The Cost of Producing Potted Orchids ❦ Hawaiian Agricultural Products

3/4/13 The Cost of Producing Potted Orchids ❦ Hawaiian Agricultural Products

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The Cost of Producing Potted Orchids

Sabry Shehata and Linda J. Cox

I. Introduction

The purpose of this publication is to investigate the costs of potted orchids in Hawaii anddevelop software for growers to estimate their production cost. The main objective is toprovide investors and other existing farms with an accurate method for estimating the costof production customized to their farm operation. The software is located at the websitewww.hawaiianagriculturalproducts.com, which provides convenient and fast methods forestimating the cost of production. It can be used for planning new orchid farms andexpanding the existing operation. It can also be used for various managerial decisions, suchas sensitivity analysis and farm budgeting.

II. Industry Analysis

The potted orchid industry has continued to grow in the past 5 years. The total potted orchidsales increased from 2.316 million pots annually to 3.382 million in 2003, an annual increase of9%. The total sales grew from $9.957 million in the 1999 to $ 13.73 million in 2003, an annualincrease of 7.6%. (HASS, Hawaii Department of Agriculture). It is expected the trend willcontinue.

III. Methodology and Cost Assumptions

Telephone and personal interviews were conducted with growers across the State of Hawaiifrom April to September 2005, in order to determine the costs associated with producingpotted orchids by each variety. Fifty-two producers participated in the study; 43 thatproduced only potted orchids were used for estimating the cost of production.

The production of the growers surveyed amounted to 2.78 million potted plants andaccounted for about 70% of the total predicted orchid production in the year 2005. (Giventhe estimated annual increase of in sales of potted orchids is 9%, the estimated total sales in2005 is 3.99 million pots).

All listed growers were identified and contacted to determine their willingness to participate.In order to protect the identity of the growers, the number of growers interviewed in eachcategory is not disclosed.

Production coefficients are estimated based on the information provided by the growerssurveyed and validated with researchers and previous publications. ( ) These coefficients arekept constant in estimating the cost of production. Two different coefficients are used toestimate the cost of production, one for farms that produced less than 25,000 and the otherfor farms producing 25,000 pots or greater per year. These are labor cost per plant, fertilizercost per plant, chemical cost per plant, plants per SF, packaging material cost per plant, potcost per plant, and media cost per plant. The costs of insurance, repair, and taxes are thesame for both sizes and a percentage of the total fixed cost is used. It was assumed that ittakes two years for the plant to mature. Certain coefficients were linearly extrapolated asrelated to the size of operation. Smaller operator uses a ratio of 4/5 shade houses togreenhouses and in a larger operation, the ratio is 1/8. The larger operation produces 2.17plats per square foot while smaller operators produce .82 plants per square foot. Thesecoefficients can be changed as new information comes up.

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IV. Industry Structure

The orchid industry consists of many small farms and a few large farms. The larger farms aremore vertically integrated from production to shipping to wholesaling and/or retailers.Among those who participated in the survey, the average covered area is 110,000 S.F., whichproduced an average of 85,562 potted orchids annually, an average of 1.886 pots per S.F.

The size of production varies from 1,400 pots per year to 400,000 per year. 60% of the farmsproduced less than 25,000 pots per year, supplying 10% of the total pots produced. Theaverage production per farm amounted to 11,748 pots per year. 40% of the farm surveyedproduces more than 25,000 pots per year, and contributed 90% of the total production. Theaverage production amounted to 230,182 pots per year.

V. Production Cost

Only farmers who produce potted orchids were utilized to estimate the average cost perplant. Those who produce cut flowers were not utilized in the analysis. Information wasobtained on the total plants produced, amount of water used, fertilizer, chemicals, pots,media, and hours of labor used in the growing, harvesting and shipping potted orchids, aswell the cost of these inputs was used to estimate the average cost per pot. The sample wasdivided in two groups: small growers who produce less than 25,000 pots per year, and thelarger ones who produce 25,000 and over.

To use the software individuals have to log on to www.hawaiianproducts.com, where theyare required to provide information on average monthly bills including electricity, phone,internet, cell, and other utilities, price paid per unit of inputs, and monthly administrationexpenses, including management, secretary, and office help. Other overhead includes alloffice costs: office supplies, computer, etc. per month, hourly wages in dollars, as well asbenefits as a percentage of the hourly wages, 0–100, and the interest rate they pay onfinancing their equipment. Growers need to enter the number of each orchid speciesgrowers are planning to produce, all equipment and machinery cost, as well quantities andprice for each item. They can also change the life expectancy according to the depreciationschedule.

All results are dependent upon the initial production coefficients and the user's data enteredinto the outlined text boxes. The various results are only as accurate as information enteredby the users.

The software was tested to determine the cost of production for small farms. The averagedata collected from the survey was used to estimate the average production cost amongsmall growers. The cost of producing 11,748 pots was calculated using the software and ispresented below. (See table 1).

Variable Costs

Per Plant Per Square Foot Farm Total

Amount Dollars Amount Dollars Amount Dollars

Labor Cost 0.10hrs 0.9775 0.08hrs 0.7960 1,175hrs 11,484

Water Cost 24.00gal 0.0240 19.54gal 0.0195 281,952gal 282

Fertilizer 0.06lbs 0.0605 0.05lbs 0.0493 711lbs 711

Chemicals 0.0713 0.0581 838

Pots 0.0700 0.0570 822

Media 0.1000 0.0814 1,175

Machinery Fuel 0.01gal 0.0420 0.01gal 0.0342 173gal 494

Packing and ShippingMaterial

0.0320 0.0261 376

Interest on Operating 0.1377 0.1122 1,618

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Capital

Total Variable Cost 1.5151 1.2338 17,799

Total Fixed Cost 1.6210 1.3200 19,043

Total Cost of Production 3.1361 2.5538 36,843

Gross Income 3.5000 2.8501 41,118

Net Income 0.3639 0.2963 4,275

Break Even Price 3.14

Table 1 lists the annual costs associated with producing potted orchids for small growers.The average cost per S.F. is estimated at $3.14. The owner’s labor was valued at $8.50 perhour with a fringe benefit of 15%. Interest cost on the operating capital that is used will beshort term interest of 10%. All input used in production is paid except for management. At$3.50 per pot the gross sales amounted to $41,118 and the total cost amounted to $36,843per farm. The estimated return on management amounted to $4,275 annually.

For the larger growers the average data collected from the survey was used to estimate theaverage production cost among small growers. The cost of producing pots was calculatedusing the software and is presented below. (See table 2).

Table 2 lists the annual costs associated with producing potted orchids for large growers.The breakeven price is estimated at $2.45 per plant. The owner’s labor was valued at $8.50per hour with a fringe benefit of 15%. Interest cost on operating capital used will be shortterm interest of 10%. All input used in production except for management is paid. At anaverage of $3.50 per pot the gross sales amounted to $805,637 and the total cost amountedto $563,973 per farm. The estimated return on management amounted to $241,664annually.

Table 2: Orchid Cost of Production for Larger Growers producing an average of 230,182 potsper year

Variable Costs

Per Plant Per Square Foot Farm Total

Amount Dollars Amount Dollars Amount Dollars

Labor Cost 0.10hrs 0.9775 0.15hrs 1.5065 23,018hrs 225,003

Water Cost 24.00gal 0.0240 36.99gal 0.0370 5,524,368gal 5,524

Fertilizer 0.06lbs 0.0605 0.09lbs 0.0932 13,926lbs 13,926

Chemicals 0.0713 0.1100 16,423

Pots 0.0700 0.1079 16,113

Media 0.1000 0.1541 23,018

Machinery Fuel 0.01gal 0.0420 0.02gal 0.0647 3,393gal 9,670

Packing and ShippingMaterial

0.0320 0.0493 7,366

Interest on OperatingCapital

0.1377 0.2123 31,704

Total Variable Cost 1.5151 2.3351 348,747

Total Fixed Cost 0.9350 1.4411 215,226

Total Cost of Production 2.4501 3.7761 563,973



Gross Income 3.5000 5.3942 805,637

Net Income 1.0499 1.6181 241,664

Break Even Price 2.45

It should be noted here that the cost of production for small growers is higher than largerfarms. This is due to economy of scale which lowers the cost of production per unit. The largegrowers use the resources provided more efficiently and many larger farms have verticallyintegrated their farm operation.

VI. Conclusion

Finally, the software for cost of production for potted orchids has been developed, and islocated at the website, www.hawaiianagriculturalproducts.com, and can be modified toinclude other horticultural commodities. This will provide a convenient and fast method forestimating the cost of production. The growers need to be trained to use this site as part of afarm management training program that can be conducted statewide.

REFERENCES

Hawaii Agricultural Statistics Service. 2003. Statistics of Hawaii Agriculture 2002. HawaiiDepartment of Agriculture, Honolulu, HI.

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The Cost of Producing Potted Orchids ❦ Hawaiian Agricultural Products