Financial and Practical Considerations of Selecting Zero Runoff Subirrigation Systems Wen-fei L. Uva Department of Agricultural, Resource, and Managerial Economics Cornell University Modified by Georgia Agriculture Education Curriculum Office June, 2002

What is Zero Runoff Subirrigation Technology?

Growers’ Challenges New Technology Economic Issues Environmental Issues Sustainable Businesses Horticultural Issues

Common Concerns High Investment Costs Insufficient Production and Cultural Information Potential Disease Problem Hard to Manage ? Which System to Adopt?

Four Commonly Used Zero Runoff Subirrigation Systems

Ebb-and-Flow Rolling Bench System

Dutch Movable Tray System

Flood Floor System

Trough Bench System

Growers’ Experience with Zero Runoff Subirrigation Systems: A 1996 Survey

Grower Characteristics 1. More large size operations - 78% with >$500,000 annual gross sales 2. Mostly wholesale growers 3. 80% growers had less than 5 years experience 4. Convert part of the operation only - 60% converted less than 1/3 of the area 5. Many planned to convert more greenhouse area

Reasons for Adopting Zero Runoff Subirrigation Systems From the Most Important: 1. Improve Product Quality 2. Cut Production Costs 3. Increase Production Efficiency 4. More Control Over Operation 5. Environmental Concerns

Systems Adopted: 1. Most commonly used: Ebb-&-Flow Benches 2. Large operations more likely to choose the Flood Floor System 3. Large operations and operations with large zero runoff areas tend to use more than one type of system

Benefits Received From Using Zero Runoff Subirrigation Systems From the Most Important: 1. Savings on watering labor 2. Savings on fertilizer 3. Product uniformity & better product appearance 4. Savings on water 5. Increased productivity 6. Higher space utilization efficiency

Management Adjustments Lower fertilizer rate (1/2) Close monitoring of EC and pH Adjust irrigation schedule Adjust cropping schedule Automation and mechanization Labor training Majority (84%) did not treat the solutions > 20% found less disease problem; 78% found no change

Financial Aspects

Some Important Concepts Variable Costs: cost items vary with production volume i.e. plant materials, pots, mix, fertilizer, labor... Fixed Costs: cost items do not vary with production volume i.e. rent, interests, manager salary, telephone, depreciation... Costs & Profit per Square Foot Week (SFW) Time Value of Money

Case Studies: Comparing the profitability of using the 4 zero runoff subirrigation systems to produce 3 crop categories

Small potted plants (< 5” pot) 4 1/2” Geranium: an 8-week crop

Large potted plants (> 5” pot) –6” Poinsettia: a 17-week crop

Bedding plant plugs and flats –1204 size Impatiens flats: a 10-week crop Plug Production

Flat Production

11 Production Models

The Greenhouse Model A 20,000 sq. ft. model greenhouse facility Firm’s Marginal Tax Rate: 30% Inflation Rate: 3% Average space use efficiency: Ebb&flow benches: 87% Dutch movable trays: 85% Flood floors: 90% Trough benches: 77% No salvage values

Initial Investment Costs Annual Equivalent Costs Adjusted for the Tax Saving from Accounting Depreciation c = (C - Ds) x r x (1+r) n (1+r) n - 1 c = annual equivalent investment cost ($) C = initial investment cost ($) Ds = present value of tax saving from accounting depreciation ($) r = after-tax real discount rate (%) n = lifetime of investment item (yrs)

Assumptions After-tax Real Cost of Capital: 4.73%. –50% Borrowed Capital - Cost: 8.5% –50% Equity Capital - Cost: 14% calculation: Before-tax nominal discount rate (%): R’ = (P e * r e ) + (P b * r b ) After-tax nominal discount rate(%): r’ = R’ * (1-t) r = 1+r’ 1+i - 1 After-tax real discount rate(%):

Assumptions: Product prices: 4 1/2” Geranium - $1.85/pot 6” Poinsettia - $4.10/pot 1204 Impatiens flat - $6.75/flat Labor: Head grower: $32,800/year Hourly wage: $9.0/hour Worker’s compensation: 20%

Profit/pot & Profit/SFW GH floor Price Shrinkage Total before tax return Material costs Overhead costs Labor costs Total before tax costs Income tax Tax savings from depreciation Initial investment costs Annual equivalent investment costs adjusted for the tax saving

Profit/SFW Greenhouse Floor

Risk Analysis of Cost Uncertainty Crisis = Risks + Opportunities

Risk Analysis Approaches Sensitivity analysis “What if”scenarios Simulation: Sample random values from a probability distribution for each variable The golden rule: each one of these scenarios must be potentially observable in real life Excel can do all the above

Sensitivity Analysis Answer the question: How will the decision be affected if the cost value changes? Changes in variables generally did not affect the profitability rankings among systems

Sensitivity Analysis of Labor Costs

Sensitivity Analysis of Initial Investment

Simulation Variable Probability Distributions Identify by minimum, most likely and maximum values Sample Size: –300 simulations for each production models

Results of Simulation

Conclusions: Growers adopted ZRS technology mainly because it improved their operation quality, not environmental concerns Best system for each crop category –Small Potted Plants: Dutch Movable Trays –Large Potted Plants: Flood Floors (?) –Bedding Crop Flats: Flood Floors

Conclusions: Changes of the major cost variables did not affect the profitability rankings of the alternative investment projects

Implications to Growers: Make more informed decisions when adopting ZRS technology Choose the system(s) best suited for the operation and financial goals Apply the analysis methods to other investment projects in the future Growers can utilize the existing computer technology for the analysis Excel was used for this study

New Technology Economic Issues Environmental Issues Sustainable Horticultural Businesses Horticultural Issues