Production costs: Crunch the numbers

The diversity of this industry creates obstacles when growers try to precisely calculate operating costs. No matter the size of the nursery or the type of crops grown, NGBC participants agreed that the industry in general lacks a clear understanding of costs. And that affects product pricing and profits.

Dan Batson, founder of GreenForest Nursery in Perkinston, Miss., spends a lot of time and effort looking for better ways to calculate the operating costs of his 160-acre container nursery. He’s researching two ways to perform the calculations. One is by equivalent units and the other is by square footage units. To put it in perspective, greenhouses use the square footage calculation.

“I’m trying to figure out which way is more relevant to long-term nursery production,” he says.

It’s not a simple calculation, by any means. And when you take one crop and plug it into each calculation, you get different results.

“We took one of our items and looked at it from both angles. We got very different results. In one formula, it was our most profitable crop, and in the other formula, it was our least profitable.”

It’s a perplexing and aggravating situation. To help work through the conundrum, Batson is working with Texas A&M’s Charlie Hall, an expert in horticultural economics.

“The industry is so diverse, and even individual nurseries are diverse, that it’s almost physically impossible and almost financially impossible to come up to exact figures you’re spending on each crop,” Batson says.

The question remains, can you have a formula without taking every little bit of information from the nursery and plugging it in? Batson and Hall are working on a more generic formula that would give nursery owners valid information.

In the nursery industry, the longevity of a plant at the nursery is a key factor in determining the cost of production, Batson says.

“The faster you turn a product, the more profitable you are. Certainly both formulas are telling me that. We need to charge accordingly based on the longevity of the crop’s production cycle. Instinctively you know if it’s there longer, you should charge more. But from a marketing standpoint, that just doesn’t calculate,” he adds.

It almost becomes a chicken-and-egg scenario. Knowing your costs of production coincides with proper pricing. For more information on how some of our participants handle plant prices, see the story on page 20.

As Batson continues to improve calculating costs, he also has raised prices of certain crops.

“But we don’t have a lot of wiggle room,” he adds. “Once we’re comfortable using whatever cost model we come up with, we can look more at profitability, better pricing and whether we should stop producing certain items.”

J. Frank Schmidt & Son in Boring, Ore., grows more than 500 cultivars of trees and shrubs on more than 2,000 acres, making it quite a feat to track production costs. But Art Anderson, the nursery’s general manager and chief operations officer, has an interesting perspective.

“Every grower has some sort of limited resource whether it’s people, finances or physical resources, for example. But you have to determine your priority in the market. If it’s volume of product, you obviously need lots of labor and land. So you’ll have to figure out what it costs to achieve that priority,” Anderson says. “If you’re looking at high quality with low volume, then your focus is on different issues, such as marketing, control over things like diseases or production processes, higher quality inputs and better monitoring of water, just to name a few. Carefully evaluate those needs and decide where to adjust your production costs.”

Costs aren’t all about production inputs, Anderson says. Costs should also include building a team that will help drive your business to success, he says.

“There needs to be a person or a management team that looks at the bigger picture and sets priorities,” he says.

And like Batson at GreenForest, Anderson and his team realize a better understanding of costs leads to better product pricing.

Two years ago, JFS started the process of evaluating the profitability of each of the cultivars it grows, and the nursery eliminated 12 varieties.

“If you’re not making money on a crop, you want to know why. Maybe it’s a production problem, disease pressure, a grafting problem or difficulty finding a seed source,” Anderson says. “Once you go through those scenarios and fix the situation, go back and re-evaluate them at a later time. If you can’t find a way to make money on a product, eliminate it.

“Don’t sell your plants below their value. It’s better to dump it. Don’t create the perception that it’s worth less than it really is or sell for less than it costs to grow it.”

Some of our participants discussed the cost of production spreadsheet that was developed by Michigan State University. It estimates cost of production on a per-unit and total enterprise basis. Find the free worksheets at http://bit.ly/1B7ZgyV.

The spreadsheet generates estimates for total economic cost, meeting net worth cost, meeting cash flow demand cost and necessary sale price to attain a projected profit above the estimated total economic cost. Primary inputs are from business income tax returns and costs from records or suppliers. Cost estimations from the spreadsheet are compared to costs from the previous year from Schedule F and nursery records.

Tom Fernandez, associate professor of horticulture at Michigan State, helped create the worksheets with Tom Dudek, extension educator at MSU Extension and Roger Betz at MSU Extension.

Costs are separated into variable (direct) costs and overhead (indirect) costs. Direct costs change proportionally as the units of production change. Indirect costs tend not to change as units of production change. Direct cost per unit of production are entered directly into the enterprise budgets. Five worksheets help calculate some of these estimated direct costs, including fertilizer, pesticides, substrate, overwintering materials and various direct labor costs.

Indirect costs are allocated to the unit of production using the concept of square foot weeks. Square foot weeks is determined by multiplying the average area (in feet) by time (in weeks) that it takes to produce the crop.