Understanding Cost of Production Helps Christmas Tree Producers Maximize Profits and Manage Risk
Knowing cost of production and break-even sales price is one key to keeping Christmas tree producers in business.
Most people aren’t thinking about Christmas trees at this time of the year, but Christmas tree producers work year round to ensure a good supply of quality trees at the end of each year.
Imagine that you are a wholesale Christmas tree grower, and in July you are offered a contract to sell your trees for $20 each. Perhaps you have a retail lot or a choose-and-cut farm, and you plan to charge $50 per tree this coming season. Are these prices profitable for you, and if so, by how much? How can you know?
Growing Christmas trees is economically important to many of the Great Lakes states, but it may not continue to be if producers unwittingly sell their trees at a loss. As the costs of fuel, fertilizer, labor, etc., have increased, the cost of growing Christmas trees has also increased. Because of the slim profit margins in Christmas tree production, it is important that growers understand their per tree costs and potential revenue associated with all of their enterprises – cut trees, wreaths, garland, live trees – to determine break-even prices and potential profit for each tree.
The break-even price per tree is determined by calculating total production variable and fixed costs and dividing that total by the number of trees sold. For example, if total production and fixed costs per acre are $18,330 over a nine-year production cycle and 900 trees per acre will be sold, the breakeven price per tree equals $18,330 divided by 900 trees, or $20 per tree. Armed with this break-even price information, one can determine that a wholesale price of $20 per tree, as in the example above, is just breaking even. On the other hand, the suggested retail plan – selling trees for $50 – would net $30 profit per tree.
To determine actual costs, Michigan State University Extension recommends utilizing a bookkeeping system that is designed for agricultural operations and allocating costs associated with the Christmas tree profit center to that profit center. You can then compare your costs for each expenditure category to an industry benchmark, such as a university cost of production report. For example, if your repair costs are much higher than the benchmark, this should be a red flag to you and encourage investigation into why this is occurring. If your costs are in line with the benchmark, it is an indication that you are at least on par with the industry standard.
For a Christmas tree farm, common variable expenses include transplants, shearing, young tree management, fertilizer, pesticides, fuel, repairs, and hourly or seasonal labor expenses. Costs that do not vary with output – fixed costs – include expenses such as depreciation, real estate taxes, land charges, salaried labor, and liability and fire insurance. These costs are incurred whether or not production occurs. One fixed cost that producers sometimes neglect to address is the owner’s unpaid labor. As an example, a tart cherry cost of production study in Michigan valued owner’s labor at $25 per hour plus self-employment tax of 15.3 percent, for a total of $28.83 per hour.
There are resources available to help you determine your cost of production and break-even price for Christmas trees. The MSU Department of Forestry has been conducting periodic studies of cost and return for Christmas tree production in Michigan for a number of years. The most recent study can be found at http://ctreeinfo.anr.msu.edu/. These studies are intended to help growers understand their cost of production and selling price so they can make appropriate management decisions that are critical to remaining competitive. Other Michigan State University Extension budgeting resources can be accessed online at http://firm.msue.msu.edu in the Budgets, Cost of Production and Decision Making categories. While there, you can also find custom machine and work rate estimates, current land values and rental rates.
Using these tools is an excellent way for Christmas tree producers to develop a deeper understanding of their production costs, which is a fundamental step toward managing risk and maximizing profit.
This story was originally printed in the Michigan Farmer Magazine.