2018 Economic report: Establishment and production costs for hazelnuts in Ontario

Introduction

This report tries to reflect the management practices used by growers today. Soil condition, cultivar selections, personal grower management decisions and the unique meso-climates of Ontario result in many different grower practices in training systems, pest management programs and fertilizer rates.

Objectives

The hazelnut industry utilizes the cost of establishment and cost of production models to determine the profitability of the industry and to help growers make business decisions and planting plans. Growers can use the input costs as general guidelines to help identify strengths and weaknesses in their business.

Methods and procedures

The information used in this report is derived from surveys with growers and private consultants, Oregon State University hazelnut extension material and data from researchers, extensions and agribusiness.

Input costs are organized into variable and measurable fixed costs. Variable costs include plants, seed, fertilizers, pesticides, marketing charges, hired labour, tractor and machine costs and interest on operating capital.

Measurable fixed costs are interest on investment, depreciation and other overhead cost items such as a portion of utilities, equipment storage, insurance, accounting, farm vehicles and general maintenance.

Assumptions

The contribution margin is obtained by subtracting the total variable costs from the gross income. Contribution margin is the amount of funds that the crop contributes to cover fixed costs and provide returns for owner management and investment.

Hired Labour is charged at $17.40 per hour, which includes benefits (Workers' Compensation, Employment Insurance and Canada Pension Plan).

Hired machine operator labour is charged at $19.45 per hour (includes benefits).

Machinery and equipment costs are based on an orchard size of 10 acres.

Machinery costs are calculated based on the purchase price for 2018, useful life, annual use and trade-in value.

Interest on investment is calculated at 3.0%, which is the average interest rate paid by chartered banks on Guaranteed Investment Certificates plus 1%.

The interest rate applied to the operating capital is based on the prime lending rate of 3.95% plus 1.0% = 4.95%.

Interest on Establishment Costs is the operating capital compounded annually until the orchard generates revenue to first pay down the accumulated interest and then the outstanding principal. Operating capital includes cost of materials, fuel, repairs, labour and other cash items but does not include farm overhead expenses.

Fuel costs are based on the size of each tractor, truck or self-propelled machine used in production. The following farm-gate fuel prices are used: diesel $1.05/litre and gasoline $0.93/litre. Fuel costs are net of all 2018 provincial and federal rebates.

Ontario does not have an established yield history for hazelnuts. The full production yield used is 2,500 pounds per acre. Wide differences of commercial production and conditions for each farm can exist and increased experience of Ontario yields will be gained over time.

Yields used are 15% of annual yield for year 5, 30% year 6, 45% year 7, 60% year 8, 75% year 9, 90% year 10 and full production is achieved in year 11.

The prices listed are current world prices paid in Oregon stated in Canadian dollars.

The orchard was initially planted at double density spaced at 8 × 20 feet and 270 trees per acre to achieve higher yields earlier in the establishment period. In Year 10 every other tree is removed to a final planting density of 16 × 20 feet and 135 trees per acre.

The establishment of the orchard covers a 9.5 year period: a half-year for pre-plant preparation, one year for planting and 8 years for the tree to grow to full cropping potential.

Consulting Services includes several items such leaf and soil sampling, pest monitoring etc.

The establishment costs will need to be recovered over the productive life of the orchard. An estimate of the annual costs to recover establishment costs is included in the Total Establishment Costs section for each variety. They are amortized over the 25 years of full production at a rate of interest of 3.0%.

Due to rounding, figures may not add to the total shown.

Land costs and carrying charges are not included as part of the establishment or production costs because of the extreme variance in land prices.

Land ownership and rental prices vary considerably from farm to farm depending on road location, services, soil types, access to water, and potential for urban development. For this reason, a space is provided to insert land rental cost in the variable cost section and land ownership in the fixed cost section. Costs should be added into orchard establishment and cost of production.

A management allowance is not included as a cost.

All operating labour costs are charged to the project whether the owner performs the task or whether it was hired out.

These assumptions reflect the current practices in the industry and adapted from Oregon and do not necessarily represent recommendations from the contributors.

The authors assume no liability or responsibility as a result of the reader relying or acting upon the information contained herein. Any use or misuse of the information is the sole responsibility of the reader.

Ontario hazelnut cost of production — 2018

• Tree density: 270 trees/acre
• Year 10 every other tree removed
• Established density: 135 trees/acre
• Years of full production: 25 years
• Average orchard size: 10 acres
• Harvest yield (full production): 2,500 lbs/acre
• Expected market price ($/lb): $2.25/lb

Estimated cost per acre ($): pre-plant year to year 5

Estimated cost per acre ($): year 6 to mature

Total establishment costs per acre (excluding harvest): $3,5690.

Amortized establishment costs (25 years): $1,073.

Total cost of production per lb (excluding land and food safety): $1.25.

Estimated times per operation (number of times per year per acre)

Break even and profitability analysis

Breakeven in year 16 (does not include land, food safety and traceability costs).