CHARACTERIZATION OF APPLE PRODUCTION IN THE NORTH
INTERIOR OF PORTUGAL: A Microeconomic Perspective1
João Rebelo2
Abstract
The aim of this paper was to characterise in microeconomic terms apple production in the north
interior of Portugal (region of Trás-os-Montes e Alto Douro) so that the indicators presented can be
compared with those verified in other situations. Taking into account the complexity of the fruit cluster,
where various conditioning factors intervene, we presented the framework of apple production (general
aspects, typology of the fruit farms and the marketing chain) and evaluated, from a financial perspective,
the feasibility of setting up apple orchards with 4, 8 and 12 ha respectively. In order to do so, we described
and quantified in some detail the investment, current benefits and costs, cash-flows and net benefits
involved and considered the optimal dimensions. Furthermore, we also described the costs of investment
and storage/packing associated with the predominant systems of conservation (refrigeration), normalisation
and packing existing in the region.
1. Introduction
The aim of this paper is to characterise and evaluate in microeconomic terms the
activity of apple production in the north interior of Portugal of which the standard results
presented may be used as basis for a comparison/extrapolation (benchmarking) in other
contexts, in particular those regions of Romania that present identical/similar
characteristics.
Naturally competitive advantage in fruit growing, as in of any other
sector/activity, is dependent on the capacity to manage and retain the value added within
its own filière. Figure 1, adapted from Porter (1990), summarises the determinants
(elements and relations) which should be considered in the assessing of the competitive
advantages of the fruit cluster, as a means of detecting the strengths, weaknesses, threats
and opportunities and on the basis of which one can stipulate the most appropriate
strategies and tactics for competitive success.
Figure 2 illustrates the typical market flow for apple production. While conscious
that for clear appreciation of the whole sector the systemic approach included in figure 1
should be adopted, as well as the various activities of the filière inherent in the
production and commercialisation of apples, in this paper we restrict the analysis to the
1
2
The information included in this paper reflects the academic background of the author (namely his PhD
in Economics), his experience as a small apple producer in the county of Lamego, and his fruitful
contacts with fruit farms and conservation, normalisation and packing plants in the region.
Department of Economics and Sociology of the University of Trás-os-Montes and Alto Douro.
1
third and fourth rectangle of figure 2, with special emphasis on the economic conditions
of apple production. To this end, we present the indicators related to the framework of
the production activity in the north interior of Portugal (general aspects, typology of
apple farms and the marketing chain), to the financial and economic evaluation of the
apple orchards (investment, farm costs and benefits, net benefits and cash-flows and
optimal dimension) as well the description of conservation, normalisation and packing
plants (investment associated with the dominant type of plants and the costs of
conservation, normalisation and packing). We conclude with some final remarks.
2
FIRM STRATEGY STRUCTURE
AND RIVALRY
 Type of farms
 Producer organisations
 Rivalry experience regarding
price and quality
 Agricultural policy
FACTOR CONDITIONS
 Physical resources
(land, water, etc.)
 Human resources
(quantity, skills, etc.)
 Capital resources
(amount and cost)
 Infrastructures
(transports and
communications)
DEMAND CONDITION
 Home demand
conditions
 Demand size and
growth pattern
 Internationalisation of
domestic demand




RELATING AND
SUPPORTING SECTORS
Suppliers competitive
advantage
Relationships with suppliers
and institutions
Professional associations
Use of the rejected fruit
Figure 1 – The competitive advantage of the horticultural cluster
3
FARM INPUTS
Rootstocks; agro-chemicals;
tractors and tools; lubricants;
irrigation material; refrigeration,
normalisation and packaging
equipment.
equipment; etc.
FARM RETAIL SUPPLY
FARM PRODUCTON (APPLES)
(Technical and economic conditions)
MARKETING CHAIN
Spot market
Own vertical integration
Farmers firm
Co-operatives
FOOD WHOLESALING
FOOD SERVICES
OUTLETS
FOOD RETAILING
CONSUMERS
Figure 2 – Typical marketing flow to apple production
4
2. Framework of the apple production activity in the north interior of Portugal
2.1. General aspects
Portugal is a country with a population of roughly 9.9 million distributed over an
area of 91,950 km2 with extremely varied horographic and climatic conditions. Typically
it has mild Mediterranean climate which is moderated by the influence of the Atlantic
Ocean. The summers are hot and dry, whereas the winters are relatively mild with the
exception of a few days where the temperatures can fall to below zero. The north interior
is a mountainous region with a wider temperature range than the rest of the country.
On a national scale the main fruit crops3 are oranges (20,383 ha), apples (23,967
ha), pears (13,087 ha), peaches (10,977 ha), figs (8,403 ha), grapes (7,518 ha) cherries
(3,656 ha) and kiwis (1,117 ha).
As is the case with most farm products, Portugal is a net importer of fresh fruit. In
the 1996/97 season its degree of a self-sufficiency degree was 69.3% against a
consumption of 104 kg/per-capita (table 1). The apple production met only 81.4% of
internal demand4, the annual consumption per-capita5 being 27 kg. Portugal imports
primarily from Spain, France, Argentina and Chile, 36%, 32%, 14% and 8%
respectively. The Golden Delicious variety made up 35% of the total imports. It exports
mainly to Spain (about 65% total) and 18% of the total apples exported are used as
rejects/seconds consumed in the manufacturing of cider.
Table 1 - Supply balance of fresh fruit in 1996/97(tons)
Production
(tons)
Imports (tons)
Fresh fruit
818,000
430,000
Apple
236,000
67,000
Exports
Human
consumption
per-capita (kg)
Self-sufficiency (%)
86,000
104
69,3
13,000
27
81,4
(tons)
Source: Planning and Agri- food Policy Division; Ministry of Agriculture, Rural Development and Fisheries
3
4
5
Data from July 1999, kindly supplied by the Planning and Agri-food Policy Division of the Ministry of
Agriculture, Rural Development and Fisheries.
We emphasise, however, that in the last few years due to bad climatic conditions, production has been
lower than that obtained under normal conditions.
Of the 290,000 tons used only 270,000 tons are for human consumption, losses constituting the
differential (6,9%).
5
In the last decade there has been a gradual process of converting apple orchards6
with the uprooting of the obsolete trees and the planting of new ones; effects which will
be felt in a near future. From this arises the expectation that Portugal will be able to reach
a degree of apple self-sufficiency of over 100%, without increasing the cultivated area,
that is, via an increase in productivity.
Although apple orchards are geographically spread out practically throughout the
country, they are most prominent in the north interior of Portugal (counties of Lamego,
Tarouca, Armamar, Moimenta da Beira and Carrazeda de Ansiães), making up about
20% of the total area of the country and 40% of the national production.
Due to the climatic conditions, namely the occasional late frosts, annual
production is subject to strong variations. In order to reduce the risks linked to these
climatic variations and to reduce the negative impact of the incomes of fruit growers, the
Portuguese government has set up an insurance scheme for apple trees from the third
year of plantation onwards, and subsidises about 60% of the insurance premium. Most of
the fruit growers take out this insurance policy.
2.2. Typology of apple farms
The apple farms are exclusively private almost all carry out their activity in own
rustic property.
The area of farms producing of apples varies considerably, between 0.3 ha and 50
ha with the most frequent being between 2 and 4 ha.
Even though the apple tree is the main crop, most of the farmers also grow grapes
and vegetables for household consumption, other fruit (cherries, peaches and dried fruit)
and even raise cattle (cows and sheep). Although this type of farming does not allow the
maximum benefit from the economies of scale associated with large scale of monoproduction, it does allow for pooling of risks associated with the climatic factors, market
conditions and even the scope economies (synergy) in the use of resources, for example,
use of year-long permanently available labour.
6
Financial help in the form of subsidies contributed to this conversion both at the start and to establish
new orchards. European Agricultural Guidance and Guarantee Fund (EAGGF-Guidance) granted this.
6
Apple production is made up of the Golden Group (about 30%), Red Delicious
(about 40%) and the rest, varieties like Granny Smith, Bravo Esmolfe (a specific
Portuguese variety) and Reineta. Recently, although on a small scale, Galaxy and Fuji
orchards have been set up. A few years ago seasonal varieties like Vista Bella, Jersey
Mac and Summered were tried out, but these were not commercially successful. The
market has also not been totally receptive to the Jonagold and Jonagored varieties.
Regarding management, there are family-owned farms as well as firm-run farms,
with the former being more prominent. A farm is classified as family owned if it meets
the following requirements:
-
50% of the labour is carried out by the household members who benefit from at
least 50% of the total income.
-
The labour does not exceed two workman units (WMU), where 1 WMU equals
240 days (1,920 hours) of work/year.
Firm-run farms are those which do not meet these requirements.
Taking into account the income and the labour time involved in the farming
activity by the farmers, there are both full-time farmers (person whose income derived
from farming is equal or superior to 50% of their global income and who spends more
than 50% of their total labour time on the same farm) and part-time farmers (person who
does not fulfil the former conditions), the former being the dominant category.
In conclusion, there are various types of farms and farmers, who generally fit into
the following categories:
-
Part-time farmers with multiple activities, where farming only complements the
income and activity of other occupations in which they are either employer or
employee. Generally these farms are small.
-
Full-time farmers have farms with areas between 4 and 40 ha.
2.3. Marketing chain
Typically there are five systems for conservation, normalisation, packing and
commercialisation of the fruit.
7
a) Direct marketing to the intermediary/fruit dealer (spot market). In this
case the farmers sell the produce during/after the harvesting season to
intermediaries7, thus investing only in the production sector. In the everincreasing concentration of distribution of agri-food products this type of
commercialisation has been losing importance to alternatives approaches.
b) Downstream vertical integration, with sales to intermediaries (incomplete
vertical integration). In this case the farm invests only in conservation
(refrigeration) equipment and in some cases in small grading systems, selling
the fruit to intermediaries. This option is more frequent in farms of average size
(between 5 and 10 ha). Oversee these fruit growers have the capacity to
refrigerate 27,000 tons (an average of 200 tons per fruit grower).
c) Downstream vertical integration on the part of the fruit grower, with
direct sales in the consumer market (complete vertical integration). This
system is adopted by bigger farms (generally with an area of over 20 ha), those
which usually sell the apples essentially to the wholesalers, supermarkets and
hypermarkets. This alternative implies investing in refrigeration, normalisation,
packing and distribution equipment. As a whole, these fruit growers have the
capacity to refrigerate 16,000 tons (an average of 800 tons/fruit grower).
d) Co-operatives (formal co-operation). There are two fruit co-operatives in the
region capable of refrigerating 8,000 tons (about 60% controlled atmosphere
and 40% normal atmosphere). Despite subsequent technological changes, these
units were first installed in the late 1960's and early 1970's as a result of the
first boom in apple tree plantation and to meet the demands of the farmers.
These organisations whose aim is to associate small-scale farmers, have had
difficulties in penetrating key markets, mostly due to the organisational
complexity and the type of management inherent in the legal status of the cooperative firms (Vitaliano, 1983) and to the free-rider problem on the part of
the associates (leaving the co-operative when production is low and prices are
better through other means of commercialisation).
7
In some cases the buyer does picking.
8
e) Producer firms (informal co-operation). These are private companies run by
farmers who co-ordinate their commercial activity horizontally, installing a unit
which stores (refrigerates), packs and normalises the fruit of its associates who,
as in the co-operative, are autonomous in the regarding management decisions.
Essentially the difference between this and a co-operative is the legal form and
the concomitant differences in organisational and management. In the last
decade this has been the preferred option. Four units with the capacity to
refrigerate 15,000 tons (60% controlled atmosphere and 40% normal
atmosphere) have been constituted in the region. Regarding forward individual
integration, these units allow simultaneous economies of scale to be reached,
namely in transaction costs and the capacity to negotiate with firms involved in
the final distribution (supermarkets and hyper-markets) which is ever and more
concentrated and absorbs an increasing share of the market (over to 50%).
The option to sell the fruit via one the above means is a strategic choice where
various factors are involved, both at the level of capital/risk and management. Peterson
and Wysocki (1998) suggest some factors to take into consideration when deciding to opt
for the strategy of co-ordination/vertical integration.
In point 4 we will summarise the investment and respective exploitation costs
associated with the systems referred to in b), c) and e).
3. Financial and economic evaluation of the apple orchards
In this section we present a set of indicators relevant to the investment, costs and
gross benefits of exploitation which allow us to calculate the associated net benefit of
alternative orchards with 4, 8 and 12 ha. Underlying the choice of these three options
was, essentially, the possibility of mechanisation using either a hired or self-owned
tractors and also the fact that, in region’s case, 4 ha is considered to be the minimum size
for the farm to be placed in the category of full-time farmer. The monetary values are all
given in US dollars ($).
9
3.1. Investment
The investment associated with the setting up of orchards varies naturally with the
concrete conditions of each farm. In the region, besides the direct investment in
plantations (preparation of the ground, correction of soil conditions, fertilisation, plants,
supports, wire and labour) there is also the need to trap water supplies, store water and
install of watering systems. The latter two are important because the availability of water
is more and more one of the critical factors to consider when deciding on investment in
plantations.
a) Investment in plantations (cost/hectare and global).
In order to calculate the investment per hectare, we consider the following
assumptions:
- Three types of soil exist, which influence the preparation of the ground for
plantation: Deep soils only need deep ploughing; soils on flat land need deep
digging and levelling; half slopes soils need terracing, deep digging and
levelling.
- All soils in the region are acidic and poor in organic matter, therefore, in need
of organic matter and fertilisers (phosphorous and potassium).
- Apple trees are planted at intervals of 4.5x1.5m2 (1,400 units/ha), on a central
axis and using M9 rootstocks.
- The irrigation is carried out using drip irrigation. The droppers are at distance
of 1.25 m from each other, that is, 1,680 droppers/ha (1,400x1.5m /1.25m),
each of them with a capacity of 4 litres/hour. There is a total consumption of
1,512m3/season/ha in an average annual period of watering for 3 months and
2.5 hours/day.
- The average investment in water accessing and storage (bore holes, wells,
ponds, tanks, etc.) is of about $2,000/ha.
- The average cost of drip irrigation is $2,600/ha.
In table 2, we summarise the investment in the various components of plantation
sizes, for the three types of soils and areas, including the access and storage of water and
drip irrigation. Naturally, besides the monetary economies (for example, low prices
associated with greater volumes of purchases and/or services), if the plantations are
established in a single block it is possible to obtain technical economies (less
consumption of some parts of the investment), therefore, some scale economies.
Nevertheless, besides the difficulty of quantifying these savings they are not considered
relevant, so we have not included them in our analysis.
10
Table 2 - Investment in planting and watering
Unit
Cost
($)
Preparation soil/ha
-Caterpillar tractor (hours)
-Tractor (hours)
Correction/fertilisations soil/ha
-Lime (tons)
-Organic materials (tons)
Rootstocks/ha (units)
Supports/ha (units)
Wire/ha (kg)
Labour/ha (man days)
Total plantation/ha
Accessing and storage water/ha
Drip irrigation/ha
Total investment/ha
Orchard with 4 ha
- Plantation
- Accessing and storage water
- Irrigation
- Total
Orchard with 8 ha
- Plantation
- Accessing and storage water
- Irrigation
- Total
Orchard with 12 ha
- Plantation
- Accessing and storage water
- Irrigation
- Total
No sub-soil
ploughing
Quant. Value ($)
42
18
20
360
48
70
2
4,6
0,8
21
5
6
1,400
280
500
5
240
420
2,800
1,288
400
105
5,613
2,000
2,600
10,213
Plane soil
Quant. Value ($)
Slope soil
Quant.
Value ($)
50
8
2,100
144
80
8
3,360
144
5
6
1,400
280
500
5
240
420
2,800
1,288
400
105
7,497
2,000
2,600
12,097
5
6
1,400
280
500
5
240
420
2,800
1,288
400
105
8,757
2,000
2,600
13,357
22,452
8,000
10,400
40,852
29,988
8,000
10,400
48,388
35,028
8,000
10,400
53,428
44,904
16,000
20,800
81,704
59,976
16,000
20,800
96,776
70,056
16,000
20,800
106,856
67,356
24,000
31,200
122,556
89,964
24,000
31,200
145,164
105,084
24,000
31,200
160,284
b) Investment in mechanisation (tractor and tools)
In the region, typically, farms of a smaller size (with an area of less than 4 ha) do
not have their own tractor, farms of average size have a tractor of between 35 and 45 HP
(an average of 40 HP) and tools, whereas the bigger farms have tractors of 75 HP and the
respective tools.
On the other hand, regardless of the size, all fruit farms are mechanised. The
smaller ones hire tractor, the average-sized and bigger farms have their own. This means
an investment in tractor and tools according to options A and B described in table 3.
11
Table 3 - Investment in tractor and tools ($)
Option A
Tractor 75 HP
Tractor 40 HP
Cable 5,000 Kg
Cable 3,125 kg
Sprayer 1000 L with turbine
Sprayer 400 L with turbine
Scarificador
Disk harrow
Plough
Other tools
Total
Option B
29,000
16,700
2,800
2,000
5,500
2,300
520
1,200
670
1,500
24,890
520
1,200
670
1,500
41,190
3.2. Farm costs and benefits
The values given for the costs and benefits associated with the production of apples
assume the following underlying data:
-
The orchards begin their cycle of production in the third year, reaching a stable
production from the 5th year onwards. Between the 5th and 15th year the
average production is 40 tons/ha.
-
Of the total production, 10% is sold as rejects/seconds for agro-industrial use
(manufacture of cider) and the rest is sold for human consumption (consumed
fresh).
-
The average selling prices on leaving the farm are: apple for human
consumption, $235/ton; apples for industry, $36/ton.
-
Annually, fertilisation is done with organic matter and fertilisers. In the phase
of full production this represents a cost of $240/ha.
-
The average cost of pharmaceuticals treatments for a full-production orchard is
13/14 per season, with an annual cost of $580/ha in pharmaceuticals. This may,
however, vary according to the location and annual climatic conditions.
-
The average cost of energy used on irrigation is $200/ha.
-
The harvest insurance for production of 40 tons, where the producer must pay
about 40% of the total premium (the other 60% is paid by the state) amounts to
$310/ha.
12
-
Where the farms own the tractors and tools, the cost ($2.6/hour) is only for the
fuel and lubricants. Besides these costs, one still has to consider from the 3rd
year onwards, there are annual maintenance and repair costs (4% of the value of
the equipment). The same cost applies to drip irrigation.
-
The tractor and tools have a life of 10 years with a depreciation of 10%/year.
-
The life of the plantation investment is 15 years, the life of accessing and
storage water and the materials for drip irrigation is also 15 years, with an
annual depreciation of 6.67%/year.
-
As is the case for the investment, there can be technical and monetary
economies associated with the increase in size in the variable costs, which are
of little importance and which do not change the cash-flow.
Tables 4 and 5 show bimonthly use of labour (man days) and mechanised traction
(hours), as well as the respective variable costs until the year of stable production, at
which point they too stabilise.
Table 4 - Labour use and expenditure
Labour use/ha (man days)
- January/February
- March/April
- May/June
- July/August
- September/October
- November/December
- Total year
Wage/day ($)
Orchard with 4 ha
- Labour use (days/year)
- Expenditure ($)
Orchard with 8 ha
- Labour use (days/year)
- Expenditure ($)
Orchard with 12 ha
- Labour use (days/year)
- Expenditure ($)
1st year
2nd year
3rd year
4th year
2
2
2
2
2
4
2
2
2
2
8
4
4
4
20
10
21
12
21
40
21
10
4
4
4
31
2
55
21
12
4
4
4
54
2
80
21
40
840
48
1,008
160
3,360
220
4,620
320
6,720
80
1,680
96
2,016
320
6,720
440
9,240
640
13,440
120
2,520
144
3,024
480
10,080
660
13,860
960
20,160
13
5th year
Table 5 – Tractor use and expenditure
1st year
Tractor use/ha (hours)
- January/February
- March/April
- May/June
- July/August
- September/October
- November/December
- Total year
Owned tractor -Cost/hour ($)
Hired tractor – Cost/hour ($)
Orchard with 4 ha
- Tractor use (hours/year)
- Expenditure ($)
Orchard with 8 ha
- Tractor use (hours/year)
- Expenditure ($)
Orchard with 12 ha
- Tractor use (hours/year)
- Expenditure ($)
2nd year
3rd year
4th year
5th year
2
4
4
4
0
0
14
2.6
16
3
6
6
6
0
0
21
2.6
16
4
8
8
8
6
0
34
2.6
16
5
10
10
10
8
0
43
2.6
16
6
10
10
10
14
0
50
2.6
16
56
896
84
1,344
136
2,176
172
2,752
200
3,200
112
291
168
437
272
707
344
894
400
1,040
168
437
252
655
408
1,061
516
1,342
600
1,560
Table 6 shows other variable costs up to the point when the orchard reaches full
production. Table 7 includes the gross benefits. Both the costs and the gross benefits are
considered to be stable from the year of stable production onwards.
Table 6 - Other variable costs ($)
Fertilisation/ha
Pharmaceuticals treatments/ha
Electric power/irrigation/ha
Harvest insurance/ha
Total cost/ha
Orchard with 4 ha
Orchard with 8 ha
Orchard with 12 ha
1st year
2nd year
3rd year
50
80
105
200
300
400
100
120
160
52
350
500
717
1,400
2,000
2,868
2,800
4,000
5,736
4,200
6,000
8,604
14
4th year
185
500
200
160
1,045
4,180
8,360
12,540
5th year
240
580
200
310
1,330
5,320
10,640
15,960
Table 7 - Gross benefits
1st year
2nd year
3rd year
4th year
5th year
9
1
10
18
2
20
36
4
40
2,115
36
2,151
4,230
72
4,302
8,460
144
8,604
8,604
17,208
25,812
17,208
34,416
51,624
34,416
68,832
103,248
Production/ha (tons)
- For fresh consumption
- Industrial use
- Total
Production value/ha ($)
- For fresh consumption ($235/ton)
- Industrial refuse ($36/ton)
- Total
Gross benefits ($)
- Orchard with 4 ha
- Orchard with 8 ha
- Orchard with 12 ha
3.3. Net benefits and cash-flows
Taking into account the values of the costs and gross benefits presented above
(tables 7 and 8) and using as reference the investment in the intermediate situation of
farms on flat soil (table 2), at this point we present the net benefit inherent to each type of
farm (tables 8, 9 and 10).
Table 8 - Net benefits, orchard with 4 ha on flat land ($)
0 year
1 – Gross benefits
2 – Investment
3 – Variable costs
3.1 – Labour
3.2 – Tractor
3.3 – Other variable costs
3.4 – Equipment maintenance (4%)
3.5 – Total (3.1+...+3.5)
4 – Cash-flow (1-2-3.5)
5 – Depreciation of assets
5.1 – Plantation (6.67%)
5.2 – Accessing/storage water (6.67%)
5.3 – Irrigation (6.67%)
5.4 – Tractor and tools (10%)
5.5 – Total (5.1+....+5.4)
6 – Net benefits (4-5.5)
1st year
2nd year
840
896
1,400
1,008
1,344
2,000
-48,388
3,136
-3,136
-48,388
2,000
533
694
0
3,227
-6,363
3rd year 4th year
8,604
17,208
5th year
34,416
48,388
15
4,352
-4,352
3,360
2,176
2,868
416
8,820
-216
4,620
2,752
4,180
416
11,968
5,240
6,720
3,200
5,320
416
15,656
18,760
2,000
533
694
0
3,227
-7,579
2,000
533
694
0
3,227
-3,443
2,000
533
694
0
3,227
2,013
2,000
533
694
0
3,227
15,533
Table 9 - Net benefits, orchard with 8 ha on flat land ($)
0 year
1 – Gross benefits
2 – Investment
3 – Variable costs
3.1 – Labour
3.2 – Tractor
3.3 – Other variable costs
3.4 – Equipment maintenance (4%)
3.5 – Total (3.1+...+3.5)
4 – Cash-flow (1-2-3.5)
5 – Depreciation of assets
5.1 – Plantation (6.67%)
5.2 – Accessing/storage water (6.67%)
5.3 – Irrigation (6.67%)
5.4 – Tractor and tools (10%)
5.5 – Total (5.1+....+5.4)
6 – Net benefits (4-5.5)
1st year
2nd year
3rd year 4th year
17,208
34,416
5th year
68,832
121,666
1,680
291
2,800
2,016
437
4,000
6,453
-6,453
6,720
707
5,736
1,828
14,991
2,217
9,240
894
8,360
1,828
20,322
14,094
13,440
1,040
10,640
1,828
26,948
41,884
-121,666
4,771
-4,771
-121,666
4,000
1,067
1,388
2,489
8,944
-13,715
4,000
1,067
1,388
2,489
8,944
-15,397
4,000
1,067
1,388
2,489
8,944
-6,727
4,000
1,067
1,388
2,489
8,944
5,150
4,000
1,067
1,388
2,489
8,944
32,940
3rd year 4th year
25,812
51,624
5th year
103,248
Table 10 - Net benefits, orchard with 12 ha on flat land ($)
0 year
1 – Gross benefits
2 – Investment
3 – Variable costs
3.1 – Labour
3.2 – Tractor
3.3 – Other variable costs
3.4 – Equipment maintenance (4%)
3.5 – Total (3.1+...+3.5)
4 – Cash-flow (1-2-3.5)
5 – Depreciation of assets
5.1 – Plantation (6.67%)
5.2 – Accessing/storage water (6.67%)
5.3 – Irrigation (6.67%)
5.4 – Tractor and tools (10%)
5.5 – Total (5.1+....+5.4)
6 – Net benefits (4-5.5)
1st year
2nd year
186,354
2,520
437
4,200
3,024
655
6,000
9,679
-9,679
10,080
1,061
8,604
2,896
22,641
3,171
13,860
1,342
12,540
2,896
30,638
20,986
20,160
1,560
15,960
2,896
40,576
62,672
-186,354
7,157
-7,157
-186,354
6,000
1,601
2,081
4,119
13,801
-20,958
6,000
1,601
2,081
4,119
13,801
-23,480
6,000
1,601
2,081
4,119
13,801
-10,630
6,000
1,601
2,081
4,119
13,801
7,185
6,000
1,601
2,081
4,119
13,801
48,871
Table 11 includes the calculus of the labour net income yield per workman unit
(LI/WMU), in the year of stable production, for each type farm type, on the basis of the
respective cash-flows (tables 8, 9 and 10). We followed the methodology adopted by the
European Union and then by Portugal in order to calculate the LI/WMU to evaluate the
economic feasibility of farm projects. In this context:
- No value was attributed to the land;
16
- An opportunity cost of 4%/year was attributed to the investment made in land
improvements (to cover investment in plantations and supply and storage
water);
- An opportunity cost of 5% was attributed to the working capital (value of the
equipment) and petty cash (this is equal to 50% of the annual variable costs,
excluding depreciation);
- Each WMU corresponds to 240 days or 1,920 hours of work /year.
Table 11 - Labour net income
1 – Net benefits ($)
2 – Salaries paid ($)
3 – Rent paid ($)
4 – Equipment ($)
5 – Circulating capital –50% of the variable expenditures ($)
6 – Total of working capital 3+4+5 ($)
7 – Remuneration attributed to working capital, 5% of 6 ($)
8 – Land improvements ($)
9 – Remuneration attributed to improvements land, 4% of 8 (%)
11 – Labour income, 1+2+3-7-9 ($)
12 – Total labour used (WMU)
13 – Labour net income, 11/12 ($/WMU)
Orchard
4 ha
Orchard
8 ha
Orchard
12 ha
15,533
6,720
0
10,400
7,828
18,228
911
37,988
1,520
19,822
1.33
14,903
32,940
13,440
0
45,690
13,474
59,164
2,958
75,976
3,039
40,383
2.67
15,125
48,871
20,160
0
72,390
20,288
92,678
4,634
113,964
4,559
59,839
4.00
14,960
In table 12 we present the annual cash-flows, the respective internal rate of return
(IRR) at a constant price and also the critical point of production (CPP)8 in the year of
stable production. The value of the cash-flows includes the purchase (replacement) of the
tractor and tools in the 10th year, as well as their residual value (50% of the purchase
value) in the 15th year.
8
The CPP represents the volume production for which the exploitation obtains zero profit, that is, PxQc
= AVCxQc + FC (P - AVC), where: P = unit selling price; Qc = CPP; AVG = average variable cost; FC
= fixed cost. It is necessary for the orchards to undergo maintenance annually whether there is
production or not, so 80% of cost considered as variable (tables 8, 9 and 10) are considered fixed costs.
That is FC is the sum of 80% of the variable costs of exploitation with the annual depreciation and the
remuneration attributed to the working capital and land improvements. The AVC is the quotient of the
variable costs and the respective volume of the normal production (160, 320 and 480 tons, respectively)
17
Table 12 - Cash-flows, IRR and CPP
Year
Orchard
4 ha
Orchard
8 ha
Orchard
12 ha
-48,388
-3,136
-4,352
-216
5,240
18,760
18,760
18,760
18,760
18,760
18,760
18,760
18,760
18,760
18,760
18,760
-121,666
-4,771
-6,453
2,217
14,094
41,884
41,884
41,884
41,884
41,884
16,994
41,884
41,884
41,884
41,884
54,329
-186,354
-7,157
-9,679
3,171
20,986
62,672
62,672
62,672
62,672
62,672
21,482
62,672
62,672
62,672
62,672
83,267
16%
15%
15%
215
20
18,181
93
23
215
17
36,499
184
23
215
17
55,455
280
23
1 – Cash-flows
0
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
2 – IRR (internal rate return)
3 – CPP (critical production point)
3.1 – Unit price ($/Kg)
3.2 – Unit variable cost ($/kg)
3.3 – Total fixed costs ($)
3.4 –CPP (tons) = 3.3/(3.1-3.2),
3.5 – CPP/ha (tons)
3.4. Optimal dimension
Theoretically, in economic terms, the optimal dimension, or the exploitation
optimum corresponding to the optimal dimension, is the production volume, which
allows production at a minimum unit cost (long-run minimum average cost). In
competing industries, where the firm is price-taker, that level of production is
simultaneously the most economic (average minimum cost) and the most profitable.
In practice, it is not easy for the farming firms whose activity involves a
multiplicity of elements and inter-relations, to determine the optimal dimension or the
optimum combination of productive factors (figures 1 and 2). This is intimately related to
the respective marginal productivity and with the prices/opportunity costs of the factors,
18
those that do not always have an objective or quantifiable character. Additionally, in fruit
crops the sunk costs inherent in some components of the investment are not without
value, which conditions farms entry into or exit from the activity, consequently
influencing the optimal dimension.
Therefore, in relation to this topic, we can conclude from the practice observed in
the apple orchards in this region that:
a) The way the activity is carried out, the technical economies associated with
scale are low. The continuous exploitation of the area cultivated allows some
technical economies, especially in the consumption of tractor use and labour,
but this is of little relevance.
b) The optimum level of operation is compatible with various dimensions, that is,
the activity has a structure of costs of the type shown in figure 3. The long-run
average cost (LAC) has the shape of a long U.
$/Unit of
output
LAC
Figure 3 – Long-run average cost for apple orchards
Output
c) In the choice of the adequate dimension, factors such as the availability of
labour (especially in the case of farming households), tractor costs, the capital
available, the activity carried out and the risk associated with the activity
should be considered.
d) Table 13 summarises the bimonthly labour availability in the case of 1, 2 and 3
WMUs and the use in the stable production year, for the types of farms
19
mentioned. A comparison between the availability and the consumption allows
one to deduce that: the size of 4, 8 and 12 ha are compatible with farms with
the availability of 1, 2 and 3 WMUs respectively, despite having to use
external labour during the pruning and picking season. Excluding the peak
season, there is always unused available labour, hence, the importance of
complementing apple production with other activities. One of these activities
may be the conservation and later the commercialisation of the apples (a
typical case in most fruit farms of the region).
e) When we consider the use of tractor and tools (table 13), in economic terms,
comparing the fixed and variable costs of a self-owned tractor and one that is
hired, we have the following situation:
- Difference in the variable costs $13.4;
- Fixed costs, 19% of the purchase cost (maintenance and repair - 4%,
depreciation - 10%, imputed costs - 5%), giving $4,729 and $7,826 for
option A and B, respectively;
- It is only economically viable to buy a tractor and tools if these are used for
at least 353 hours ($4,729/$13.4), 7.06 ha and 584 hours ($7,826/$13.4),
11.68 ha, in options A and B respectively
Table 13 – Labour availability and use of labour and tractor
January/
February
Availability (man/days)
- 1 WMU
- 2 WMU
3 WMU
March/
April
May/
June
July/
August
September/
October
November/
December
Total
40
80
120
40
80
120
40
80
120
40
80
120
40
80
120
40
80
120
240
480
720
48
16
16
16
216
8
320
Labour use (man/days)
-
4 ha
-
8 ha
- 12 ha
Tractor use (hours)
- 4 ha
- 8 ha
12 ha
96
32
32
32
432
16
640
144
48
48
48
648
24
960
24
48
72
40
80
120
40
80
120
40
80
120
56
112
168
0
0
0
200
400
600
20
f) In reality, as long as there is a market in which to sell apples it and all the
parameters referred to in this paper are met, namely at the production level and
the sales prices, apple production is a profitable activity. This is clearly seen in
the value of IRR. However, farms have to produce more than 23 tons/ha (CPP)
in order to have a profit.
g) Assuming that the farmer has enough know-how, namely professional training
which allows him to carry out the activity, when deciding to invest in apple
orchards the following inter-related determining elements (among others) must
be present:
- The production factors involved in the activity must be in good technical
and economic conditions;
- Technical and climatic conditions must be appropriate;
- Land tenure secure for a period of at least 15 years;
- Thorough analysis and choice of appropriate circuits of conservation,
packing and commercialisation of the apple, not forgetting the influence of
market factors;
- Financial conditions of the farmer, namely available financial resources to
invest and finance the farm deficit in the first years; we cannot forget that
this is an activity with no immediate profits and that orchard maintenance
with the underlying costs of the first years are determining factors in the
success of the activity;
- In order to reduce individual risks and strong negative variations in the
income, it is absolutely essential that collective systems capable of
financing these setbacks be set up, for example, harvest insurance.
4. Conservation, normalisation and packing plants
As was mentioned in 2.3, there are three predominant types of plants linked to the
conservation, normalisation and packing of fruit: incomplete vertical integration,
complete vertical integration and horizontal co-ordination of commercialisation via firm/
21
producer organisation. We shall now discuss the cost of the investment associated with
each, and also the costs of conservation, normalisation and packing.
4.1. Investment
We shall describe the initial fixed assets cost for each of the options.
a) Farmers who proceed with an incomplete individual vertical integration,
having the capacity to refrigerate 200 tons, selling the apples to intermediaries
without normalisation or packing. The direct investment associated with this
type is shown in table 14.
Table 14 - Investment in storage plants of 200 tons
Quantity
Unit cost ($)
Total cost ($)
Warehouse/Construction (m2)
400
200
80,000
3 freezers (tons)
200
450
90,000
Plastic containers (tons)
200
140
28,000
1
15,600
15,600
Fork-lift of 1,500 kg
a) Sub-total
Overheads (10% de a))
213,600
21,360
Total investment
234,960
b) Farmers who proceed with a complete individual integration. These have
freezers with a capacity of 800 tons (600 tons normal temperature and 200 tons
controlled temperature), selling the fruit in the final market after the
indispensable processes of conservation, normalisation and packing. The direct
investment associated with this is shown in table 15
22
Table15 - Investment in storage plants of 800 tons
Quantity
Warehouse/Construction (m2)
Unit Cost
($)
Total Cost
($)
1,200
200
240,000
6 Freezers (tons)
800
450
360,000
Plastic containers (tons)
800
140
112,000
Semiautomatic grading equipment (2 tons/hour)
1
73,000
73,000
Fork-lift of 1,500 kg
2
15,600
31,200
Scales
7,800
Lorries for transporting fruit
52,000
Office furniture
4,200
a) Sub-total
Overheads (10% of a))
880,200
88,020
Total investment
968,220
c) Farmers who commercialise their fruit via producer organisations. These
have the capacity to refrigerate 3,500 tons (1,400 tons at a normal temperature
and 2,100 tons at a controlled temperature), selling the fruit in the final market
after the indispensable processes of conservation, normalisation and packing.
The direct investment associated with this is described in table 16.
Table 16 - Investment in storage plants of 3,500 tons
Quantity
Unit cost ($)
Total cost ($)
Warehouse/Building (m2)
4,000
200
800,000
12 freezers (tons)
3,500
295
1,032,500
Plastic containers (tons)
3,500
140
490,000
1
385,000
385,000
Automatic grading system (8 tons/hour)
Scales
27,000
Automatic strapping
42,000
Fork- lift of 2,000 kg
3
Lorries for transporting fruit
20,900
62,700
104,000
Office Equipment
15,000
a) Sub-total
Overheads (10% of a))
2,958,200
295,820
Total investment
3,254,020
23
4.2. Conservation, normalisation and packing costs
Table 17 shows the direct costs inherent to the conservation (refrigeration) of an
average period of 6 months, normalisation and packing of fruit for each of the units
mentioned. Firms with 200 tons capacity generally sell the stored fruit to intermediaries
who will then have the cost of normalisation and packing. For those who integrate the
whole circuit (this being the predominant situation) the apples are sold in non-reusable
cardboard boxes.
Table 17 - Unit costs of refrigeration, storage and packing apples ($/ton)
200 tons unit
800 tons unit
3,500 tons unit
Initial storage labour
15
8
5
Electric power
35
30
20
Packing materials
50
50
Normalisation/packing labour
General costs
30
15
20
10
Unit cost before depreciation
50
133
105
Depreciation (6.67%*Investment/tons)
Unit total cost
78
81
62
128
214
167
5. Final remarks
The aim of this paper was to characterise in microeconomic terms apple
production in the north interior of Portugal (region of Trás-os-Montes e Alto Douro) so
that the indicators presented can be compared with those verified in other situations.
Taking into account the complexity of the fruit cluster, where various
conditioning factors intervene, we presented the framework of apple production in the
north interior of Portugal (general aspects, typology of the fruit farms and the marketing
chain) and evaluated, from a financial perspective, the feasibility of setting up apple
orchards with 4, 8 and 12 ha respectively. In order to do so, we described and quantified
in some detail the investment, current benefits and costs, cash-flows and net benefits
involved and considered the optimal dimensions. Furthermore, we also described the
24
costs of investment and storage/packing associated with the predominant systems of
conservation (refrigeration), normalisation and packing existing in the region.
From the financial analysis carried out (IRR and LI/WMU), we concluded that, in
the light of the parameters assumed, the apple orchard activity assures levels of
reasonable profitability. However, in each specific case, it must be seen a complex
system where various factors intervene, such as the professional training of the farmer,
the availability of production factors, the climatic conditions of the farm, the market and
the system marketing, the financing of the investment and the farming deficit in the first
years of activity and the harvest insurance. These are the factors that need be carefully
examined before any investment is undertaken.
References
Peterson, Christopher and A. Wysocky, 1998. “Strategic Choice along the Vertical
Coordination Continuum”. Staff Paper #98-16, Department of Agricultural
Economics, Michigan State University. USA.
Porter, Michael E., 1990. “The Competitive Advantage of Nations”. The Macmillan Press
Ltd. London, England.
Vitaliano, Peter, 1983. “Cooperative Enterprise: An Alternative Conceptual Basis for
Analyzing a Complex Institution”. Journal of Agricultural Economics, 65(5):
1078-1083.
25