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 and develop software for growers to estimate their production cost. The main objective is to provide investors and other existing farms with an accurate method for estimating the cost of production customized to their farm operation. The software is located at the website www.hawaiianagriculturalproducts.com, which provides convenient and fast methods for estimating the cost of production. It can be used for planning new orchid farms and expanding the existing operation. It can also be used for various managerial decisions, such as sensitivity analysis and farm budgeting.
II. Industry Analysis
The potted orchid industry has continued to grow in the past 5 years. The total potted orchid sales increased from 2.316 million pots annually to 3.382 million in 2003, an annual increase of 9%. The total sales grew from $9.957 million in the 1999 to $ 13.73 million in 2003, an annual increase of 7.6%. (HASS, Hawaii Department of Agriculture). It is expected the trend will continue.
III. Methodology and Cost Assumptions
Telephone and personal interviews were conducted with growers across the State of Hawaii from April to September 2005, in order to determine the costs associated with producing potted orchids by each variety. Fifty-two producers participated in the study; 43 that produced only potted orchids were used for estimating the cost of production.
The production of the growers surveyed amounted to 2.78 million potted plants and accounted for about 70% of the total predicted orchid production in the year 2005. (Given the estimated annual increase of in sales of potted orchids is 9%, the estimated total sales in 2005 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 each category is not disclosed.
Production coefficients are estimated based on the information provided by the growers surveyed and validated with researchers and previous publications. ( ) These coefficients are kept constant in estimating the cost of production. Two different coefficients are used to estimate the cost of production, one for farms that produced less than 25,000 and the other for farms producing 25,000 pots or greater per year. These are labor cost per plant, fertilizer cost per plant, chemical cost per plant, plants per SF, packaging material cost per plant, pot cost per plant, and media cost per plant. The costs of insurance, repair, and taxes are the same for both sizes and a percentage of the total fixed cost is used. It was assumed that it takes two years for the plant to mature. Certain coefficients were linearly extrapolated as related to the size of operation. Smaller operator uses a ratio of 4/5 shade houses to greenhouses and in a larger operation, the ratio is 1/8. The larger operation produces 2.17 plats per square foot while smaller operators produce .82 plants per square foot. These coefficients can be changed as new information comes up.
IV. Industry Structure
The orchid industry consists of many small farms and a few large farms. The larger farms are more 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., which produced 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 farms produced less than 25,000 pots per year, supplying 10% of the total pots produced. The average production per farm amounted to 11,748 pots per year. 40% of the farm surveyed produces more than 25,000 pots per year, and contributed 90% of the total production. The average production amounted to 230,182 pots per year.
V. Production Cost
Only farmers who produce potted orchids were utilized to estimate the average cost per plant. Those who produce cut flowers were not utilized in the analysis. Information was obtained 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, as well the cost of these inputs was used to estimate the average cost per pot. The sample was divided in two groups: small growers who produce less than 25,000 pots per year, and the larger ones who produce 25,000 and over.
To use the software individuals have to log on to www.hawaiianproducts.com, where they are required to provide information on average monthly bills including electricity, phone, internet, cell, and other utilities, price paid per unit of inputs, and monthly administration expenses, including management, secretary, and office help. Other overhead includes all office costs: office supplies, computer, etc. per month, hourly wages in dollars, as well as benefits as a percentage of the hourly wages, 0–100, and the interest rate they pay on financing their equipment. Growers need to enter the number of each orchid species growers are planning to produce, all equipment and machinery cost, as well quantities and price for each item. They can also change the life expectancy according to the depreciation schedule.
All results are dependent upon the initial production coefficients and the user's data entered into the outlined text boxes. The various results are only as accurate as information entered by the users.
The software was tested to determine the cost of production for small farms. The average data collected from the survey was used to estimate the average production cost among small growers. The cost of producing 11,748 pots was calculated using the software and is presented below. (See table 1).
| Variable Costs | Per Plant | Per Square Foot | Farm Total | ||||||
| Amount | Dollars | Amount | Dollars | Amount | Dollars | ||||
| Labor Cost | 0.10 | hrs | 0.9775 | 0.08 | hrs | 0.7960 | 1,175 | hrs | 11,484 |
| Water Cost | 24.00 | gal | 0.0240 | 19.54 | gal | 0.0195 | 281,952 | gal | 282 |
| Fertilizer | 0.06 | lbs | 0.0605 | 0.05 | lbs | 0.0493 | 711 | lbs | 711 |
| Chemicals | 0.0713 | 0.0581 | 838 | ||||||
| Pots | 0.0700 | 0.0570 | 822 | ||||||
| Media | 0.1000 | 0.0814 | 1,175 | ||||||
| Machinery Fuel | 0.01 | gal | 0.0420 | 0.01 | gal | 0.0342 | 173 | gal | 494 |
| Packing and Shipping Material | 0.0320 | 0.0261 | 376 | ||||||
| Interest on Operating Capital | 0.1377 | 0.1122 | 1,618 | ||||||
| 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 per hour with a fringe benefit of 15%. Interest cost on the operating capital that is used will be short 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 $36,843 per 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 the average production cost among small growers. The cost of producing pots was calculated using 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 $8.50 per hour with a fringe benefit of 15%. Interest cost on operating capital used will be short term interest of 10%. All input used in production except for management is paid. At an average of $3.50 per pot the gross sales amounted to $805,637 and the total cost amounted to $563,973 per farm. The estimated return on management amounted to $241,664 annually.
Table 2: Orchid Cost of Production for Larger Growers producing an average of 230,182 pots per year
| Variable Costs | Per Plant | Per Square Foot | Farm Total | ||||||
| Amount | Dollars | Amount | Dollars | Amount | Dollars | ||||
| Labor Cost | 0.10 | hrs | 0.9775 | 0.15 | hrs | 1.5065 | 23,018 | hrs | 225,003 |
| Water Cost | 24.00 | gal | 0.0240 | 36.99 | gal | 0.0370 | 5,524,368 | gal | 5,524 |
| Fertilizer | 0.06 | lbs | 0.0605 | 0.09 | lbs | 0.0932 | 13,926 | lbs | 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 | 0.01 | gal | 0.0420 | 0.02 | gal | 0.0647 | 3,393 | gal | 9,670 |
| Packing and Shipping Material | 0.0320 | 0.0493 | 7,366 | ||||||
| Interest on Operating Capital | 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 larger farms. This is due to economy of scale which lowers the cost of production per unit. The large growers use the resources provided more efficiently and many larger farms have vertically integrated their farm operation.
VI. Conclusion
Finally, the software for cost of production for potted orchids has been developed, and is located at the website, www.hawaiianagriculturalproducts.com, and can be modified to include other horticultural commodities. This will provide a convenient and fast method for estimating the cost of production. The growers need to be trained to use this site as part of a farm management training program that can be conducted statewide.
REFERENCES
Hawaii Agricultural Statistics Service. 2003. Statistics of Hawaii Agriculture 2002. Hawaii Department of Agriculture, Honolulu, HI.