Proceedings
of The World Avocado Congress III, 1995 233 - 244
FINANCIAL
MODELLING: A LOGICAL MEANS OF EVALUATING TREE ESPACEMENT FOR AVOCADO ORCHARD
DEVELOPMENTS
R. W. L. Snaddon N.A.S. Reay
H L Hall & Sons (Farms) (Pty) Ltd H L Hall & Sons (Farms) (Pty) Ltd P 0 Mataffin 1205 P 0 Mataffin 1205
South
Africa South Africa
Abstract
Good investment decisions
require a feel for the relationship between risk and reward. Tree espacement is
often approached from a purely horticultural perspective with a view to
maximizing tons of production per hectare as early as possible. In this paper a
simple model is developed which allows the financial impact of different tree
espacements to be examined by setting off establishment, maintenance and
production costs against future income streams for different economic
scenarios. Results are presented for a set of horticultural and economic
assumptions and the efficacy of the model in aiding investment decisions is
demonstrated.
1. Introduction
Given fixed land, water and
climatic resources, tree espacement and cultivar selection become the most
significant decisions in planning new avocado orchards. The cultivar, soils and
climate will dictate individual tree growth rates and fruit yields. Tree
espacement will ultimately dictate development costs and, together with orchard
thinning requirements, the cash inflows and outflows for the investment.
Land and other costs dictate that better returns are generally achievable with intensive development involving sophisticated irrigation systems in order to improve yield quantum and reliability (Toerien, 1984). In the drive to increase unit orchard yields, tree planting densities have been increased as high as 800 trees/ha (Köhne et al., 1990, Köhne et al., 1992). At these densities, early overcrowding becomes an issue and chemical treatments and girdling have been investigated as means of delaying overcrowding and improving early yields (Köhne, 1992). These investigative efforts notwithstanding, precious little has been published on the financial risks and rewards associated with going to higher densities.
This situation can perhaps
best be summed up by the findings of the Special Workshop held at the Second
World Avocado Congress (Köhne et al., 1992), i.e.
"Plant as many trees as is economically feasible using precocious
cultivars and thin with courage. The closest initial tree spacing that is
economically feasible is the spacing that attains high enough yields to make
some profit before the first thinning".
While providing some help to
planners, these guidelines do not specify what "some" profit is and
they do not address the financial risk in trying to achieve this.
The authors
believe that each investment's cash flows and risks thereto will be uniquely
affected by cultivars, soils, climates, markets and environmental factors such
as pests, hail and frost and that the adequacy of the profit margin should be
matched to the risk. In this paper,
we describe a simple computer modeling method which has been used to great advantage
in the authors' organisation for making orchard development decisions,
particularly with respect to initial tree espacement.
2. Modeling Methodology
Financial
modeling of an investment such as an avocado orchard development requires the
calculation of the anticipated cash inflows and outflows over the investment
period. Avocado orchards are long term investments and one is typically looking
at an investment period of 10 years or longer with cash flows calculated over 1
year intervals. Modern spreadsheet computer software provides the ideal tool
for making such calculations and many of the commercial packages have built-in
functions for calculating the financial parameters for carrying out the desired
financial analysis.
The methodology reported
in this paper is based on the unit tree. In this, the basic information
required to calculate cash inflows and outflows from income and expenditure is
derived from a knowledge and analysis of information on a per tree basis. This
is then expanded to a per unit area (per hectare) basis once the number of
trees per hectare (tree espacement) is specified.
Cash inflows result from the
sale of fruit. These can be modeled by understanding the expected yield per
tree over time and converting these to cash inflows per hectare by specifying
tree espacement and the revenue per ton of yield which is expected to be
realised from the sale of the fruit. Obviously, the price obtained at sale will
depend on a number of factors such as size, quality and market dynamics. In the
examples presented in the paper tree yields have been taken from the work of
Wolstenholme et al. (1991) and revenues per ton from the authors' understanding
of the historical pricing which South Africa avocado farmers have been able to
achieve for various grades of fruit on the domestic and European markets.
Cash outflows result from the
costs incurred in establishing and maintaining the orchard and in harvesting,
packaging, marketing and distributing the crop. Depending on individual
circumstances, investors may also wish to set off certain indirect costs such
as administration charges and financing costs. These different costs will vary
from country to country around the world and from organisation to organisation.
In the examples presented in the paper, the authors have relied on historical
costing data derived from their organization's long standing involvement in the
South African avocado industry. Costs are expressed on a per hectare basis and
in the context of tree espacement, various costs such as establishment, fertilizer and energy
costs will depend on planting density and must be accounted for accordingly.
The beauty of spreadsheet
software is that it allows revenues and expenses to be set up and calculated in
logical tabular form and it permits easy and flexible examination of the impact
of changing various parameters, values and assumptions. A typical spreadsheet
layout for an investment calculation of this nature is presented in Table 1.
3. Demonstration Examples
Fuerte and Hass at planting
densities of 440 trees/ha and 880 trees/ha are modeled to demonstrate the
efficacy of the method in assessing the financial viabilities of different tree
espacements. The individual tree yields used for these two cultivars are
presented in Figure 1. Other key assumptions are set out in Table 2.
The following scenarios are
investigated:
3.1 Thinning
It is assumed that no special
treatments such as paclobutrazol sprays or special practices such as girdling
are deployed to affect tree growth and yield and that thinning occurs before
there is any adverse impact on individual tree yields. It is assumed then that
Hass, the more vigorous cultivar, requires thinning at years 6 and 8 for 440
trees/ha and at years 4, 6 and 8 for 880 trees/ha. Fuerte is thinned at year 8
for 440 trees/ha and at years 6 and 8 for 880 trees/ha. The impact of having to
thin Fuerte one year earlier, i.e. at years 5 and 7, at the higher density (880
trees/ha) is also examined.
3.2 Hail
Hail damage is a real factor
in many of the avocado production areas of South Africa. The impact of
incurring hail damage in year 4 which reduces yield for that and the subsequent
year by 80% and 40% respectively is investigated.
4. Results & Discussion
In this paper cumulative cash
flow and internal rate of return (IRR) are used to evaluate the different
orchard investment scenarios. The IRR represents the "overall" rate
of return produced by the cash flows over the investment period. The pay back
time and the risk expressed in terms of the maximum negative position of this
investment are revealed by the cumulative cash flow results.
Figure 2 represents the
result for the base case investment scenarios for Hass at the two espacements.
There is very little difference in the IRR for the two espacements; the pay
back time is not significantly better for the 880 trees/ha and the maximum
negative exposure at year 2 is nearly R8000/ha (21.7%) greater for the denser planting. Given the extra
management effort required, an investor would seriously question whether the
high density planting is warranted under these conditions. If, however, we look
at the hail damage scenario for these two espacements (Figure 3), the higher
density orchard fairs significantly better, suggesting that if hail is a real
concern, the 880 trees/ha would be the preferred route.
The Fuerte base
case results suggest there is more merit in the higher density planting if
thinning is only necessary at years 6 and 8 (Figure 4). The pay back time is
significantly shorter and the IRR is 36.97% at 880 trees/ha vs 27.78% at 440
trees/ha. However, should thinning be required at years 5 and 7 instead, the
440 trees/ha would give a higher return with lower risks. Figure 5 represents
the results for the hail damage scenario with 440 trees/ha thinned at year 8
and 880 trees/ha thinned at years 5 and 7. Here, the lower density investment
is the outright winner with an IRR of 13.40% at 440 trees/ha vs 0.57% at 880
trees/ha.
The above
results have been put forward simply to illustrate how the modeling method may
be used to assist in decision making. Examination of these limited number of
scenarios demonstrates the fact that there are no cut and dry answers to
the question of appropriate spacing. The modeling method does, however, allow
the investor to set down what is believed to be the most likely to occur -under
the investor's circumstances and then to examine the sensitivity of the
investment outcome to the various assumptions made and to the impact of
different physical scenarios. To this end, the impact of cultural practices
such as girdling to increase pre-thinning yield and paclobutrazol sprays to
delay thinning can easily be modeled as can alternate bearing.
5. Conclusion
Computer spreadsheet
technology provides an inexpensive and effective means of evaluating the
pros and cons and the risks and rewards associated with avocado orchard
investments and the choice of tree espacement. The limited results presented in
this paper clearly demonstrate that there are no simple right or wrong answers
to the question of appropriate planting density. Rather, one should expect a
unique outcome for each physical situation planned and the appropriate decision
on tree espacement should be taken after weighing all relevant factors such as
climate and management capability and balancing the investor's own appetite for
risk and reward.
References
Köhne, J.S. and Kremer-Köhne,
S., 1990. Results of a high density avocado planting. South African Avocado
Growers' Association Yearbook. 13:31-32.
J.S.Köhne, 1992. Increased yield through girdling of young Hass
trees prior to thinning. South African Avocado Growers' Association
Yearbook, 15:68.
Köhne,
J.S., and Whitney, G.W.,
1992. Workshop 4: Tree spacing or tree thinning - which is best? Proc. Sec.
World Avocado Cong. 679.
Toerien, J.C., Meyer, N., and
Milne, D.L., 1984. The economies of avocado production in the Tzaneen area. The
Citrus and Subtropical Fruit Journal.
4 - 8.
Wolstenholme, B.N., Kaiser,
C., and Palmer, P., 1991. Yield potential of intensively managed avocados in
the Natal Midlands - the early bearing years. South African Avocado Growers'
Association Yearbook, 14 : 15-18.