Economics of

Texas 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

Citrus Industry Value of Output

Table 1. 2001-2002 Texas Citrus Aggregate Wholesale Values.Fresh Shipment Sales $61,073,646

Juice Shipment Sales $16,102,000

Gift Fruit Sales* $3,668,000

Local Fruit Shipment Sales $1,422,222

TOTAL $82,265,868Notes: Shipment data obtained from TVCC Final Report, June 15, 2002 Wholesale values obtained from industry sources, and represent conservative estimates. Gift Fruit Shipment Sales represent retail sails.

Impact of Citrus and Other RGV CropsTable 2. Measures of Economic Impacts of Rio Grande Valley Crops, 2001

REGIONAL GROSS REGIONAL VALUE REGIONALPRODUCTS VALUE OF PRODUCTION ADDED INCOME EMPLOYMENT

Corn $6,427,200 $5,524,630 196.6

Cotton $18,658,400 $13,804,271 456.1

Grain Sorghum $32,372,683 $27,826,597 990.3

Oilseeds $387,000 $353,387 14.7

Sugar Cane $44,908,432 $37,056,883 1,208.0

Vegetables $152,753,625 $119,719,228 4,946.6

Citrus $82,265,868 $38,865,862 2,495.3

Livestock $57,336,000 $46,136,396 3,166.5

Hay/Alfalfa $4,253,000 $2,999,860 340.3

Nursery $53,340,000 $45,497,306 2,831.8

Other $23,312,000 $19,884,387 1,237.6

TOTAL $476,014,207 $357,668,808 17,883.7Notes: The employment numbers are in FTE job equivalents , and represent roughly three part-time jobs Value of production data are from USDA NASS; impact multipliers are from IMPLAN The sugar cane value of production is extrapolated from 2000 NASS data The citrus value of production represents the 2001-2002 wholesale shipments value of juice, fresh fruit, gift fruit, and local fruit sales .

Citrus and Total RGV Ag Value

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 both the GrapefruitJuice and Fresh Markets

Grapefruit: Florida vs. Others

Florida has the corner on the Orange Juice Market, but California owns the Fresh Market

Juice Market fruit is heavily discounted compared to 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…

Florida Supply & Prices

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)

Production Costs

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

Records for 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)

Year 2 CostsGrapefruit Investment Summary: Grapefruit Investment Analysis: Gross Returns,============================================= Variable Cost, Fixed Cost, Allocated Items, andBreak-even Year: 7 years Net Returns, Year 1 - 20.

======================================================Net Present Value: $352 per acre GR VC FC AL NR discounted at Year 1 $0 $1,491 $47 $150 ($1,688)

5% Year 2 $17 $660 $257 $150 ($1,050)Year 3 $225 $675 $257 $150 ($857)Year 4 $450 $741 $257 $150 ($698)Year 5 $675 $741 $257 $150 ($473)Year 6 $930 $741 $257 $150 ($218)Year 7 $1,350 $741 $257 $150 $202Year 8 $1,775 $774 $257 $150 $594Year 9 $1,775 $774 $257 $150 $594Year 10 $1,775 $774 $257 $150 $594Year 11 $1,775 $774 $257 $150 $594Year 12 $1,775 $774 $257 $150 $594Year 13 $1,775 $774 $257 $150 $594Year 14 $1,775 $774 $257 $150 $594Year 15 $1,775 $774 $3 $150 $848Year 16 $1,775 $774 $3 $150 $848Year 17 $1,775 $774 $3 $150 $848Year 18 $1,775 $774 $3 $150 $848Year 19 $1,775 $774 $3 $150 $848Year 20 $1,775 $774 $3 $150 $848

Urban Growth Projections in 2050

Managing Risk• Natural Risks

tropical wind damage water shortages Hard freezes (avg. every 11 years!!)

• Economic DecisionsPurchasing insuranceInvesting in protective technologyHow much can I afford to pay for these?How does risk affect investment scenario?

Commodity Lost Crop Sales Full Time JobEquivalent Loss

Cotton $ 7.8 Million 318

Other Row Crops $ 1.9 Million 97

Citrus $ 5.1 Million 368

Sugarcane $ 7.9 Million 517

Fall Vegetables $55.0 Million 1,984

TOTAL $77.7 Million 3,284

Losses Attributable to Inadequate Losses Attributable to Inadequate Irrigation Water in 1998 DroughtIrrigation Water in 1998 Drought

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. EXAMPLE ONE: Top Working vs. Conventional Orchard ReplacementConventional Orchard Replacement

Preparation Cost: $ /acrePreparation Cost: $ /acre

Labor Expense:Labor Expense:

$ /acre$ /acre

Materials Cost: $ /acre

One Year Old Top-Worked TreesOne Year Old Top-Worked Trees

(ca. 3.5’ to 4’ tall)(ca. 3.5’ to 4’ tall)

Three Year Old Valencias Three Year Old Valencias Top-Worked onto GrapefruitTop-Worked onto Grapefruit

Yield=ten tons per acreYield=ten tons per acre