Crop Costing W21

[00:00:01]all right so our third week of greenhouse crops two and um i know you're taking a business course uh but we don't really get good cost estimating in that course so we've added it to this class because sooner or a given later and so i want to walk you through the process it's not as intimidating as it may seem um you've got your powerpoint slide you've got the video there is a an assignment that you'll have to work through and uh hopefully i've made that as self-explanatory as possible that's due i think the week of february 14th so um all right let's dig right into this so where's your profit um there's an old saying uh that if you can't measure it you can't manage it and uh this is just a simple little photograph showing a bunch of people on a production line planting what looks like hostas into gallon pots and this scenario is something that you as greenhouse growers you'll have to assess on a regular basis because ultimately a good part of your job will be labor management you know you've got your growing duties and then there's labor management and labor management means you need to look at a situation and say is this being done as efficiently as possible so we've got one two three four five six seven and i think this is someone here eight people working in this particular context um and you need to say okay is this the most efficient way for us to be doing this um where are the bottlenecks who is not carrying their weight who is unnecessary uh and then go from there anyway so a lot of it is common sense but we're going to go through just some of the all the things that go into figuring out a cost um now costing is obviously meant to go into what do you charge right and so before we get into that i want to talk a little bit about how the industry works uh and how pricing works and right off the bat you have to decide are you a retail greenhouse person right so you're selling direct to customer or are you wholesale so what's the difference right so wholesale means you're selling to someone who's going to sell it again or resale it to someone else um sometimes you can be selling directly to a retailer who will then resale that to a another person or sometimes you're selling to someone who's gonna sell to someone else who then will sell it to the customer everyone adds on their costs and they all need to make money so your prices are negotiated based on where you are in that sort of what we call food chain uh or custody chain of that plant before it makes it to the end consumer um and oftentimes pricing depends on the volume of plant material you're shipping where they're buying so if they're buying just a few pots you know you don't you don't have to give them the discount that someone is buying hundreds of thousands would get so lots of those sort of things on the wholesale side now typically uh there are what we call price takers you know and and uh price taker means you're dictated a price and you know a lot of the times that's the case because you know let's be honest you're probably not the only person on the planet growing a particular plant and others will try to supply the same plant so that means there's competition and so the large the chains you know home depots canadian tires whatever they're going to say well i can get it for this price and so that means you have to take that price accept it or uh you have to offer something that distinguishes you from the other people so that you're not necessarily limited by that price could be better quality could be better packaging could be a more consistent supply so i don't know those things you would get to know in your business better than anyone something to keep in mind unfortunately is that you know definitely weather and market are a factor and like last year with covid that really threw everyone uh for a bit of a loop uh in the end growers actually did okay because a lot more people were at home gardening and there was tremendous demand for plants and a lot of growers had panicked and gotten rid of stuff early assuming that the season was going to be a bust and ended up being short so speculative growers did very well last year but you know there's weather and now we can add pandemic and other things that just are out of your control but you know you do your best um one other thing to mention is on the wholesale side uh walmart did this thing of introducing pay by scan home depot does it as well um some other big box stores uh and what that means is that at the checkout when they scan the barcode on your plant and it makes a beep at that point do you only get paid for your plant and that is really not an ideal scenario for a lot of greenhouses because what happens to your plant before it's bought you know is it sitting on a rack drying out did someone knock it over with a forklift if it doesn't sell you don't get paid so there's tremendous risk with pay by scan and so some growers that do this they charge a premium for their product because they have to make sure their product is managed properly so for example home depots the garden centers are actually managed by the greenhouses that supply them so for example jeffrey's greenhouses supplies a lot of home depots and they pay their own staff to go to those home depots and manage the plants so that they are successful in selling so that's a whole other layer of cost they have to factor in but interestingly walmart is going away from pay by scan in the states uh and you know we're hoping that that just goes away but so far it hasn't so retail price you know what what do people charge when it comes to retail well usually it's what the market will bear so they charge as much as they can get away with um you know so much depends on it you know marketing quality uniqueness all these things have a factor in what you can pay um but you know often you have to charge as much as you possibly can because it's difficult to change the price after the fact um but you know when you're new to the market that's that's a really tricky thing but to begin with which is where we're heading with this lesson you need to know what your cost is before you even start talking about what you're going to sell it for and that seems really easy or logical but you'd be surprised at how many farmers have not properly assessed their costs and are not making money on crops that there's that they're selling and that really spins their wheels having said that there are crops that we call cash flow crops that keep the business going so that staff don't have to be laid off and a good example of that would be say fall moms for example where the the margins the profit margin is very minimal but it keeps your staff busy through the summer covers the operating cost of the business you don't have to shut down and then you know you have your staff uh and everything everything is operational to shut down so that when you get to the crops or you make your real money then you can carry on but you would never want to put a crop like that beside a crop you are making money at a time of year when you should be profitable so you have to be really careful about that idea um in terms of retail something that sets you apart uh is really critical for success so something that makes you unique some value-added element or a unique variety that kind of stuff but uh i should have put that slide earlier whatever all right so you have to know you know before you know what you're going to price your charge you got to figure out what your costs are so you know in terms of pricing i should mention there is two strategies there is cost plus right so you take your cost and you add a fixed margin so let's say well we always have to make you know fifty percent profit so we'll figure out our cost we'll add our fifteen percent and that's what we're going to charge and then there's the what the market will bear which is just charge as much as you can get away with and still sell your product and ultimately most people start with that with the last one market will bear because uh it gives the product a lifespan if you go cost plus and you always have to maintain your 15 profit margin right that means that you're regularly going to be increasing the cost of your item and the market or the customers may become fatigued by seeing the price constantly going up so you have to decide for yourself how you're going to approach that but you know for basically anything that's new to the market you'd go with what the market will bear if you're dealing with a commodity something that the market is very familiar with it's going to be a cost plus all right so what are some uh everyday business costs that you might have right there's things like labor heat you know in your greenhouse in canada hydro electricity maintenance things break no matter what what about the plant material you're buying that you're actually going gonna plant in the soil pots plastic trays fertilizer pesticides biologicals what about plant death you know we call that shrinkage uh depreciation i'm not gonna really get into that to this lesson but that's something that is a factor you buy a car for twenty thousand dollars ten years later it's worth five thousand dollars the car still works but you've lost fifteen thousand dollars um insurance gotta have it and then there's always the bank they take their cut right um so we have to identify those costs and then we have to put them into a category and sort of the two major categories are what we call overhead costs which are kind of independent of the crop and then there's input costs which are directly related to your crop so we're going to talk a little bit about identifying those and then within those categories there are what we call fixed and variable right so uh a fixed cost those pictures should be reversed uh a fixed cost you know you nail it in the wall it's done it's not going anywhere where variable cost changes depending on various factors right so we have to make sure we understand what those costs are so for example the insurance for your farm is fixed it's got it's not going to change depending on what crops you're growing it's based on the physical position of the greenhouse and all the equipment that's there that's fixed where variable cost is going to be well okay so uh the price of the cutting might change from year to year or your labor depending on what machinery you have might change depending on the crop that kind of thing right so think costs that are out of your control and costs that are in control um so overhead costs input costs and then within that there's fixed and variable costs so fixed overhead costs things like interest on your loans right taxes for your land insurance accounting fees those are fixed cost things like heat hydro maintenance that's from your overhead at least not necessarily your input costs um but generally speaking are variable ones things like uh you know heat and hydro we spent a lot of time trying to reduce costs especially you know in because we live in a cold climate so we we work on improving the efficiencies of our boilers we work with energy curtains all that stuff to very to reduce that overhead variable cost of heat um things like interest rates all we can do is try to negotiate with the bank to get a better interest rate but there's not much we can do we have very little as a grower over that kind of thing now input costs this is seeds media fertilizer pest control that kind of stuff those things we we try to to control but we don't always have a lot of control over then there's things like labor right so we can improve the efficiency of our labor to reduce our costs you know there's costs that go into crops like transplanting putting tags in actually irrigating are you using hand or automated fertilizers right is there a more efficient or cost effective fertilizer you can use all these sorts of things even shipping like cardboard that sort of stuff and of course the better a job you do as a grower you can reduce the cost of pest control for example like fungicides if you do a better job of climate management you might have fewer fungal issues with your crop now there are always labor saving devices i got a few videos here i want to show you uh this is from something from the future right this is where you know i'm sure 10 years from now we look back and say oh that was so slow look at our robots now but [Music] so [Music] but you know it may be slow but robots work 24 7 7 days a week 24 hours a day you know it's i bet you even that slow robot would probably keep up with current uh production rates then there's transportation within the greenhouse this video shows you this is fairly common in greenhouses now to cut down on labor [Music] [Music] so yeah there's greenhouses are are big and have long walkways and moving plant material around can be time consuming and so farms use lots of different strategies and conveyors is definitely one that you'll come across the echo's design is all simplicity there's two drums one on the drive side one on the idle side looking very similar to a dry cleaners clothesline or even a ski lift the simplicity allows the baskets to come right to you and the user to have all the control they need all the action of the echo takes place on the drive side where we are standing right now so we got the motor we've got the controller we do all the watering right here now that can be changed based on the customer's need but in most cases it's done all here right by the drone so yeah moving hanging basket lines huge labor savings not to mention reduced damage because you don't have to walk out into the bay to hang the baskets you stand in the walkway and you hang them as the cable goes by and then of course any irrigation there's no leakage over top the crop because the watering happens over top of the concrete walkway [Music] and moving flood benches has become pretty much an industry standard in the ornamental world tons of automation some greenhouses are actually closed in the sense that you don't even have to walk in them as a grower there's robot cameras that zip around the greenhouse and take pictures of the crops to give the sales people real-time inventory and then they can click on an actual table like this one here and it will shuffle the tables and bring it out into the barn for packing uh don't underestimate how high-tech greenhouse can be for labor savings [Music] all right this robotic system was actually developed in ontario and is being used by at least half a dozen farms and uh the robots work again 24 hours a day seven days a week and the growers just specify spacing so they can grow pots tight so we call pot to pot for a certain duration in a bay and then when the plants reach a certain level of maturity they can put the robots in specify the spacing and then they'll work through the entire bay all night they come back in the morning and the pots are now at the new spacing that you specified um yeah all right so those are just some examples of how people have reduced their labor costs but what do we do about uh you know our costs and why are they so important well obviously if your costs of goods are you know quite a bit lower we make more money right so that's the end of the day that's pretty straightforward whatever um what we're trying to do is figure out how we can reduce our variable cost so that we can make as much money as possible right that every dollar in savings from your cost of production goes straight to the profit margin or what we call the bottom line so when we're looking at costs i put the slide in here just as sort of a quick review to help you practice in terms of what these different costs might be right so accounting fees is it uh overhead fixed overhead variable input cost fixed or input cost variable so accounting fees are an example of an overhead fixed cost insurance same thing loan interest more or less the same thing you know interest can be negotiated but it's fixed rent overhead yep fixed a variable it's pretty much fixed repairs it's a overhead but it could be variable generally speaking most farms budget a certain amount so they keep it as a fixed value taxes overhead fixed utilities overhead variable uh this one is a bit challenging because you know what i generally for costing crops and i'll mention this again later your heat cost fluctuates year to year but you have a pretty good idea of what the cost is going to be so sometimes it's easier to say to look at your overall average cost per year you can look at your current cost for gas and you can have a pretty good idea of what your heating costs will be for the year which means that it's something you can use as a fixed number on your spreadsheet if you have to labor depends on how much you're growing and what you're growing so you have to figure out what that variable cost will be cuttings that's an input cost ipm input cost fertilizer input cost all right let's move on a word about loss plant loss or shrinkage from death uh they hurt that hurts a lot when you throw a pot out the rule of thumb is that for every pot you throw out you have to grow about 2.5 more plants to make up just for the cost of the plant you threw out so be careful about that that can hurt the bottom lines tremendously another thing about getting into assessing costs is that you need to make some decisions about you know what you're good at and what you're not good at is it does it make sense for you to buy in cuttings and root them yourself or should be buying in a finished plug things like gerberas which we talked about already or begonias might make sense to buy in as a finished plug as opposed to a cutting because of the special facilities required or skilled to produce a quality plug so be honest about your abilities and decide whether it's cheaper to buy in or grow your own so yeah in terms of decisions for improving efficiency make decisions right uh how we make those decisions based on is based on you know collecting data you know timing jobs get a stopwatch see how long it takes uh look at all those things empirically and try to write down their costs uh look at what the effect of the job is on workers if there's a very very very repetitive task that you know decreases morale maybe there's a machine you can use that would impact them uh this this picture here whoop just let me erase that this picture down here actually is a really simple device that was developed many many years ago that has saved people a lot of sore backs from spacing crops on the ground by hand what you do is there's these uh these u-shaped brackets down here which slide under the lip of the pot and so you can pick up one two three four five pots and move these handles apart and it spreads the pots and then you can put them down so you can carry pick up five pots carry them to a new location and then space them uh that solves sore backs and things like that you got people bending down all the time that's gonna wreck their backs so this is a very cost effective way to improve you know your employers employees morale and productivity so you need to figure out where your main costs are what you can change what you can't change look at where the bottlenecks are like where are things really slowing down and can you improve that process a lot of this is kind of common sense that i can't help you with in a lesson but you have to sort of look and observe your surroundings and figure out ways to be more efficient and what i can tell you and this is sometimes people miss out on this is listen to your employees so you know maybe you're not the boss maybe you're a grower and you're managing the staff but the staff that you're managing have valuable input and it's really important that you talk to them they might say hey you know that the big guy said we're supposed to do it this way but you know we noticed that if we do it this way we can actually get this job done more quickly and respect them and and listen to them and try it out if you're concerned about what might happen well then you can communicate their ideas to the boss but if it's always top down management it doesn't always translate into efficiency so it's important to listen to everyone another thing about improving efficiencies is looking at how long it takes to pay back a particular piece of equipment um we call that the payback period or the fancy term is roi or return on investment but typically what that means is looking at how much does that particular piece of equipment cost how much does it save you divide that over the number of years it takes to pay it back and you have to decide is that worthwhile or not and in farming typically we try to have the equipment paid for within three years five years at the absolute most but that's a real stretch in the greenhouse world you know if you can pay back the cost within a year then you've made a mistake and you should have bought that a couple of years ago already so let this is a uh an example of how we would determine the payback cost so let's say you spend twenty thousand dollars a year in labor filling pots with soil by hand okay that's costing you that many in hours of labor to fill all your pots now let's say you can buy a machine that cost sixty thousand dollars right and now the machine doesn't operate completely by itself you still have labor but it cuts your cuts your labor down from 20 000 to only 5 000 to a year by per year to operate in labor so it's saving you 15 000 a year in labor right so that's this line here we're saving fifteen thousand dollars a year in labor okay so we're gonna take the cost of that device and our savings right so sixty thousand dollars divided by our savings in labor of fifteen thousand that's four years to pay back so based on that it makes sense to buy it because four years later you're gonna own it and now you're gonna be saving even more money so other things you know there's things like you know new equipment you can justify those changes with your costs sometimes adding or removing a crop is another way to save uh profitability because if you go through this entire exercise and you realize that a crop you're growing is not making you money get rid of it so this is a you know it seems obvious but again really important step to do another thing i've mentioned is identify workers strengths you have some workers that are very good at tasks they should be doing that and if you have workers that are not very good at tasks you need to find something different for them to do all right so first off conclusions we need to know all our costs we need to know which ones are fixed and which ones we can control the variables we need to help we need to know how long our crop is going to be in the greenhouse and we need to know how much space so this these two last points step us into the next area where we need to figure out the cost per individual plant that we're trying to sell so it's important we know how long the crop takes to finish from you know seed to sale or cutting to sale and we need to know how much space that's going to take so what do we do to calculate this we look at first of all our input costs per plant right so the seed the plastic pot the soil how much labor to plant it and move it what's our in ipm cost and maybe our fertilizer cost and that's going to give us our cost of production next we're going to look at our overhead costs right so we're going to look at the entire farm as a whole to operate things like interest insurance heat management maintenance accounting that goes into our cost of greenhouse i'm going to call it cost of greenhouse or our overhead costs so when we're trying to figure out our cost per plant we need to take our fixed overhead greenhouse costs our variable overhead greenhouse costs and then our crop input costs and calculate them as they contribute to each individual plant that we're growing so we start right with our cost per square foot or square meter i'm going to use square foot here i don't know calmly old school you could do meter whatever it doesn't matter but we'll do square foot we try to relate our costs per square foot because ultimately we'll know how much plant a plant takes up in terms of a square foot in the greenhouse so right we're going to relate all our costs back to that unit next we're going to figure out how many weeks or days typically we do weeks if it's a really fast crop you can do days but we usually do weeks we can figure how many weeks the crop is in the greenhouse right so we have the area and we have the duration so then we can figure out that per plant so let's say for example you know you've got five cents per square foot per day is your overhead cost and let's say the plant needs one square foot and it takes 90 days to finish right so that's 90 times 5 cents per day which is 4.50 per plant to produce for when it's finished so that's just an example obviously um then we look at our input cost over and above our overhead let's say it's a dollar fifty a pot that's our cutting saw soil pots etc add them together and we have six dollars per pot is our cost to produce that plant with everything included all right a word about spacing you know if you have a six inch pot let's say this is a six inch pot and you're gonna do six inch spacing that actually means that plant takes up one square foot this shows you how that happens so this is our six inch pot and six inch spacing means six plus six by 6 plus 6 which is 12 by 12 which is one square foot i've had students get really confused about that in the past so hopefully this picture helps you understand that all right so we have our overhead cost per square foot we divide it by the number of weeks that the greenhouse is operating let's say it's 52 weeks we have the square feet that the crop occupies in the greenhouse and we have the number of weeks to finish put it all together and we end up with our overhead cost per square foot per week that it's in the greenhouse so here's an example let's say we have a 10 thousand square foot greenhouse and our overhead cost is fifty thousand dollars for that greenhouse and we multiply or divide that out per square foot that means that we have an overhead cost of five dollars per square foot right now we divide that by the number of weeks and we end up with 10 cents per square foot per week overhead cost so if for example our crop is in the greenhouse for eight weeks our overhead cost is 80 cents per pot okay again don't let this get too confusing we're just trying to just try to figure out what our cost is per square foot and then how many weeks the crop is in the greenhouse and then put that all together so let's do an example all right this is a full example this is kind of what you'll see in your assignment that's due i have except i have it all in a spreadsheet ready to go you just have to plug in the numbers and it calculates it so let's say our overhead cost is 20 cents per square foot per week and we're growing 500 pots at one square foot per pot and it's a 10 week crop so 500 pots at one square foot per plot means we need 500 square feet to grow the crop right and the crop is 10 weeks long so 500 times 10 weeks gives us 5 000 square foot weeks the units combined all right so now we're going to take that 5 000 square foot weeks times our overhead cost per week which i gave you at the top 20 cents per square foot week so 5 000 times 20 cents gives us a thousand dollars all right so then we're gonna take our overhead cost per pot which is the thousand dollars divided by the number of pots 500 pots right is two dollars per pot walk through this slide a few times yourself to make sure you understand it and you'll be just fine okay so there's our overhead cost per square foot per week we figured how many square feet our crop is how many weeks calculate our total cost for that crop and then relate it back to each individual pot so let's continue now we look at our input cost that's our overhead per pot right so insurance taxes management fees etc now we're going to add in our input costs so cuttings soil pot labor fertilizer shipping costs that works out to a dollar 15 per pot now we take our overhead cost per pot our input cost per pot and we have three dollars and 15 cents per pot that's our absolute cost to produce that plant so there are some assumptions we're doing here right we're assuming the greenhouse is operating 52 weeks out of the year which unfortunately is not always the case sometimes you have to take our fixed overhead costs and average out over the actual year or weeks that the greenhouse is in production could be only 48 weeks of the year and the rest of that time in the year it's empty so there's no crops contributing to it so we're going to take those costs and determine and spread it over the weeks that we're only in production you know sometimes you have bedding plant greenhouses that are only operating for four months out of the entire year well they have to be honest with themselves they have to take their fixed overhead costs and only spread it over the weeks that they're in production that would not be helpful to just say well the other weeks are you know they're over those weeks well there's nothing in the greenhouse so just understand that that that's the case now for the vast majority of greenhouses they operate year-round so this is less of an issue but i've mentioned it because you know it could be like for example veggies they rip out for two weeks so there's two weeks of the year where you know there's no crop oh i'm not writing that very well okay one more thing uh you may notice i kind of treat heat and hydro uh as a as a maybe more like a fixed thing um it's simpler to treat it as a as a fixed heat for the entire greenhouse and then take your crops contribution to that now sometimes you have cool crops and warmer crops in the same greenhouse that gets really complicated i would consider you just take the entire greenhouse heating bill as a fixed amount for that year and divide it across and if you want to know what that is you can look at your average cost for your greenhouse over the last three years adjust for the current pricing and then just treat it as a fixed element but you know it's variable in the sense you can reduce it by being efficient but you don't have that much control if your crop needs a certain amount of growing degree days it's going to need them [Music] um yeah so again putting it all into context we have our fixed overhead costs mortgage interest management our variable things like heat and hydro which we're going to try to sort of treat as semi-fixed and then we have our crop input cost so for sure what's going to happen with these guys is these are based on a per square foot area so they're overhead per square feet and this is strictly input per unit pot so these are these are your cuttings your inputs are cuttings pot soil etc where your overhead are you know crop not crop specific but greenhouse specific costs like heat management labor stuff like that that is not dependent on individual crops accounting mortgage insurance that kind of thing so if you can measure it you can manage it that's a important phrase