This is the final in a series on orchard performance in the context of financial management.
This article considers some elements associated with orchard income (fruit sales*).
The series flow has discussed the following:
- Although there are many things which affect our business, we must not become despondent about those which are outside our control. Rather, we must work hard to effectively manage the things we can control, and that means taking time out each season to work on business planning, a key element of which is the annual budget.
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We must have a clear understanding of our Equity Ratio—this represents the proportion of the business we own. The higher our Equity Ratio, the lower our debt.
When debt is low we have a better capacity to withstand at least two poor growing/trading years, or to take up a business opportunity when one arises.
In essence, is our business in a weak position, or a strong position? -
We should know the critical things that our bottom line must meet each year. We must be able to pay family drawings, make debt repayments, invest in orchard development and, hopefully, have something left over to invest off-farm.
Whatever the total of this figure (plus an allowance for tax) our business should be generating this cash surplus in more years than not. That will be reflected in our accountant’s annual Profit & Loss account (in simple terms, add depreciation back to the net profit). - Finally, our annual cashflow budget should determine if our production and marketing systems can produce the income that must be generated to meet all our expenses (many of which are fixed) and produce the surplus we need to meet our family and capital commitments.
This article considers some elements associated with orchard income (fruit sales*).
The income equation—orchard area
As I have presented before, the primary production income equation is simply:
Income = area (hectares) x yield (bins per hectare) x price ($ per bin)
Considering area first, this is normally one of the biggest limiting factors on our business. That is, the land area we have is all we have.
To maximise income, we will plant up most of our land, we will plant varieties that yield well, and we will try hard each season to get the best market return we can.
However, some orchardists who keep some land free of trees may not be trying to maximise income, but may be able to better-manage the problem that arises when an old block has to be pushed out—they will have some land available to plant the new block before the old one must be removed and may be able to avoid some of the income volatility that arises during the nonproductive period of a young block.
Over time, it is likely that income will ultimately peak on a fixed area of land. That is the point when pressure will build to buy more land, because the ‘natural’ inflation (typically 4% to 5% per year on Australian farms) of fixed costs will tend to reduce profit.
When a son or daughter returns to the farm and starts their own family there will also be pressure to expand because two, or more, families are now dependant on the fixed area.
Orchards which are close to urban areas can find expansion difficult because land prices may reflect housing value rather than agricultural value. A commentator such as Phil Ruthven has advocated for many years that farmers do not have to own land. As superannuation money tries to find new agricultural outlets for investment, there may be more opportunities in the future for land to be leased rather than bought.
The income equation—yield
The higher our average yield the higher our potential income. That is, a block that yields 50 tonnes per hectare should produce more income than if it produces 40 tonnes per hectare from the same fixed inputs.
This yield fact is certainly true for processing fruit grown in the Goulburn Valley. Despite processor incentives to improve fruit quality, growers will optimise returns by picking as much fruit as they can from each block.
Market fruit works in a different way from processing fruit. For most growers, marketable yield is critical, not total yield, as discussed next.
Yield is influenced by factors such as choice of rootstock, an effective nutrition program, good canopy management, and gear which can help avoid the worst seasonal conditions.
Although it may not be feasible to install netting or fans for some growers, the other factors are directly under grower control.
The income equation—return per bin
Bin return is influenced by two key elements:
- The general market price for each grade of fruit and for each variety—market price is generally determined by supply and demand each season.
- Fruit quality—including size, skin finish, flavour and texture.
Of these two factors, fruit quality, or packout has the most important influence on price, regardless of fruit grade.
Growers who can produce the varieties that customers want, to a quality that keeps them wanting more, will achieve the highest returns.
Packout is influenced by factors such as canopy management, crop load, harvest management, and gear which minimises severe weather events.
Again, there are enough of these factors under grower control to provide opportunities to improve packout.
Conclusion
There are many jobs to do on an orchard each season, and it can be difficult for growers to identify the important tasks that could make a favourable impact on business performance.
Understanding what these are takes some time, data and analysis.
I suggest that undertaking some simple financial analysis each year, as I have tried to demonstrate in this series, is a good starting point.
By understanding your equity position, identifying what cash surplus you need to achieve, and developing a simple budget that tries to understand and fulfil that need, you will ask yourself many of the necessary questions as to how work must be done.
*I have drawn some agronomic information from the AgFirst website, specifically: Factors Critical to Orchard Profitability, July 2001. Please check their website for details.
