Part 1. Comparison of economic performance

The capital cost of orchard development and the rate of yield accumulation both increase with increasing tree density. A key economic issue is whether the extra costs of greater tree numbers are compensated for by extra revenue from higher early yields.

This question is explored with a computer model to compare the profitability of 3 plant densities (667, 1250 and 1950 trees/ha). These 3 trees densities could represent typical spacings for MM106, M26 and M9 rootstocks respectively. However, the focus of comparisons is on plant densities rather than specific rootstocks or varieties. The structure and assumptions and data used in the model are summarised in the Appendix.

Comparisons are made using Internal Rate of Return (IRR) which is the time adjusted or the discounted cash flow measure of the expected rate of return expressed as a percentage.

Results

The key drivers of orchard profitability are fruit value and marketable yield. Both appear to have more influence on profitability than tree density. A fruit value of $16/CE and an average yield of 2,450 packed cartons/ha appears to be necessary to achieve an acceptable level of profitability (IRR > 10%) from a new apple planting. IRR increases with increasing tree density but at a diminishing rate. IRR for densities of 667, 1,250 and 1,905 trees/ha at a fruit value of $16/CE are 11, 14 and 15% respectively.

On the other hand, orchard systems fail to achieve profitability if insufficient marketable yield is achieved. IRR drops to zero when average yield from densities of 667, 1,250 and 1,905 trees/ha is 1850, 1740 and 1650 packed CEs/ha respectively (where fruit value is $16/CE).

Development

Orchard development costs are considerable, (15, 22 and $30k/ha for densities of 667, 1,250 and 1,905 trees/ha) yet only relatively small gains in productivity are required to pay for extra investment in better irrigation systems, trees or tree support. For example, an additional average annual production of 65 CEs/ha is required to fund the extra cost of tree support to 2.3m and micro-sprinkler irrigation compared with tree support to 1.7m and drip irrigation.

Variable Costs

The cost of many activities is estimated to be lower on smaller trees. The following variable costs are used:

Tree training and pruning costs appear to be significantly lower for small trees. Thinning costs may be similar for all densities especially if considerable fruit removal is necessary on precocious, dwarf trees. Picking is easier on smaller trees although it can be difficult in practice for the grower to `capture' these benefits. Freight and packing are large variable costs and are not directly related to tree size.

Variable cost proportions:

Higher density systems appear to deliver small but significant savings in variable costs. Variable costs for densities of 667, 1,250 and 1,905 trees/ha were $5.29, $4.93 and $4.64/CE respectively.

Risk Analysis

Crop failure has a greater impact on higher density plantings because early yields are more essential to achieve profitability with more intensive systems.

Financial risk is increased by greater exposure to debt arising from increased development expenditure. A higher rate of return may be needed for higher density plantings to offset that risk.

Intangibles

There are many factors affecting profitability which have not been accounted for in this analysis. These include:

· Any effects of tree density on fruit quality and value,
· Any effects of tree size on how effectively orchard operations can be carried out.

Part 2: Developing Profitable Intensive Plantings

Profitable apple plantings require varieties that will perform well in the orchard and will receive a high price over a reasonable period into the future. Achieving a high price requires an apple to be:

· enjoyable to eat,
· different in appearance,
· consistent in quality,
· and in short supply.

These requirements rule out many current varieties. However, T273 is a new but as yet unproven variety that could, in my view, achieve these requirements. This variety appears to give a relatively vigorous tree and a medium sized apple. So, like Gala, it could suit higher densities and more dwarfing rootstocks.

Production Royalties

Upon commercialisation, royalties for T273 will likely be collected on a production rather than tree based method. This raises the question of the effect of a royalty collection method on orchard profitability.

A 2% production based royalty on orchard gate return is approximately equivalent to a $1.50 per tree royalty. A 3% production based royalty reduces IRR for 1905, 1250 and 667 tree densities compared to a $1.50 tree royalty by 0.6, 1.0 and 1.3% respectively.

Development options

There are a number of ways to obtain trees for planting. These could include growing your own, buying grafters and working them over or arranging purchase on favourable terms (contract grown). A number of scenarios were tested with the model and results are summarised below:

The `planting and grafting over for $4.00 per tree' option appears less attractive than purchasing average quality trees for $7.50 if grafting delays fruit production by 1 year.

Reducing tree cost by arranging `contract growing' with a nursery for $6.25 per tree improves profitability marginally. `Growing your own' at a cost of $4.00 per tree improves profitability slightly at low densities and more significantly at high densities (+1% for 667 trees/ha increasing to +3% at 1905 trees).

Purchasing `high quality contract grown' trees shows further benefits, particularly at higher densities, if yield performance is improved as a result of higher tree quality (+1, +4 and +6% for 667, 1250 and 1905 densities). (See 'improved' yield profile in the Appendix).

The profitability of new developments improves significantly if higher returns and packouts are budgeted for. The 'plant and graft' option still trails the planting of contract grown trees which produce IRR's of 21, 26 and 28% at densities of 667, 1250 and 1905 trees/ha.

Planting high quality, contract grown trees which produce improved production, higher packouts (85%) and higher prices ($18/CE) show IRR's of 23, 31 and 35% at densities of 667, 1250 and 1905 trees/ha.

Conclusions

The orchard development model perhaps simply confirms what we already know:

· The key drivers of orchard profitability are fruit value and marketable yield,
· That higher density systems can be more profitable provided things go to plan,
· The profitability of new developments is maximised by planting the best value trees available (highest quality and lowest price) and ensuring that they grow and produce to their full potential.

Appendix

Model Structure

Key assumptions and data