Economics ofTexas Citrus Dr. Patil’s Class Nov. 24, 2004
CONTENTS • Big Picture Stuff: Supply & Demand, Prices, and Price Determinants of Citrus • Orchard Level Economic Picture: Discussion of costs of production and investment framework. Demo of Excel templates and tips on keeping/managing orchard information with Excel. Revision of A&M budgets to fit your own numbers. • Evaluating simple on-farm choices: Alternative greasy spot and arthropod management • Considering Alternative Technology, Example One: Topworking Orchards • Considering Alternative Technology, Example Two: Microbudding • Discussion of Risk and Risk Management
Basic Point to Remember: • The important economic issues about citrus involve the long-term, perennial, fixed asset nature of orchards • Implications: • The supply of citrus is relatively unresponsive to short-run changes in citrus prices • Orchard profitability (or evaluation of alternative technologies) must be measured in a multi-year investment framework • Risk issues involve the TIMING of unexpected losses or costs
Prices & Income • Fresh Market • grapefruit • oranges • insert graph • Juice Market • grapefruit • oranges • insert graph
Supply/Demand Shifts • Demand can shift from • changes in consumer income • changes in consumer preferences • changes in price of substitute or complementary commodities • Supply can shift from • changes in technology (prod. costs) • changes in input prices (prod. costs) • changes in no. of producers
Florida's Loss, Texas' Gain October 15, 2004 By Lana Robinson In the best of all worlds, every agricultural producer would prosper. But much of the time, due to crop failures, natural disasters, and other factors, farmers in one region benefit from the misfortune of those in another. With Florida's citrus industry in shambles following four treacherous hurricanes over a six-week period, Texas citrus growers are expecting a stronger market for their product this season. "Given the shortfall this year, we would expect a little higher demand and the No. 2s (Choice) grapefruit may be easier to move. That's why we're excited," said Dr. Julian Sauls, professor and Extension horticulturist in Weslaco. Sauls said 70 percent of the grapefruit in Texas are grown for the fresh market. Of those, 45 to 50 percent are No. 1s (Fancy) and 20 to 30 percent are Choice. In a normal year, Fancy grapefruit make money and Choice does well to break even. In the aftermath of the Florida disasters, California's summer grapefruit sales also surged and FCOJ (frozen concentrated orange juice) prices rose dramatically. Florida boasts close to 800,000 citrus acres, compared to the Rio Grande Valley's approximate 28,000 acres. Florida supplies 75 percent of all U.S. grapefruits. The Sunshine State specializes in white and pink grapefruit, while Texas focuses on the red grapefruit varieties.
Florida has the corner on the Orange Juice Market, but California owns the Fresh Market
Prices & Income • Fresh market citrus gets higher price per box (or per acre) than juice market • Since consumption is fairly stable, and acreage is fixed in short run, changes in prices result from supply shifts due to weather, for example…
Thought Questions • Grapefruit prices are higher every winter & lower every spring. Is this a function of Supply or Demand? • Would new information about citrus health benefits affect Supply or Demand? How?
Industry Strategies • TX Industry strategy is to differentiate Texas grapefruit via trademarks, brands, advertising, to create a separate (and hopefully higher) demand for our specific product • Another strategy is to aggressively market in the times/locations where TX citrus is most available • Another strategy is to regulate (via federal marketing order) the packaging and labeling of TX citrus
Grower Level Economics: Production Costs • Orchard Establishment (Year 1 - Year 3) • Young Bearing Trees (Year 4 - Year 8) • Mature Bearing Trees (Year 8 and older)
Investment Decisions • Orchard investments require up-front, long--term commitment of land & financial capital • Orchards have annual costs & returns over a number of years • How can you decide today whether an orchard investment will pay over it’s lifetime? • Financial planning involves the Three R’s • Records • Rates of Return • Risk
Recordsfor Financial Planning • Need a system to store, organize, and retrieve records of resource inventory & usage, production, expenses, income & assets • Need a system to summarize records into performance measures and reports, and to easily play with the numbers • Computerized Examples: Excel templates, Accounting Programs (e.g., Quickbooks), or custom ag software programs
Rates of Return • Most things you do in an orchard setting involve long-term investment decisions • land • nursery stock • Must consider time value of money, e.g, today’s dollars are worth more than future dollars • Should consider alternative uses of that capital • Evaluate investments by discounting future calculations that discount future rev. streams
Risk Management Strategies • Likelihood of big, destructive, random events like hurricanes and severe freezes • Insurance products and costs • Technology effects and costs (in a risk premium sense)
Managing Risk • Natural Risks • tropical wind damage • water shortages • Hard freezes (avg. every 11 years!!) • Economic Decisions • Purchasing insurance • Investing in protective technology • How much can I afford to pay for these? • How does risk affect investment scenario?
Conclusion • Texas citrus can be a good investment, but only with careful consideration of alternative investments and risks • The Texas citrus industry will likely endure, both as a hobby activity as well as a small (low acreage), input intensive, high tech enterprise
EXAMPLE ONE: Top Working vs. Conventional Orchard Replacement Preparation Cost: $ /acre
Labor Expense: $ /acre
One Year Old Top-Worked Trees (ca. 3.5’ to 4’ tall)
Three Year Old Valencias Top-Worked onto Grapefruit Yield=ten tons per acre