Costs of Orchard Establishment and Production Summary for Avocados in California:
Based on 2011 studies: www.coststudies.ucdavis.edu
Etaferahu Takele, UCCE Area Advisor, Ag. Econ/Farm Management, southern California and Mao Vue, UCCE Staff Research Associate
In fall 2012, we completed and published sample costs and returns studies for establishment and production practices for conventional and organic avocados in the major producing counties. We divided the production regions into two parts to show the differences in production methods and costs especially as related to water prices. The northern part of the growing region includesVentura,Santa BarbaraandSan Luis Obispocounties. The southern part of the growing region includesSan DiegoandRiversidecounties. We developed four studies, two conventional methods and two organic methods, one for each region.
Data for the sample cost studies were obtained from growers, farm advisors, pest control advisors and other agricultural institutions including banks, agricultural appraisers and equipment dealers. The data we obtained were entered into a budget generator program for calculation and development of sample establishment and production costs.
The studies provide the detail assumptions used in the development of establishment and production costs (ref. the above website) Some common assumptions to all of the cost studies include average labor wages with benefits of $14 per hour for manual and irrigation labor and $18 per hour for machine labor. We used a price of $1.07 per pound which is the five-year average obtained from the California Avocado Commission (CAC) to calculate crop value and we assumed an additional $0.20 per pound premium for organic avocados, and used $1.20 per pound for organic avocados crop value.
Table 1 shows the summary of costs of establishment and production and returns per acre by production method, region, and county. Establishment costs include the accumulated net costs (gross returns less costs) during the orchard development period from year 1 to 6. The production costs estimates are for year 7 + when the trees are considered nearly mature and fully yielding. Gross returns are price per pound times yield. Gross margin are returns above operating and cash overhead costs and returns to management are returns above total costs.
Establishment and production costs are higher for San Diego County than any other avocado producing counties for both the conventional and organic production. In conventional production, establishment costs inSan DiegoCountyare higher by 8% above the northern growing region ofVentura,Santa BarbaraandSan Luis Obispocounties and 15% aboveRiversideCounty. Production costs inSan DiegoCountyare higher by 15% aboveVenturaandSanta Barbaracounties and 21% aboveSan Luis Obispoand 18% aboveRiversideCounty. The main difference is accounted for by water cost, which in our study was assumed $1,200 per ac-ft. forSan DiegoCounty, $650 per ac-ft. for Riverside County, $325 per ac-ft. for Ventura and Santa Barbara, and $200 per ac-ft. for San Luis Obispo. According to the local farm advisor, the high water cost in the southern growing region, especially inSan DiegoCounty, is due to various drought years and the loss of shares of water from theColorado River. Other influencing factors that resulted in higher establishment and production costs for San Diego County include lower yields due to wider space planting (145 trees per acre vs. 180 per acre in the northern region) and higher labor costs for material applications on steeper hillsides.
Organic avocado production costs are generally higher than conventional production regardless of the production region. Orchard establishment costs of organic avocados run 11-12% higher in the northern producing region and 12%-14% in the southern region than the conventional production practices. Similarly, production costs run 11%-12% higher in the northern producing region and 10%-12% higher in the southern producing region than conventional production practices. The main differences between conventional and organic productions include material costs, hours spent on labor, and yields. Organic material particularly in fertilization and pest management tends to cost more and require more labor hours for application than conventional materials. For example, organic fertilizers are usually in dry or granular form and have lower amount of nitrogen per pound (feathermeal 12% for organic vs. UN-32% nitrogen for conventional) therefore requires higher application rates and will take longer to apply by hand. Organic pest control such as spinosad ($34 per ounce) for thrips control cost more than conventional insecticide (abamectin $1 per ounce). In addition, organic growers spend more hours hand weeding in the northern region. Gypsum is hand applied for phytopthora root rot treatment in organic production and costs more to apply than potassium phosphite for conventional production. Overall, costs for organic production results in $3,453 more ($2,471 more for fertilization, $348 more for pesticide, $338 more for root rot treatment and $296 more in weeding) than the conventional method in the northern region and costs $3,804 more ($2,846 more for fertilization, $346 more for pesticide and $610 more for root rot treatment) than the conventional method in the southern region.
There is also a yield difference between conventional and organic productions. Yield is generally higher for conventional than organic production methods regardless of the production region. The yield level provided by growers includes 15% more for conventional production methods than the organic production methods for the northern producing region and 14% more in southern producing regions.
Gross returns estimates for organic production in the northern producing region are higher than gross returns in San Diego and Riverside counties for both conventional and organic production. This is due to higher yield attained from the narrow space planting in the northern producing counties (22’x11’=180 trees per acre in the northern producing regions vs. 20’x15’= 145 trees per acre in the southern producing region).
Gross margin (returns above all cash costs) and returns to management (returns above total costs except management) are all positive for both the northern and the southern part of the growing region. However, gross margins are much lower than the northern growing region. Net margins are positive for the northern part of the growing region but are negative for the southern part.
We provided the breakeven prices analyses in Table 2. Given our costs of production estimates and yield assumption of 12,400 and 11,200 pounds per acre for conventional avocados, respectively for Ventura and Santa Barbara counties and San Luis Obispo County the breakeven prices to cover cash costs are $0.47/lb. in Ventura and Santa Barbara counties and $0.46/lb. in San Luis Obispo County. Whereas the breakeven prices to cover all costs are $0.88/lb. for Ventura and Santa Barbara counties and $0.91/lb. for San Luis Obispo County. This means given the $1.07 price per pound of avocados, there will be $0.60/lb. gross margin and $0.19/lb. net margin for Ventura and Santa Barbara counties; and there will be $0.61/lb. gross margin and $$0.16/lb. net margin for San Luis Obispo County.
For organic production, given the cost of production estimates and yield assumption of 10,500 and 9,500 pounds per acre, respectively for Ventura and Santa Barbara counties and San Luis Obispo County, the breakeven price to cover cash costs is $0.65/lb. for all counties (Ventura, Santa Barbara, and San Luis Obispo). The breakeven prices to cover all costs in organic production are $1.16/lb. for Ventura and Santa Barbara counties and $1.22/lb. for San Luis Obispo County. This means that given the $1.27 price per pound of organic avocados, there will be $0.62/lb. gross margin for all counties and $0.11/lb. net margin for Ventura and Santa Barbara counties and $0.05/lb. net margin for San Luis Obispo County.
In the southern producing region, given our costs of production estimates and yield assumption of 9,000 pounds per acre for conventional avocados for both San Diego and Riverside counties, the breakeven prices to cover cash costs are $1.01/lb. for San Diego and $0.79/lb. for Riverside. Whereas, the breakeven prices to cover all costs are $1.44/lb. for San Diego County and $1.18/lb. for Riverside County. This means that given the $1.07 price per pound of avocados, there will be $0.06 per pound gross margin for San Diego County and $0.28/lb. gross margin for Riverside County. However, the breakeven price falls short by -$0.17/lb. and -$0.11/lb. net margin, respective for San Diego and Riverside counties.
Given our costs of production estimates and yield assumption of 7,700 pounds per acre for organic avocados, for San Diego and Riverside counties, the breakeven prices to cover cash costs are $1.31/lb. for San Diego and $1.05/lb. for Riverside. The breakeven prices to cover all costs are $1.87/lb. for San Diego County and $1.57/lb. for Riverside County. This means that given the $1.27 price per pound of organic avocados, there will be a shortfall of -$0.04/lb. gross margin for San Diego County but a positive gross margin of $0.22/lb. for Riverside County. Net margins fall short of the breakeven prices by -$0.60/lb. and -$0.30/lb., respectively for San Diego and Riverside counties.
Overall, narrow space planting with higher yields and lower water costs are positive impacts on returns to management in the northern producing region with substantial profitability levels that keeps the industry moving forward. On the other hand, the wider spacing and lower yield and higher water costs have negatively affected the overall returns to management in the southern producing region. Currently, there is a trial in the southern producing region on narrow spacing with an emphasis on pruning methods. In the future, we hope to develop a thorough costs study on narrow spacing in the southern producing region after trials are completed. For detail information on our assumptions, costs tables, and profitability analyses copies of the avocado costs studies for both regions on conventional and organic avocados can be retrieve from the above referenced website.