Fruit production is exceeding demand. Labor costs are at all-time highs, and technologies aimed at easing the crunch carry high up-front costs at a difficult time. More consolidation is likely in the future.
With these costs of production on the rise, the fruit industry is in for some tough times, according to two financial speakers at the Washington State Tree Fruit Association’s Annual Meeting in December in Wenatchee.
Things aren’t hopeless, however. The tree fruit industry has its best days ahead, said Ken Ballard, vice president of Northwest Farm Credit Services, but a few bad days will come first.
“Let’s survive this downturn, so that we can enjoy those best days ahead of us,” he said.
Ballard and Karina Gallardo, a Washington State University agricultural economist, presented some sobering figures and tips for how to survive lean times during an economic session at the industry gathering.
Labor is the biggest wild card
Ballard estimated that among the fruit companies he works with, the fixed labor cost per acre of apples was $3,050, with a variable harvest and thinning cost of $55 per bin in 2017, the most recent year for which he had public tallies. In 2021, that will reach $3,681 per acre and $66.38 per bin.
His projections account for Washington’s scheduled minimum wage increases and an Adverse Effect Wage Rate, or AEWR, the federal minimum for H-2A workers, that he assumes will continue to increase accordingly.
Since his presentation, Washington’s minimum wage has risen to $13.50 in 2020. Meanwhile, the U.S. Department of Labor raised the AEWR in all geographic regions of the country for 2020. It’s highest in Washington and Oregon, at $15.83, up 5 percent from $15.03 last year, marking a 50-percent increase since 2011. (The 2020 rate for several other fruit-growing states: $14.77 for California, $14.40 for Michigan and $14.29 for New York.)
Of course, labor is not the only cost. Throwing in fertilizers, equipment and other expenses, the total cost to produce an acre of apples in Washington was $10,900 in 2017 and $182 per bin, assuming an established 60-bins-per-acre orchard. Ballard anticipates those figures will rise to $12,214 per acre and $204 per bin by 2021.
And those are probably low projections, he said. Though he included estimates for other expenses, he only calculated inflation for labor.
However, production levels make a big difference, he said. When assuming a boost in production, the cost per acre goes up, but the cost per bin comes down as expenses are spread out. In a 90-bins-per-acre block, costs in 2017 were $12,550 per acre and $139 per bin in Ballard’s estimates. In 2021, they will reach $14,206 per acre and $158 per bin, 23 percent less than in the lower production 60-bins-per-acre block described above.
Ballard had more cautionary news when it came to returns on investment for replanting an orchard.
He ran a scenario of a new orchard that cost $35,000 to plant and $8,000 each in training for years two and three. Assuming apple prices at $25 per box and 90 bins per acre, a grower could expect to earn a 3.7 percent rate of return. At that rate, it would take 15 years to return the cost of the orchard development.
That’s bad, he said: “I don’t think 3.7 is enough to really make anyone feel real comfortable.”
The picture improved when he assumed higher prices and higher volumes per acre, but growers should think hard before replanting, he said. Rather, consider just pushing the trees and letting the ground lie until the cycle improves, which he believes will be in three to five years.
Farms that have cash are more likely to weather the bad times, he said. Most businesses fail because they run out of cash, not because they have a bad product or poor management.
In normal times, he recommends setting aside about one-third of annual expenses as working capital. In a downturn, he urges more to pay for rising costs and to keep up with sluggish returns, absorb losses and complete capital projects.
If an expensive capital project is a must, seek long-term debt, he said. Don’t use up working capital. However, he suggested cash-challenged businesses consider the following financial moves to avoid that debt: Sell assets, such as unused ground or a vacation home, for cash; sell productive ground and farm it on lease; or invite in family money or outside money to provide cash.
Breaking down the break-even
Gallardo broke down costs in her apple enterprise budget, a cost analysis she runs every four or five years for different agricultural products, depending on funding. She hasn’t published her most recent budget yet, because she is still fine-tuning figures before her peer review, but she shared preliminary conclusions with the industry in December.
“I’m afraid I don’t have good news,” she said.
Based on her models, Honeycrisp is the only apple to cover all costs in a full-production orchard, returning $41,681 per acre, barely above the $41,018 per acre cost of production. The other apples she studied — Gala, Granny Smith, Fuji and Cripps Pink — returned amounts well below the cost of production.
However, Gallardo adds more layers to her cost total than many growers would.
She has four cost categories, including the usual depreciation; taxes and insurance; and variable costs, such as labor and chemicals. However, she also throws into the mix “opportunity costs”: the capital growers could invest on other activities, using roughly 5 percent as a model return rate. She encourages growers to think that way when making decisions about investing in new equipment or replanting an orchard to a high-value variety.
Her figures are based on 300-acre farms, yields between 75 and 85 bins per acre and densities of 1,089 or 1,452 trees per acre, depending on variety. She also calculated start-up costs, including wind machines, trellises and land.
In this analysis, the break-even F.O.B price for Honeycrisp apples was $56.09 per 40-pound box. For Cripps Pink it was $36.41, Gala $34.58 and Fuji $34.50.
Prices don’t often reach those levels, she said. In fact, Gala sometimes doesn’t even fetch $26.91, the break-even point considering only the variable costs.
Though her information is sobering, the industry should use it to pivot wisely, she said in a follow-up interview. Marketers and retailers, for example, should negotiate higher prices based on the figures, while growers should consider them when deciding whether to invest in higher densities and more profitable varieties.
“This is a moment to grab those opportunities,” she said. •
—by Ross Courtney
—O’Rourke: Is apple demand falling?