Managing the costs of growing apples and pearsBusiness Management
Wondering how to lift your business’s performance and cost efficiencies? AgFirst’s Ross Wilson provides some advice on maximising the four Ps – production, packout, price and people.
At first glance, the industry’s yield and packout analysis data seems to tell a positive story. Yield for apple growers on the ‘modelled’1 orchard has been climbing steadily from 30 t/ha in 2010 to 50 t/ha in 2022. Class 1 packout has risen from 68 to 73 per cent in the same period.
“So far, so good,” said Horticultural Consultant and Director of AgFirst, Ross Wilson, presenting insights from the industry’s Orchard Business Analysis (OBA) to delegates at APAL’s 2023 Technical Symposium. “However, while yield is increasing nicely, we need to look at the full range of business metrics including revenue per ha, surplus per ha (EBITDA) and average Class 1 return ($/kg).”
And that’s where a different story emerges. Ross revealed that the industry’s surplus per ha dropped in 2021 to nearly zero, and the 2022 forecast is similarly poor. “That level of profitability is nowhere near enough,” he said, “and a lot of growers are saying it will be similar again in 2023. This unprecedented period of subsequent losses is placing significant pressure on apple and pear growing businesses.”
Highlighting the importance of not viewing revenue in isolation, Ross points to the rising cost of production (COP) per planted ha on the model orchard (up from $40,000 to $80,000 p/ha over 10 years, although some of this increase is yield-driven) and the rising COP per gross kg.
“It’s tempting to assign rising costs to the underlying inflation rate, but we have analysed the Australian and New Zealand cost of growing apples and pears and found the industry’s inflation is significantly higher than the underlying rate,” Ross said.
Clearly, growers need to dig deeper into what makes up their costs, but the biggest driver in rising costs is labour. “Labour represents at least 60 per cent of orchard costs. That’s where our focus needs to be to reduce the cost of production,” Ross said.
However, the difference between the profitability of the upper quartile (UQ) and average segments of the model offers some good news. Ross points out that UQ businesses are still making good money when times are tough. According to the analysis, the gross yield for UQ growers is 52 t/ha compared to the average of 46 t/ha. Class 1 PO is 75 per cent (compared with 73 per cent), and income per ha is $47k/ha higher than the model average. While COP per ha is fairly similar, COP per kg is significantly lower for UQ producers due to higher Class 1 productivity per ha.
The stand-out statistic is income per kg: UQ growers receive 20 per cent more per kg. “This has a lot to do with having the right varieties, colour and size,” Ross said.
So, how can average growers lift their performance and cost efficiencies to the UQ level? Maximise the four Ps – production, packout, price and people – with the following strategies:
- Know your block metrics. Use the OBA or other benchmarking tool to identify your business’s strengths and weaknesses.
- Only plant varieties that will have good margins for extended periods – and be ruthless about removing underperforming blocks.
- Use all skills at your disposal to maximise the Class 1 yield of all current orchard blocks. Good yields and high packouts will increase income and lower COP per/kg.
- New blocks must be on systems that maximise Class 1 yield and are labour efficient (platform ready and robot capable).
- New blocks need to achieve rapid yield accumulation.
- Work with leading effective post-harvest and marketing partners who can maximise the returns for your product sustainably year on year.
- Look at the most cost-efficient labour models: hourly vs piece rate, permanent vs casual, and the best sources of labour supply (locals, backpackers, Pacific Islanders).
- Consider mechanical alternatives such as platforms vs bag and ladder, and tree trimming to save pruning costs.
- Always ask if there is a better way and learn from your neighbours.
- Invest in the people who will make the orchard business perform because without the right people none of the above will be achievable.
Finally, monitor labour costs closely. “You can’t manage what you don’t monitor,” Ross said. “The costs of labour can blow out really quickly if you’re not onto it. Some of our upper quartile growers have systems where they know labour costs per tree, per block on a real-time basis”.
The Orchard Business Analysis (OBA) is a benchmarking tool which captures year-on-year changes in performance of a ‘model’ representative orchard, the costs and returns of which are based on data from a pool of contributing growing businesses nationally, but are not industry averages.
To request a copy of the OBA, email [email protected].
This article was first published in the Spring 2023 edition of AFG.