June 2004

Cost of Producing Pansies By Brian Whipker

Profitable production of pansies is dependent upon the knowledge and control of production costs. Growers who understand production costs will be better prepared to make decisions on the optimal number of plants to produce and price to establish. The costs presented here should be useful to current growers who wish to compare their own production expenses and for potential growers in determining whether to begin growing fall pansies. The data was collected from a North Carolina firm that specializes in producing high-quality pansy plants for the landscape and retail garden center market. Costs are calculated for the 2003 growing year and compare the production of deep 1801 and deep 606-cell pack flats.

Costs

Costs can be categorized as either variable or fixed. Variable costs, also called direct costs, are costs that are incurred directly when growing a plant. Variable cost items include the pots, plants, root substrate, chemicals and hourly labor used to grow the crop. These items' costs are easily allocated to a specific crop because the materials used to produce the crop and the production practices followed are known. The variable costs for an 1801 flat were $2.04 (Figure 1, left) and $3.22 for a 606 flat (Figure 2, page 111).

The primary reason for the $1.18 higher costs with the 606 flat was because twice as many plugs were used. The cost of the pansy plugs was the single highest variable cost item, representing 45 percent of the variable costs of the 1801 flat and 57 percent of a 606 flat. The flat, insert, label and substrate are the next highest expenses at $0.83 or 41 percent of the variable costs for an 1801 and $0.97 or 30 percent for a 606 flat. Transplant labor was more expensive with the 606 flat because fewer flats can be planted per hour with the extra time needed to plant the 36 plugs. Similar to what was found in earlier cost studies with garden mums and ornamental cabbage, chemicals used on pansies are only a small percentage of the production costs and were less than 2.5 cents per flat.

Fixed Costs, also called overhead or indirect costs, are incurred whether or not a crop is produced. They include items like management salaries, depreciation, insurance, interest, repairs, marketing and taxes. Fixed costs are the general operation expenses of the greenhouse facility. These costs are usually the hardest to determine and to equitably allocate to each crop grown. In general, for greenhouse operations, fixed costs are allocated to a crop on a cost-per-square-foot-per-week basis.

Because pansies fill in a production niche during the fall, fixed costs for this firm were allocated based on a percentage of the growing year. Greenhouse production occurs 10 out of 12 months. Pansy production occurs over a four-month time span. Therefore, 40 percent of the annual fixed costs were allocated to the pansies and other fall crops such as poinsettias and garden mums. (The remaining 60 percent of fixed costs was allocated to the spring crops.) The fixed costs were further divided between 1801 flats and 606 flats based on the percentage of growing area they required. Overall, 16 percent of the annual fixed costs were allocated to the 1801s and 12 percent to the 606s. Fixed costs for an 1801 flat totaled $4.51 per flat (see Figure 1, page 106) and $4.94 for a 606 flat (see Figure 2, page 111).

The depreciation expense was fairly high for this firm because of their method of allocating fixed costs, their investment in capital equipment and their use of an accelerated depreciation schedule. Firms utilizing new machinery and equipment will also have a high depreciation expense, while firms that rely on used equipment will have lower depreciation expenses.

Allocating costs

As stated earlier, fixed costs can be allocated to a crop in a variety of ways. Because this firm allocated these expenses as a percentage of the production time, this means that pansies carry a greater percentage (28 percent) of the fixed costs than would be allocated if costs were based on square-foot-weeks. Crops such as poinsettias, which have a longer production time and require more fuel to heat the greenhouse, should be allocated a larger amount of the overhead expenses. In essence, these fixed costs are being under-allocated to the poinsettia crop.

Is this an appropriate approach? It all gets back to philosophy of the firm. They have excellent growers who they keep on staff year round and they want to protect the profit generated from the spring crops. Growing pansies fills a niche to keep the growers employed, provides cash flow and contributes revenue to cover fixed expenses. So with that philosophy, using the percentage of production time approach to allocate fixed costs to the pansy crop is appropriate. Other firms may decide to allocate costs based on the inputs required or allocate a higher percentage of the fixed costs to the spring bedding plant crop. Those firms may find their fixed expenses to be as much as 50 percent lower than reported for this greenhouse.

Shrink

Even under the best production practices, a certain percentage of the crop will not be marketable due to poor growth, insects, disease or damage. The input costs used in the production of these non-marketable plants have to be accounted for in some way by the operation. This is accounted for by adjusting the production cost by a shrink factor. In this case, a 10.7-percent shrink was calculated for the 1801 flats and 8.3-percent shrink for the 606 flats. Losses added $0.78 to the cost of an 1801 flat and $0.73 to a 606 flat. Shrink is an expense that must be managed. As profit margins continue their downward trend in the greenhouse industry, the shrink percentage will have a huge impact on the total profitability of the firm and will require a greater focus by greenhouse operators in the future.

Total production costs per 1801 flat, including the shrink, were $7.34 (see Figure 1, page 106). It cost $8.89 to grow a 606 flat (see Figure 2, page 111).

Profitability

By adding the total variable costs and total fixed costs together, this provides the total cost of producing fall pansies. The profitability of the crop is directly related to the price received. The profitability per 1801 flat was $2.41 (a 33-percent profit margin). The 606 flats were grown at a loss of $1.17 per flat. Why the difference in profitability between an 1801 and 606? The primary reason for the profitability difference is the sales price: 1801s were sold for $9.75 per flat and 606s sold for $7.72 per flat. A contributing factor was also the higher plug costs for the 606 flats.

Losses are not a good thing and should be avoided. This grower would need to evaluate options to try to make 606 flats more profitable. One option is to stop growing them, but 606s are required for the retail trade and not growing them would negatively affect sales of other fall crops. A second option would be to increase production of 606s to spread out more of the fixed costs. Of course there would have to be a market for the extra 606s, and establishing one would take time. Otherwise, the extra flats could turn into losses and increase the shrink percentage. Option three would be to try to increase the sales price, but the price competition in the area may limit that approach. The fourth option would be to try to decrease the shrink percentage, but factors such as weather and market conditions limit the ability of a grower to manage it. A fifth option is to increase the production of 1801s if the market can absorb them to offset the losses of the 606s. A sixth option is to calculate production costs for the entire firm and evaluate the distribution of fixed costs. Maybe a greater amount of the fixed costs should be shifted from pansies to the spring crop?

Question to ask

The overall question to ask: Was it profitable for the operation to grow pansies? Reflecting back to the overall philosophy of the operation the answer is yes. The total profit of $72,164.53 from the 1801s was greater than the loss of $22,170.78 with the 606s. The total profit with pansies was $49,993.75. The firm achieved their goal of covering fixed costs, preserving the profit from the spring season and adding almost $50,000 to the bottom line.

This illustrates the importance of knowing each crop's profitability and its contribution to the firm's overhead expenses. Ideally, a firm should calculate the production costs for all crops grown, evaluate the allocation of fixed costs and determine profitability of each crop. Some crops may not be profitable, but if they contribute to covering the fixed costs or fill a void in the production mix to encourage buyers to purchase from you, then one may be required to grow them. The only way to properly evaluate an operation's profitability is to invest the time and energy into the calculations.

Using the methods outlined above will enable pansy growers to compare the profitability of their pansy crop. Of course, costs will vary among greenhouses according to their amount of capitalization in equipment and structures and their ability to purchase inputs at lower costs. Therefore, each operation will need to calculate their specific production costs in order to determine their own profitability.