for planning activities,

budgeting costs and income, either as a new grower

or an established grower allowing multi-year budgets

to be developed

� to provide a benchmark format for the industry to

compare orchard production, costs and profit on a

per canopy hectare or per tray equivalent (TE) basis

Costs included are only those expended on

productive activity. These include harvesting, general

orchard management activities such as: mowing, weed

spray, shelter trim, general maintenance and tree

husbandry activities: consultancy, monitoring, sprays,

fertiliser, irrigation, pruning and thinning, mulch,

Phytophthora control and pollination. Interest is included

in the cash flow representations. Repairs and

maintenance to plant and equipment along with fuel and

oil costs associated with plant are included as part of

the direct costs of such equipment (see the Asset Cost

Calculator section).

Rates, telephone, insurance, off orchard motor vehicle,

other administrative and land ownership costs are

excluded as these costs would be incurred whatever

business use the land was put to. Interest and

depreciation are excluded except where they relate to

equipment used on the orchard and are expressed as

part of the hourly cost of the equipment.

The Microsoft Excel spreadsheets included with the

manual are intended to be used by growers to model

their own situations (actual or planned) for new plantings

or productive blocks and to determine true costs of

equipment utilised on the orchard. Before using the

spreadsheets provided you will need to enter some basic

information about your orchard.

What is a Canopy Hectare?

All references to area or rates per area (for sprays,

fertilisers, etc) refer to a canopy hectare (c.ha) as defined

here. The area is not the gross area of your block or

your legal title but the planted area the trees occupy. It

is also not the surface area of your canopy.

To determine the planted area use the following formula:

Area (m2) = N x W x B

N = Numbers of trees when first planted

W= tree spacing within a row (m)

B = tree spacing between rows (m)

Economics of Avocado Growing Avocado Growers Manual

PG 2 of 14 October 2004 © Copyright NZ Avocado Growers Association

For example, 7m x 7m is a common spacing that gives

49m2 per tree. This equates to 204 trees (204 x 49 =

9996m2) per c.ha. Over time half or more of the trees

may be removed but the area they cover will remain the

same as the tree to tree spacing increases. For simplicity,

we refer to 200 trees per c.ha as being typical for trees

1-7 years old and 100 trees per c.ha as typical for trees

8-12 years old. Beyond a tree age of 12 years a count of

tree numbers per hectare should suffice.

Using the Excel Spreadsheets

When you first use the spreadsheets provided on floppy

disk or CD, please take the following steps to ensure

you do not mistakenly overwrite the master copies

provided.

Spreadsheet(s) Action

New Planting Costings

� Summary

� Details

Asset Cost Calculator

Activity Planner and Budgets

� YearBudget

� FertPlan

� NPKPlan

� SprayPlan


� YearBudget

� FertPlan

� NPKPlan

� SprayPlan

� 5YrBudget (established

orchards)

� 10YrBudget (new orchards)

� Go to step 6

� Go to step 6



1. Create a New Folder on your computer called say

"Avo Budgets 2005".

2. Place the disk provided in your floppy drive and

copy (drag) all sheets contained on the floppy disk

(usually A: drive) or CD drive in the folder "Avo

Economics" to your new folder "Avo Budgets 2005"

on your C: drive.

3. Remove the disk from your computer and return it

to your Manual for safe-keeping.

4. Use the sheets contained in "Avo Budgets 2005" for

modelling your situation.

5. For subsequent years you could create a new folder

"Avo Budgets 2006" and copy originals from the

floppy disk before commencing.

6. Do not try to change the names of worksheets as

they are locked.

Step

1

2

3

4

5

6

7

Established orchard

Gather information on all

equipment (assets) used on the

orchard to establish hourly

costs

Activity analysis. Review

historic performance and

activity costs using activity

planners and equipment cost

then develop

� Production budget for next

year

� Activity costs next year

� Net contribution

Develop multi-year budget

� Review historic performance

and costs using activity

planner and budgets

� Develop multi-year

production budget

� Develop multi-year activity

budget

� Contribution budget is

derived automatically

Update current year budget as

activities are performed,

expense incurred

Go to step 3 for next year

New orchard

For your situation work out

your establishment costs

As for established grower

Review Activity analysis model

and 10 year model to get a feel

for production, activities and

costs

Develop 10 year budgets

� Production budget

� Activity costs

� Annual contribution/cash

flow surplus

Decision time

� establish new orchard?

� Buy existing orchard?

Update current year budget as

activities are performed,

expense incurred

Go to step 3 for next year



Percentage Scaling

Percentage scaling is used in a number of worksheets to

allow you to change the costs and income of various

activities to match your own circumstances. In all of the

worksheets the values shown are to illustrate the

economics of an imaginary orchard based on real

examples as a guide for your own use.

For example, to show how much harvesting occurs in

some months as a percentage of total harvest you can

enter your values at the top of the YearBudget

worksheet. In the 5YrBudget worksheet we have used

percentage scaling of activities each year to allow you

to change production costs and income through

successive years.

Calculating Asset Costs

When undertaking orchard management tasks you have

the choice of using contractors or doing the work

yourself, or a mixture of both contractors and own work.

To benchmark an orchards production, costs and profit

it is important that the cost of using contractors is

compared fairly with the true cost of a grower�s own

time and equipment. An integral part of the budget

calculations is an Asset Cost Calculator. The Asset

Cost Calculator allows you to assess the hourly cost of

your equipment based on actual asset cost, assumed

depreciation, hours used per year, interest rate (cost of

money) and direct operational costs (fuel, oil and

maintenance / service). The Asset Cost Calculator can

also be used to answer the question "Do I buy or rent

equipment or employ a contractor?"

By using the Asset Cost Calculator spreadsheet

provided you can establish the hourly cost of all the

plant & equipment (valued over $500) you might use

on the orchard. Use best guesses for useful life, trade-

in values, running costs and maintenance. These figures

will be used in your costings for orchard activities.

Your own labour is costed at an hourly rate at which

you would employ labour to perform the same task,

loaded to include ACC, holiday pay etc, and

administration. For the purposes of illustration $15.00

per hour is used as the going rate for labour. However,

this rate may underestimate the pay rate for specialist

skills such as GrowSafe registered spray applicators.

Example: an average new 60 hp orchard tractor.

Assume a purchase price of $40,000 (plus GST), is

used 500 hours per year, annual service costs $1,000,

expected life on orchard 10 years, anticipated trade-in

value $15,000, overdraft interest rate 9%, fuel & oil

costs $3.00 per hour. For depreciation, it was assumed

the tractor depreciates $5,000 on purchase, then 10%

for every 1,000 hours over the ten years. For 500 hours

per year, at ten years (5,000 hours) depreciation is $5,000

plus 50% (5 years at 10%) of purchase cost ($20,000),

thus $25,000 in total, giving a trade-in of $15,000.

The model (left hand box) calculates that the hourly cost

of this tractor is $17.20 and the right hand box shows

cost variation depending on annual hours of use.

Sensitivity analysis shows that the annual cost varies

between $37.67 for 150 hours per year and $17.20 for

500 hours per year over 10 years. The more the tractor

is used the lower the per hour cost.

ASSET COST CALCULATOR

Asset Orchard tractor Sensitivity

Cost $ $ 40,000 Trade In Annual Hrs Maintenance $ per Hour

Useful life (yrs) 10 29,000 150 500 37.67

Trade in Value $ $ 15,000 27,000 200 500 30.00

Annual depreciation 2,500 25,000 250 500 25.40

Interest Rate % 9.00% 3,600 23,000 300 750 23.17

Fuel & Oil ($/hr) $ 3.00 1,500 21,000 350 750 20.86

Maintenance $ 1,000 19,000 400 750 19.13

Annual Cost $ 8,600 17,000 450 1,000 18.33

Annual hours use 500 $ 17.20 15,000 500 1,000 17.20



Example: attach a mower to this tractor.

Assume a 2m wide model costing $7,000. The trade-in

value of $3,500 was based on 75 hours use per year

over 5 years. For annual maintenance (new blades) allow

$50. Running costs allow $0.20 per hour.

The following table outlines the costs per hour for the

tractor / mower combination for different numbers of

annual hours. Add the cost of labour at $15.00 per hour

and decide when it would pay to use a contractor.

Asset Orchard Mower

Cost $ $ 7,000

Useful life (yrs) 5

Trade in Value $ $ 3,500

Annual depreciation 700

Interest Rate % 9.00% 630

Fuel & Oil ($/hr) $ 0.20 15

Maintenance $ 50

Annual Cost $ 1,395

Annual hours use 75 $ 18.60

Established Orchards Activity Planner and

Budgets

This workbook contains the bulk of the required models

as separate worksheets or �tabs� as shown along the

bottom of the screen. These are left to right:

Cover; YearBudget; FertPlan; NPKPlan;

SprayPlan; 5YrBudget; 10YrBudget; Sensitivity

Cover

Enter information about your blocks here.

YearBudget

This model is made up of three broad sections:

production and income, general orchard costs and tree

management costs.

Note shaded fields in the worksheet are locked to

prevent overwriting or change.

Production

Enter here planted area, target production per c.ha (in

tray equivalents, TE), timing of harvest by way of

percentage picked in a month and percentage of export,

local market and reject/oil. In the example, for an area

of 1.0 c.ha; target production is 3,650 TE (about 20

tonnes); 70% harvested in spring, 20% in December /

January and 10% in March with an export / local market

split of 75% / 20% and 5% rejects.

Fruit Value

Fruit value is determined using the export fruit size

profiles section. The fruit size profile is assumed to be

the same for export and local market fruit. Enter your

typical (or target) size profile as a percentage in the

export size profile fields. Usually large fruit are worth a

little less than count 20-25 fruit and small fruit worth

the least. Enter a price ratio for the larger size and the

two smaller sizes as a value greater or smaller than 100.

For count 20-25 fruit enter the expected price. The

worksheet then determines the average price for the

export and local market fruit. Enter the price for oil grade

fruit. A per TE return is then calculated.

Picking Costs

These vary with the total number of picks, size of trees

and quantity of fruit on hand. Picking costs have been

assumed to range from 15c per kg (100% ground picking

young trees), 20c per kg with a 60% / 40% ground /

machine pick ratio with 5-8 yr trees, and 25c per kg

with a 10% / 90% ground / machine pick ratio for mature

trees.

General Orchard Costs

Grass Mowing and Weed Spraying

Consider the number of times the orchard needs mowing

Mowing the Orchard

Tractor Cost

Annual Hrs $ Mower Cost Equipment Cost Your Labour TOTAL COST

150 37.67 18.60 56.27 15.00 71.27

250 25.40 18.60 44.00 15.00 59.00

350 20.86 18.60 39.46 15.00 54.46

500 17.20 18.60 35.80 15.00 50.80



and weed spraying and if you will do it with your own

equipment and time, or use a contractor. Compare

contractor charges with your hourly asset cost rate

making sure you include all of your time such as

attaching equipment and clean-up.

Shelter Belt Trim / Mulch & Root Prune

Plan for this annually from about year 4, consider also

root pruning at least every other year from about year 4.

Use the trimmings as an alternative source of mulch.

Other General Maintenance

Allow for time each year for unspecified clean-up or

maintenance work in the block.

Tree Management Costs

Consultancy

Cost is usually not directly variable with orchard size.

AvoGreen® Monitoring

Pest monitoring according to the AvoGreen® protocol

is an important component of a well run orchard. Costs

are determined by the protocol.

Spraying and SprayPlan

A detailed spray planning worksheet is on the tab named

SprayPlan to assist in planning and budgeting for sprays.

Spray requirements depend on the pest pressure

observed in your orchard and regular copper sprays

throughout the year commit the orchard to a minimum

number of sprays. The spray plan presented here is an

example only for the purposes of illustrating the cost of

spraying. It is not an exhaustive list of available sprays,

neither are the suggested sprays or mix of sprays

recommended. Always check with an appropriate expert

before applying spray mixes for compatibility issues,

and confirm spray rates and appropriateness of chosen

sprays by reference to the product label.

For the budget calculations in YearBudget it is assumed

you will complete the details in the SprayPlan

worksheet. Additional sprays can be added as needed.

Where you do your own spraying, amend the cost per

hour to reflect your situation. Include your labour rate

with the machine cost.

Fertiliser and FertPlan and NPKCalc

A detailed fertiliser planning worksheet is on the tab

named FertPlan to assist in planning and budgeting for

fertilisers. The products and rates in the example are as

per the Ravensdown Avocado Fertiliser Program for

BOP & Whangarei orchards producing 20 tonnes per

hectare. For the budget calculations in YearBudget it is

assumed you will complete the details in the FertPlan

worksheet. Amend product and rates as appropriate to

your situation. Space has been provided to add additional

products should this be required. The model provides

the opportunity to easily compare the cost of one product

against another allowing for different application rates

and NPK values.

The NPKCalc worksheet provides the opportunity to

determine total NPK input units as derived from the

planned fertiliser program. Consider total units applied

compared with recommended units for your production

level.

Irrigation

Power consumption assumes 5 units per hour to pump

10-12,000 litres with 10-12 hours in one irrigating

session. In continuously dry conditions irrigation may

need to be repeated every few days. The fixed cost of

power will be about $10 per application.

Pruning and Thinning

Pruning and thinning requirements are generally minimal

until years 7-9 when thinning is usually undertaken.

Some pruning may be undertaken annually dependent

upon storm damage to trees and shaping of trees. The

example of a thinning programme used in the budget is

to remove about 25% of trees in year 7 followed by

further thinning in year 9 when another 25% are

removed. The estimate of total costs of removal,

mulching and spreading mulch under the remaining trees

is $50 per tree removed. With mature trees in their "final"

spacings, assume annual pruning costs of about half a

days� labour per hectare and include the use of a

hydraladda and saw with one day per hectare for a man

and chainsaw to clean up trimmings.

Mulch

Annual or bi-annual applications of mulch to at least

part of the orchard are recommended. It is assumed bi-

annual application commencing in year two. There may

be sufficient mulch generated from thinning in years 7

and 9 that off orchard purchase of mulch is not required

at this time. The amount of mulch applied is based on a

band around the drip line of the tree 500mm wide and

100mm deep. One hundred trees at year 8 will require

125 m3 of mulch. Current methods of spreading (bobcat

with specialised mulch bucket) allow mulch to be spread

at 20 m3 per hour.

Phytophthora Control

Phytophthora control is an essential management activity

in avocado orchards. Research indicates that best

practice of two applications per year is better than one

application. On orchard practice is to only treat trees

that show signs of stress. In this example up to 10% of

trees may be injected each year.

Pollination

Recommended rates are per the Avocado Pollination

Best Practice Guidelines 2004. In this example 6 hives



per hectare are used. Pollinizer trees are assumed to be

treated the same as the cropping trees in the orchard.

5YrBudget

This multi-year worksheet allows planning 5 years

ahead. To use this worksheet first complete the

YearBudget (including FertPlan and SprayPlan)

worksheet as information in YearBudget is used to

calculate 5YrBudget. The worksheet layout is a summary

of YearBudget. There are six main columns, the first

brings through YearBudget values. The other columns

are then indicative values for the next five years. For

each year there is a percentage column that allows the

result for each year to be scaled relative to the

YearBudget values. Enter a percentage usually from 0

to 150 (it can be as much as you wish) against each line

item each year.

10YrBudget

This10 year multi-year cash flow worksheet provides a

representation of production, income and costs over a

10 year time frame. The cash projections have been

developed from the standard Activity Planner &

Budgets worksheets with adjustments made for varying

inputs through years 1 through 10. It follows the same

down the page format but excludes the detail present in

YearBudget.

Note, the area to be mown inside a canopy hectare

reduces over time as the trees expand in size, even

though up to half may be thinned. Conversely, the area

to be weed sprayed expands over time. Spray volumes

increase as tree volume increases as the trees grow.

Fertiliser programs also indicate changing and increasing

inputs as trees come into production and yield increases.

As income cannot be accurately predicted over time it

is best to use a reasonable guess at a long term average

income figure. Over the last five years (2000-2004)

good orchards have probably averaged a significantly

better per tray income figure than that used in the

spreadsheet example.

For the purposes of illustration and to determine if

growing avocados is a good investment option based

on returns per hectare a low annual average per tray

return of $10 has been used to calculate the 10 year

budget. If the suggested production level is achieved at

the quality levels indicated here then at an income figure

of $10 per tray there is a reasonable return to be

achieved.

Sensitivity

The Sensitivity worksheet (page one) describes the

relationship between yield and income assuming the

same per tray income and costs relative to production.

The second page allows you to look at the impact of

varying size profiles, export (quality) pack-out and

presumed value of average sized fruit to consider the

impact that these variables have on final average per

tray values.

Biennial Production

A continuing problem for growers and the industry is

biennial production, this is a good crop one year

followed by a poor crop the next year. What is the impact

of biennial production on income, costs and

profitability?

A review of AIC data of a random sample of 32 Bay of

Plenty and Whangarei orchards derived from pack

reports for the years 2000/2001 to 2003/2004 (ended

31 March) shows that few orchards achieve consistently

high production.

Season 00/01 01/02 02/03 03/04 Average

Highest production per c.ha 29.0 21.1 28.3 23.9 25.6

No. of orchards >20 tonnes 4 1 4 2 2.75

and % of orchards 13% 3% 13% 6% 8.6%

No. of orchards >16.5 tonnes 6 4 4 3 4.25

and % of orchards 19% 13% 13% 9% 13.3%

Average yield (tonnes) per c.ha 10.9 9.3 11.5 7.8 9.9

No. of orchards below average yield 18 19 18 17 18

and % of orchards 58% 61% 58% 55% 58%

Income (per TE) 00/01 01/02 02/03 03/04

Export $18.50 $14.00 $12.00 $18.00

Local Market $6.00 $9.00 $8.00 $13.00

Oil $3.00 $3.00 $3.00 $3.30



Top 3 Producers Yields Average Variation Export

1 29.0 18.7 21.0 10.4 19.8 38.5% 75.7%

2 26.3 12.6 28.2 11.9 19.8 44.7% 64.7%

3 26.4 21.1 0.0 21.5 17.3 54.7% 73.2%

Average orchard 11.0 7.0 14.5 8.5 10.3 33.6% 35.9%

The top yield for each year when averaged over the four

years was 25.6 tonnes. No individual grower averaged

more than 20 tonnes per c.ha in the four years. The top

three average producers over the four years all had large

changes in yield from year to year. These yields could

more than halve from one year to the next. However,

these growers all exported a high percentage of their

fruit. In the year with the best average production for

the 32 orchards in the sample, 2002, just 13% of orchards

exceeded 16.5 tonnes or 3,000 TE�s. Over the four years

about 60% of orchards produce less than the average

production.

Each season there are different factors at play influencing

orchard gate returns from exchange rates, market supply

and demand, including international events. Variation

in average tray returns has been as great as variations in

production. The "ups" in income have typically matched

"downs" in production this can cause dramatic variation

in total income.

Costs are much less variable than income. In the example

in the spreadsheets in this chapter the greatest cost is

mulch which you can choose to eliminate in a season if

necessary. Purchase and application of mulch represents

about 20% of the tree management costs in the

YearBudget worksheet. About 70% of fertilizer costs

are committed before fruit set, which therefore does not

allow much scope for changes in an off year. Spray costs

are dependent on pest pressure and may not vary very

much according to crop loading.

The calculations in the Sensitivity worksheet suggest

that even at a low production of 7.5 tonnes, total direct

costs are about 75% of total costs at a 20 tonne

production level. This is a difference of $2,300 per c.ha.

However, an average income of $13 per tray varies by

about $30,000 ($17,000 vs. $47,000).

The key issue then for avocado orchardists is not

managing expenditure, but to always have the best crop

you can.

Establishment Costs for New Orchards

The spreadsheet New Planting Costings allows the

establishment costs of planting a bare block of land in

avocados to be calculated. There are two main methods

of preparing the land and planting trees used in the Bay

of Plenty. The spreadsheet allows the costs of either

method to be calculated. If an activity is not undertaken

enter 0 in the appropriate cell.

Historically 600mm wide holes were dug into which a

little mulch and fertiliser was placed together with a new

tree. Virtually all trees planted in the Bay of Plenty

until recently have been established this way. Recent

developments have involved digging a large hole up to

two meters square and one to two meters deep loosening

then turning over the soil, adding mulch and appropriate

fertilisers.

An effective irrigation system is important in the

establishment of new trees where it enhances root

development, nutrient uptake and reduces the risk of

water stress during extended dry periods. Further, a

well designed irrigation system can provide some degree

of frost protection in winter, although not the substantial

warming that may be required with rogue spring frosts

during flowering.

The final element of establishment is good shelter.

Shelter should preferably be established before the initial

planting.

The costings in the example in the New Planting

Costings spreadsheet are based on using large planting

holes to establish a new block, expect to spend up to

$100 or more per planted tree using contracted services.



Acknowledgements

David Lushington � Avocado Futures Limited. For

assistance with new planting costings.

Ravensdown Co-operative Fertiliser. For fertiliser

recommendations, indicative costs and NPK values.

FruitFed Services Katikati. For indicative spray costs.

FURTHER READING

Dixon, J., 2004. Avocado Pollination Best Practice

Guidelines 2004. (www.nzavocado.co.nz)



5 Y

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Yea

r 2

Yea

r 3

Yea

r 4

Yea

r 5

economics of avocado growing - new zealand...

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