Know Your Costs

December 11, 2008 - 11:25

Times are uncertain. The financial markets are in crisis. Competition in the U.S. greenhouse industry has become fierce. Rising energy costs have made energy a much more significant cost for heating and shipping than ever before. Domestic competition, off-shore production, a weakening and stressed economy, and the growth of the mass market add up to produce downward pressure on prices.

How do you, as a producer, make money with shrinking margins, rising costs and demanding customers? With so many crops, you may not know which are making money and which are losers. The first step is to determine your costs.

A Useful Application

The Greenhouse Cost Accounting program, developed in Microsoft Excel and distributed by Rutgers University, lets you determine the costs and returns of each crop produced. The latest version of this user-friendly cost-accounting software also calculates costs of crops produced outdoors as well as greenhouse crops. The program generates information showing total costs and net returns per unit. It enables growers to easily determine the profitability of each crop. From this information, you can separate the winning crops from the losers. This software also will help you make decisions on pricing, identifying and reducing unprofitable production costs and increasing sales of profitable crops.

New features of the program include calculating key ratios and percentages of each overhead cost, and providing information from the balance sheet. In addition to analyzing your actual costs, you can use the program as a planning tool to analyze the impact of increased energy costs and prices as well as changes in marketing mixes, or other changes you are considering.

A Real-Life Example

I used figures from a 2003 survey of Northeast greenhouse growers with an average size of 138,759 square feet, sales of $2.2 million and net returns of $211,152 or 9.5 percent (Table 2).

Since 2003, the cost of fuel oil has tripled. The cost-accounting program allows you to make changes in the data to see how it affects net returns and financial ratios. I inflated fuel prices to 2008 levels and kept other costs and prices the same. Net losses are $27,788 or -1.7 percent. Using the program to test hypotheticals shows that if we take these 2008 costs but inflate prices of crops by 5 percent, the net returns become positive (Table 3). While the figures in Tables 2 and 3 are actual results of surveys of Northeast growers, Tables 1 and 4 are hypothetical production schedules constructed to match the actual income from the 2003 surveys. The program allows you to look at “what if.” For example, all crops — both greenhouse and outdoors — are profitable in the 2003 example (Tables 1 and 4). But when we increase energy costs to the 2008 level, geranium flats and poinsettias become unprofitable.

The program gives these results on a per-crop, per-unit and per-square-foot basis. If we then increase prices by 5 percent, the net return becomes positive (Table 3), but poinsettias are slightly unprofitable, losing one cent per square foot a week.

With rising fuel costs and competitive markets, you as the manager need to pay close attention to the bottom line and how changes in costs impact it. The Greenhouse Cost Accounting program will allow you to do “what if” planning on paper instead of making bigger, real mistakes in the greenhouse.

About The Author

Dr. Robin G. Brumfield is a specialist in farm management. She can be reached at brumfield@aesop.rutgers.edu or (732) 932-9171 ext. 253.

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