GROWER DECISION SUPPORT TOOL FOR CONVERSION TO A HIGH-EFFICIENCY
TART CHERRY ORCHARD SYSTEM
By
Jacob McManus

A THESIS
Submitted to
Michigan State University
in partial fulfillment of the requirement
for the degree of
MASTER OF SCIENCE
Agricultural, Food, and Resource Economics
2012

ABSTRACT
GROWER DECISION SUPPORT TOOL FOR CONVERSION TO A HIGH-EFFICIENCY
TART CHERRY ORCHARD SYSTEM
By
Jacob McManus
This thesis utilizes an asset replacement model to determine the optimal time period to
transition from an existing standard orchard to a proposed high-density orchard system. The tart
cherry industry in Michigan is the foundation for an empirical example, allowing for estimation
of variables essential to the asset replacement model. The marginal net revenue approach is used
to determine the optimal time period for asset replacement by comparing anticipated marginal
net returns of the existing orchard to the expected discounted net returns of the proposed orchard
system. Given the innate uncertainty of parameters inherent in tart cherry production, yield is
stochastically estimated to evaluate the economic returns.
Results indicate that asset replacement of an existing tart cherry orchard with a highdensity orchard system should occur before the traditional orchard removal time period. The
anticipated returns of an existing orchard are less than that of the expected net returns of the
proposed high-density orchard. This model is the first asset replacement approach developed for
an individual tart cherry grower to determine if, and when, to replace existing orchards with a
high-density orchard system.

ACKNOWLEDGEMENTS

First, I would like to thank my wife, Ellen, for her constant support and willingness to
peer edit the many drafts of this thesis. I would also like to thank my parents for all the sacrifices
that they made which allowed me to pursue an exceptional education.
I would like to extend a special thank you to my committee members, Dr. Christopher
Wolf, Dr. Daniel Guyer, and Dr. Suzanne Thornsbury for their wisdom and guidance. I would
like to especially thank Dr. Thornsbury for providing me with the opportunity to work on this
project and Dr. Wolf for stepping in and helping me complete it.
I would also like to thank:


The tart cherry growers and other industry participants in Michigan who took the time to
share with me their opinion on this project.



Dr. Fritz Roka, Dr. Bob Bors, and all the fruit growers in Florida and Canada who
provided great insight on high-density plantings and continuous harvesting technology.



The two funding sources of this research, Project GREEEN and the Michigan Cherry
Committee. Your generous support made this research possible.

Lastly, I would like to thank the faculty and students in the Department of Agriculture, Food
and Resource Economics at Michigan State University for taking the time to listen to me as I
discussed tart cherries. I wish you all the best in the future.

iii

TABLE OF CONTENTS

LIST OF TABLES ......................................................................................................................... vi
LIST OF FIGURES .................................................................................................................... viii
CHAPTER ONE ..............................................................................................................................1
INTRODUCTION AND RESEARCH CONTEXT ........................................................................1
1.1 Introduction ................................................................................................................................1
1.2 Objectives ..................................................................................................................................3
1.3 Procedure ...................................................................................................................................4
1.4 Implication .................................................................................................................................5
CHAPTER TWO .............................................................................................................................6
INDUSTRY PRACTICES ...............................................................................................................6
2.1 The Tart Cherry Industry ...........................................................................................................6
2.2 The Existing Orchard System ....................................................................................................7
2.3 The Proposed Orchard System...................................................................................................7
CHAPTER THREE .........................................................................................................................9
METHODS ......................................................................................................................................9
3.1 Stochastic Estimation .................................................................................................................9
3.2 Cost of Production ...................................................................................................................14
3.3 Net Present Value ....................................................................................................................15
3.4 Asset Replacement ...................................................................................................................18
CHAPTER FOUR ..........................................................................................................................20
DATA COLLECTION ..................................................................................................................20
4.1 Primary Data Collection ..........................................................................................................20
4.1.1 Michigan Interviews .................................................................................................20
4.1.2 Canada Interviews .....................................................................................................25
4.1.3 Florida Interviews .....................................................................................................25
4.2 Secondary Data Collection ......................................................................................................26
4.2.1 Cost of Production ....................................................................................................26
4.2.2 Yield Trajectory ........................................................................................................29
4.3 Data Results .............................................................................................................................30
4.3.1 Standard Cost of Production .....................................................................................30
4.3.2 Standard Yield Trajectory .........................................................................................32
4.3.3 High-Density Cost of Production..............................................................................34
4.3.4 High-Density Yield Trajectory .................................................................................37
CHAPTER FIVE ...........................................................................................................................38
RESULTS ......................................................................................................................................38
5.1 Cost of Production ...................................................................................................................38
5.2 Net Present Value ....................................................................................................................39
iv

5.3 Sensitivity Analysis .................................................................................................................41
5.3.1 Yield Adjustment ......................................................................................................42
5.3.2 Price Adjustment .......................................................................................................44
5.3.3 Discount Rate Adjustment ........................................................................................46
5.4 Asset Replacement ...................................................................................................................47
CHAPTER SIX ..............................................................................................................................51
CONCLUSION ..............................................................................................................................51
6.1 Summary ..................................................................................................................................51
6.2 Variable Consideration ............................................................................................................53
6.3 Future Research .......................................................................................................................54
APPENDIX A ................................................................................................................................55
APPENDIX B ................................................................................................................................56
APPENDIX C ................................................................................................................................60
APPENDIX D ................................................................................................................................68
REFERENCES ..............................................................................................................................82

v

LIST OF TABLES

Table 1: Standard Estimated Percentage Reduction in Production Cost .......................................28
Table 2: High-Density Estimated Percentage Reduction in Production Cost................................29
Table 3: Standard Estimated Production Yield Percentage Adjustment .......................................33
Table 4: High-Density Estimated Production Yield Percentage Adjustment ................................37
Table 5: Cost of Production per Pound ..........................................................................................38
Table 6: Analytical Statistics of NPV Calculation ........................................................................41
Table 7: NPV Results of Sensitivity Analysis ...............................................................................43
Table 8: Asset Replacement Results ..............................................................................................48
Table B1: Standard Orchard Parameters Describing Yield Trajectory .........................................56
Table B2: Standard Orchard Base Yield Trajectory ......................................................................57
Table B3: High-Density Orchard Parameters Describing Yield Trajectory ..................................58
Table B4: High-Density Orchard Base Yield Trajectory ..............................................................59
Table C1 (a): Standard Orchard Establishment Cost .....................................................................60
Table C1 (b): Standard Orchard Cost per Acre .............................................................................61
Table C1 (b): Standard Orchard Cost per Acre Cont. ....................................................................62
Table C2: Standard Orchard Yield Outcome per Acre ..................................................................63
Table C3 (a): High-Density Orchard Establishment Cost .............................................................64
Table C3 (b): High-Density Orchard Cost per Acre ......................................................................65
Table C3 (b): High-Density Orchard Cost per Acre Cont .............................................................66
Table C4: High-Density Orchard Yield Outcome per Acre ..........................................................67
Table D1: Standard Orchard Base NPV Calculation .....................................................................68
Table D2: High-Density Orchard Base NPV Calculation .............................................................69
vi

Table D3: Standard Orchard NPV Calculation: 1

avg. yield increase with variability ..............70

Table D4: High-Density Orchard NPV Calculation: 1
Table D5: Standard Orchard NPV Calculation: 1

avg. yield increase with variability ......71

avg. yield decrease with variability .............72

Table D6: High-Density Orchard NPV Calculation: 1

avg. yield decrease with variability .....73

Table D7: Standard Orchard NPV Calculation with 25 percent price increase .............................74
Table D8: High-Density Orchard NPV Calculation with 25 percent price increase .....................75
Table D9: Standard Orchard NPV Calculation with 25 percent price decrease ............................76
Table D10: High-Density Orchard NPV Calculation with 25 percent price decrease ..................77
Table D11: Standard Orchard NPV Calculation with risk-free discount rate ...............................78
Table D12: High-Density Orchard NPV Calculation with risk-free discount rate ........................79
Table D13: Asset Replacement Base Scenarios ............................................................................80
Table D14: Asset Replacement: 1

avg. yield decrease with variability .....................................80

Table D15: Asset Replacement with 25 percent price increase .....................................................80
Table D16: Asset Replacement with risk-free discount rate .........................................................81

vii

LIST OF FIGURES

Figure 1: Life-cycle of Tart Cherry Orchard .................................................................................27
Figure 2: Standard Orchard Establishment Cost ............................................................................31
Figure 3: Standard Orchard Annual Cost per Acre ........................................................................32
Figure 4: Standard Orchard Yield Distribution Curve...................................................................33
Figure 5: Standard Orchard Yield Trajectory and Outcome .........................................................34
Figure 6: High-Density Orchard Establishment Cost ....................................................................35
Figure 7: High-Density Orchard Annual Cost per Acre ................................................................36
Figure 8: High-Density Orchard Yield Trajectory and Outcome ..................................................37
Figure A1: Exiting Orchard System ..............................................................................................55
Figure A2: High-Density Orchard System ....................................................................................55

viii

CHAPTER ONE
INTRODUCTION AND RESEARCH CONTEXT

1.1 Introduction
Asset replacement due to deterioration, advancement in technology, or changes in
government policy occurs across all industries. In some cases asset replacement is as simple as
substituting one piece of equipment for another, in other cases a complete system redesign is
required. When an asset is replaced due to an evolution in technology there is often a
considerable amount of uncertainty surrounding the new system. If there are large sunk costs in
the existing asset and the economic life-cycle is long-term, the replacement decision becomes
increasingly complex. However, when new technology provides better economies of scale from
higher production and, in turn, reduces the unit cost of production, an industry must critically
consider the replacement decision.
The tart cherry industry in Michigan is currently contemplating such a decision with
respect to asset replacement and new technology. Previously, a multi-period dynamic
programming model was used to evaluate asset replacement in the tart cherry industry to
determine optimal replacement timing for an existing orchard with no changes in technology
(Black and Nyambane, 2004). The current study evaluates optimal replacement timing for an
existing orchard system with a proposed new technology that includes orchard redesign as well
as equipment changes. The challenge of such research originates in the variation of crucial
parameters present in the existing orchard system in addition to the underlying uncertainty of
multiple components in the proposed orchard system, due to the lack of known outcomes.
As with all perennial tree fruit production, tart cherry yields fluctuate significantly from
year-to-year. Incorporating an economic tool that models the yield variation in tart cherry
1

production is critical to solving the replacement problem. To properly model yield variation, it is
necessary to determine the probability density function of the yield distribution curve. Although
the premise that yield varies from year-to-year is widely accepted, previous research applied a
deterministic yield trajectory to estimate economic returns of a tart cherry orchard (Wright,
2005). Stochastic estimation of yield outcome is critical to accurately determine the economic
return of each orchard system.
The cost of production per pound for tart cherries in the largest growing region of the
United States (Northwest Michigan) is estimated to be approximately $0.05 higher ($0.32 per
pound) than the 27 year average grower price of $0.262 per pound (Black et al., 2010; National
Agricultural Statistic Service, 2011). Such statistics beg the critical economic question, how can
an individual tart cherry grower bring his or her cost of production down? Yet, there remains
significantly more complexity to this problem than simply producing more tart cherries per acre.
The long horticultural life-cycle of an existing orchard creates elevated sunk costs that
are difficult to recoup; initial investment is high and estimated annual returns are low. In the
existing orchard system, the annual cost of production continues to increase as input prices rise.
Additionally, yield per acre fluctuates drastically creating a lower margin per pound over the life
of the orchard. Without a fundamental shift in production techniques the average cost of
production per pound for tart cherries will continue to increase. Better economies of scale could
be realized from a higher yield per acre as fewer acres are required to maintain existing
production levels. If a grower is able to produce the same quantity of tart cherries on fewer acres,
the cost of production per pound would decrease, thus providing a grower with higher returns,
assuming that the average price per pound also remained constant.

2

Currently, there are no known high-density tart cherry orchards in commercial production
in Michigan. Though, within the tart cherry grower and research community, interest and
enthusiasm for the proposed high-density orchard system continues to increase. Uncertainty
inherent in yield outcome and cost of production has limited the ability of growers to consider a
replacement plan to convert existing orchards to the new high-density orchard technology. These
unknown variables can be theoretically projected through the use of data simulation, stochastic
estimation, and economic valuation. While uncertainty in specific parameters remains, the
economic tools available can bring insight and clarity to growers interested in replacing existing
orchards with the proposed high-density orchard system.
1.2 Objectives
The primary objective of this research is to utilize an asset replacement model to
determine the optimal replacement period to transition from an existing orchard system to a highdensity orchard system. This replacement model incorporates constraints confronted by growers
in their decision framework. There are three supporting objectives that assist in the development
of the asset replacement model.
1. Determine a method to stochastically estimate yield outcome. As described above, this study
seeks to provide the most accurate approximation of yield per acre over the life-cycle of each
orchard. Stochastic estimation of yield variation facilitates precision in projection of yields
for both orchard systems.
2. Develop accurate cost of production tables that estimate costs associated with the innate
features of each orchard system; to establish an orchard as well as the annual cost per acre
during peak production.

3

3. Compare the economic returns of each orchard system to determine if, and when, an existing
orchard system should be replaced with the proposed orchard system. Evaluating the
sensitivity of results to changes in specific variables under different scenarios provides an indepth analysis of several of the possible net returns expected from each orchard system and
evaluates robustness of outcomes with respect to changes in model parameters.
1.3 Procedures
Although there are several methods for developing an asset replacement model, the two
primary techniques for agricultural asset replacement are marginal net revenue (MNR) and
dynamic programming (DP). Previous research on asset replacement in tart cherry production
used dynamic programming to determine optimal replacement policy. Dynamic programming
provides useful information for asset replacement because it accounts for the variation in
expected performances of both present and subsequent replacement periods (Groenendall,
Galligan, and Mulder, 2004). Although the dynamic programming model has many other
positive characteristics for application to optimal replacement problems, the model can become
overly complex depending on the number of state variables defined (Smith et al., 1993).
One goal of this research is to provide a straightforward and accurate estimation of the
optimal time period of asset replacement for an individual tart cherry grower. The MNR
approach not only provides an accurate approximation of replacement, but also is a more
simplified approach making it both familiar and easily accessible to users. A criticism of the
MNR approach is that it does not account for variation in the expected performance of the asset
(Groenendall, Galligan, and Mulder, 2004). In this research, variation in production performance
is accounted for through the use of stochastic estimation of yield. This research uses the MNR

4

technique to determine the optimal replacement period of the new orchard technology, given the
constraints of investment in the existing orchard.
1.4 Implications
The direct output of this research is a method for determining the optimal time for asset
replacement in perennial tree fruit production. This study also provides an approach for modeling
the actual production performance of perennial tree fruit. The stochastic estimation used in this
study will address the shortcomings of previous academic research that utilized a deterministic
production performance for the economic comparison of expected return. Specifically, this study
provides a tart cherry decision framework to evaluate if, and when, to replace an existing
standard orchard with a high-density orchard system. Such analysis will generate insight for
policy-makers in the tart cherry agricultural subsector who impact supply and price decisions.
Finally, this study is comprehensive in that it considers the dynamics of a long-term investment
decision with high sunk costs, while providing an individual participant with a model that
estimates the specific constraints in transferring an existing asset to a proposed new asset.

5

CHAPTER TWO
INDUSTRY PRACTICES

This chapter presents a brief introduction to the tart cherry industry in Michigan, a
description of the existing orchard and technology, and an explanation of the proposed highdensity orchard system and anticipated technology.
2.1 The Tart Cherry Industry
The State of Michigan produces approximately 70 percent of tart cherries grown in the
United States (National Agricultural Statistic Service, 2011). Tart cherry production can be
divided into three regions in Michigan, northwest, west central, and southwest. Michigan
produces approximately 189 million pounds from northwest, 60 million pounds from west
central, and approximately 19 million pounds from the southwest region each year (Rothwell,
Personal Communication, 2011). The vast difference in expected production between regions is
due in large part to the Grand Traverse Bay, which provides the northwest region with a
relatively warmer winter and cooler summer, an optimal scenario for the growth of a
horticultural crop. Therefore, this study has focused primarily on data collected from the
northwest region of Michigan.
Over the last 27 years nominal grower tart cherry prices in Michigan have varied from
$0.055 per pound in 1995 to $0.479 in 2002. In those same years yield per acre also varied from
an average of 10,300 pounds per acre in 1995 to 545 pounds per acre in 2002. In Michigan, total
bearing acres have decreased 24 percent from 34,400 in 1997 to 26,200 in 2010. Additionally, in
recent years the number of growers in Michigan has decreased from 705 in 1997 to 540 in 2006
(National Agricultural Statistic Service, 2011). Such a decrease in total bearing acreage and tart
cherry growers is due in part to the expansion of real estate development on ideal tart cherry
6

orchard sites. With a relatively low grower price per pound and elevated land values, the tart
cherry industry must identify a production technique to maintain market supply with less acreage.
2.2 The Existing Orchard System
In the existing production system, an orchard is planted at a density of 20 feet between
rows and 16 feet within rows, or approximately 136 trees per acre (Figure A1). Tart cherries are
1

mechanically harvested and tree density varies from 120 to 170 trees per acre. The tree density
and orchard life-cycle is almost entirely related to the type of mechanical harvester used. Given
that the only mechanical harvesting technology available is a trunk harvester, the desire has
always been to increase trunk size as quickly as possible, thus increasing the size of the trees.
In the standard Michigan tart cherry orchard, harvesting begins around year six after
planting, and trees reach peak production in year 12, lasting until around year 23 when
productivity declines. Trees are typically removed after harvest around year 25. However, this
type of orchard limits a grower’s ability to increase production and gain economic efficiencies.
This study challenges the status quo orchard design and proposes a new orchard system that
provides a grower with the opportunity to increase production and gain economic efficiencies.
2.3 The Proposed Orchard System
The high-density orchard system considered for this research is defined as an orchard
planted at a density of 16 feet between rows and six feet within rows, or approximately 453 trees
per acre (Figure A2). In this study a high-density orchard is defined as an orchard with less than
2

600 trees per acre, but greater than 300 trees per acre. A high-density orchard with an increased

1

Average tree density has historically increased with the adoption of mechanical harvesting
technology.
2
There are some fruit tree industries, such as the apple industry, that are planting more than
1,000 trees per acre, which this study would define as super high-density orchard.
7

number of trees per acre is expected to have a significant impact on the returns a grower receives.
In the proposed high-density orchard system the existing harvesting technology (a conventional
trunk harvester) is no longer a viable option.
The high-density orchard system will utilize a harvesting technology such as an over-therow or continuous harvesting system that omits shaking the trunk of the trees. Without the need
for large tree trunks, harvest may begin in a high-density orchard system as soon as sufficient
production is available, in this case around year four after planting. Peak production will begin in
year nine, lasting until around year 20 when productivity is expected to decline. It is assumed
that the orchard will be removed after harvest in year 23. From a grower’s perspective the
benefits of the high-density system include an earlier return on investment and the potential for
an increased yield per acre. Thus, the expectation is that a high-density orchard will decrease per
unit costs from better economies of scale related to the increased yield per acre and the fewer
acres required to maintain overall production.

8

CHAPTER THREE
METHODS

This chapter derives the empirical models used to evaluate the asset replacement decision.
The first section explains the method used to stochastically estimate the yield outcome of both
orchard systems. In the second section, the cost of production equation is estimated to determine
the potential gain in economic efficiency from the proposed high-density orchard system. The
third section explains the net present value (NPV) formula as well as how both the real price per
pound and discount rate are derived. The final section describes the retention pay-off equation
used to determine the optimal asset replacement time period.
3.1 Stochastic Estimation
Tart cherry yield varies from year to year due to site selection, orchard management, and
weather (most often related to frost damage during the blossoming cycle). The variability in
yield creates a high level of complexity in the estimation of yield outcome for both the standard
and high-density orchard systems. Stochastic estimation is used to approximate the probability
distribution of potential outcomes by allowing for random variation in peak production (i.e. how
much an acre is capable of producing at optimum tree age) and year-to-year yield variation (i.e.
how much yield is realized in a given year). Yield outcome, defined as the varied or random
yield per acre over the life-cycle of the orchard, may be simulated for both a standard and highdensity orchard system using stochastic estimation. In contrast, yield trajectory is defined as the
set yield per acre over the life-cycle of the orchard before the simulated estimation of yield
outcome.
The simulated yield outcome is based on models developed for tart cherry growers in
Michigan (Beedy, Nyambane, and Black, 2005). The yield trajectory of a tart cherry orchard
9

follows the distribution of a normal probability density function. This was determined by
conducting two hypothesis tests for normality in Stata (Intercooled Stata for Windows, Version
11.0, Stata Corporation, College Station, TX, 2011) on a data set of yields per acre from a
standard tart cherry orchard at the Northwest Horticultural Research Station between 1981 and
2003 (Rothwell; Northwest Horticultural Research Station Personal Communication, 2011). The
null hypothesis was that yield trajectory of a tart cherry orchard was normal and the alterative
hypothesis was that it was non-normal. Through the use of both a Shapiro-Wilk and ShapiroFrancia test for normality, the null hypothesis was not rejected, thus implying normality (Park,
H., 2008).
The first stochastic estimate of yield per acre for the standard orchard system is the peak
production level. Average yield during peak production can vary considerably from one orchard
site to the next, even on the same farm operation. Through the use of Microsoft @Risk, a random
simulated draw from a normal distribution was used to estimate peak production (Palisade Corp.,
Newfield, NY, 2010) (Table B1). The random normal distribution draw of average yield at peak
production is described in equation (1):

where:
= average yield at peak production for the standard orchard system,
= the risk output draw of average yield at peak production,
= the mean yield per acre during peak production,
= the standard deviation per acre during peak production,
= the random variable of the normal distribution draw.

10

The standard orchard system will begin harvestable production in year six, reach peak
production in year 12 and have diminishing production returns starting in year 23. It is assumed
that trees will be pulled after harvest in year 25 for a harvestable life-cycle of 20 years. Between
years six and 12 and 23 and 25, expected yield follows a first increasing and then decreasing
linear path based on the estimated yield at peak production.
To adjust for weather and other related yield variations between years, a second
stochastic estimation was used for the standard orchard. A coefficient of variation was calculated
by dividing the standard deviation by the mean yield per acre. The coefficient of variation was
then multiplied by the yield per acre distribution to calculate year-to-year variation. These values
were then multiplied by another normal random variable generated by Microsoft @Risk for each
year of production (Palisade Corp., Newfield, NY, 2010). The calculated variation was then used
to estimate annual expected yield outcome per acre over the life-cycle of the standard orchard
(Table B2). This calculation of expected yield per acre is illustrated by equation (2).

where:
= the expected yield per acre in period
= the adjusted average yield per acre before peak production,
= the average yield at peak production in period
= the adjusted average yield per acre after peak production,
= the random variable of the normal distribution draw in period
= the standard deviation per acre in period
= time periods in the life-cycle of the orchard.

11

With limited empirical data available, the high-density orchard system creates additional
levels of uncertainty for yield estimation. Two uncertain parameters for the proposed tart cherry
high-density orchard system include the critical age points along the distribution curve and the
peak production level.
The critical age points that must be estimated for this model include first harvest, peak
production, decline, and removal. It is estimated that harvest will begin as early as year three, as
late as year five, and most likely in year four. Peak production will begin as early as year seven,
as late as year nine, and most likely in year eight. It is expected that production will be remain at
peak until it begins to decline as late as year 21, as early as year 19, and most likely in year 20
(Michigan Grower Interviews and Northwest Research Station Personal Communication, 2011).
A grower will remove the orchard as early as year 22, as late as year 24, and most likely in year
23.
Triangular distribution was considered to account for the uncertainty and parameterize
the critical age points for the high-density orchard system. Triangular distribution is frequently
used in a situation where limited sample data is available because only the minimum, maximum,
and most likely values are necessary to parameterize the model. However, given the close
proximity of the years around each critical age point, the model estimation provided no variation
in net returns between holding the year constant and allowing the critical age point year to vary.
Thus, the proposed high-density tart cherry orchard system is assumed to begin
harvestable production in year four, reach peak production in year nine and begin to have
diminishing production returns in year 21. It is assumed that the trees will be pulled after harvest
in year 23 for a harvestable life-cycle of 20 years. As with the standard orchard system, the yield
trajectory before and after peak production is also defined for the high-density orchard system

12

based on specific percentage adjustments. The stochastic estimation for this model follows a
linear increase to peak production and a decline from peak production until the trees are pulled,
similar to the standard orchard yield trajectory.
Although triangular distribution is not used in the determination of critical age points, it
is used for estimating yield at peak production. Yield parameters considered for this research are
maximum value of 25,000 pounds per acre (Robinson, Andersen, and Hoying, 2007), minimum
value of 15,000 pounds per acre (Seavert, Long, and Freeborn, 2008), and most likely value of
20,000 pounds per acre based on a high-density orchard system with 453 trees per acre
(Michigan Grower Interview, 2011). If the tree density per acre is increased to levels of 600 or
even 1200 trees per acre, the parameters would require modification to reflect this situation. The
calculated mean of the minimum, maximum, and mostly likely values forms the average yield
per acre at peak production, before introducing annual variability, for the estimated stochastic
yield outcome (Table B3), described by equation (3):

where:
= average yield at peak production for the high-density orchard system,
= the risk output draw of average yield at peak production,
= the risk triangular distribution of average yield at peak production,
= the minimum expected value of average yield at peak production,
= the most likely expected value of average yield at peak production,
= the maximum expected value of average yield at peak production.
A second stochastic estimation adjusts for weather and other related annual variations in
yield on a given site. A coefficient of variation was calculated for the high-density orchard

13

system by dividing the standard deviation by the mean yield per acre. The coefficient of variation
for the high-density orchard is higher than the coefficient of variation for the standard orchard
system. This is due to the higher expected mean and standard deviation yield per acre for the
high-density orchard system. A higher coefficient of variation for the high-density orchard
system not only accounts for the weather variation, but also the probability of catastrophic crop
failure of the high-density orchard, given the level of uncertainty. A catastrophic crop failure
may be more probable with a high-density orchard system due to the fact that more of the
production potential is derived from fewer acres. The expected yield per acre for each time
period in the life-cycle of the high-density orchard system was calculated using equation (2)
(Table B4).
3.2 Cost of Production
One of the critical economic questions posed by this research is whether or not per unit
cost of production will decrease with a high-density orchard system and provide growers with
better economies of scale. By adjusting certain parameters, yet following the basic Black et al.
(2010) method, cost of production per pound is calculated for both orchard systems based on
annual expenditures and land values in the northwest Michigan growing region. Total cost to
3

establish an orchard as well as the land control cost during establishment is amortized over the
20 year bearing life of each orchard. Land is valued based on the average farmland price for fruit
tree sites in the northwest lower peninsula of Michigan (Wittenberg and Harsh, 2011). Cost per
pound of production is calculated by equation (4):
3

Land control cost is defined as the cost associated with maintaining a piece of property in
agricultural production over the long-term life of the asset. Land invested for twenty-five years
in tart cherry production cannot be used for any other type of investment opportunity without
removing the orchard. Land control costs are estimated by calculating an opportunity cost of
what capital invested in land could earn in another investment minus the expected annual land
appreciation.
14

where:
= cost of production per pound,
= annual amortized establishment cost during the bearing years,
= annual amortized establishment land control cost during the bearing years,
= annual total cost per acre during peak production,
= annual land control cost during the bearing years,
= average expected yield per acre during the bearing years.
3.3 Net Present Value
Capital budgeting is the decision-making process for accepting or rejecting investment
projects (Ross, Westerfield, and Jaffe, 2008). Tart cherry growers face a difficult capital
budgeting decision when making the decision to plant the standard orchard or replant with a
high-density orchard system. To complicate this capital budgeting decision, a limited amount of
data is available for planting high-density tart cherry orchards in Michigan. However,
considerable evidence suggests that perennial fruit production in a high-density orchard system
creates economic advantages for a grower. For example, an Oregon State University research
project indicates that the break-even point in a high-density (340 trees per acre) sweet cherry
orchard occurred in almost half the time of a standard sweet cherry orchard (Seavert, Long, and
Freeborn, 2008).
Several capital budgeting methods can be used to evaluate investment decisions. The net
present value (NPV) method is one approach that is useful when valuing two investment projects.
The formula for NPV is described in equation (5) (Skinner, 1999):

15

where:
= the net present value per acre for all time periods,
= net cash flow in time period

= the discount rate.
The NPV of any project is calculated by summing the present value of future cash flows
and subtracting the initial investment amount. Net cash flows (NCF) are determined by equation
(6):

where:
= net cash flow in time period
= real historical average price per pound,
= the expected yield per acre in period
= the cost per acre in period

The grower price per pound used for the calculation of NPV is held constant at $0.262
per pound; the average real historical U.S. price per pound between 1984 and 2010 (National
Agricultural Statistic Service, 2011). Average nominal price per pound for tart cherries is
converted to real average price per pound by the gross domestic product deflator (GDP) (U.S.
Department of Commerce, Bureau of Economic Analysis, 2011) as shown in equation (7):

16

where:
= real historical average price per pound,
= nominal historical price per pound (1984-2010),
= gross domestic product deflator.
Actual historical tart cherry price per pound varies significantly from year-to-year
depending on several different factors, including the number of pounds held in the reserve by the
4

federal marketing order, the prior year’s yield, and the expected yield of the current year. Tart
cherry price per pound is held constant based on the fact that price is not only set by supply and
demand, but also by a noticeable influence of institutions within the tart cherry industry.
A discount rate can be used to discount the future cash flows of investment projects to
the present value. The discount rate for this project represents the risk-free rate of return a
grower would expect from an investment with no risk plus a risk premium for agricultural
production on Michigan farmland as described by equation (8):

where:
= the discount rate,
= the risk-free rate of another investment with no risk,
= the risk premium of agriculture on Michigan farmland.
Included in this discount rate is the recent five-year (2007-2011) average annual risk-free
rate of 4.30 percent for a 30 year treasury-bill (Federal Reserve Board, 2012), plus a riskpremium of six percent based on an estimate of the historical risk premium for Michigan
4

The Tart Cherry Federal Marketing Order 930, through the guidance of the Cherry Industry
Administrative Board (CIAB), is charged with determining the amount of tart cherries available
to the market by an optimal supply formula to provide price stabilization (White and Kesecker,
2007).
17

farmland (Hanson, 1999). The risk free-rate provides the required rate of return of an investment
with no risk of financial loss, while the risk premium provides the required rate of return from
farm assets. Hanson’s estimate of the risk premium for Michigan farmland was used because of a
lack of information on tart cherry historical rate of return and cost of equity.
For the standard orchard system, NCF are discounted to their present value from year six
through year 25. The discounted initial investment, orchard establishment cost from year zero
through year five, is then subtracted. For the high-density orchard system, the NCF are
discounted from year four through year 23. The discounted initial investment amount, orchard
establishment cost from year zero through year three, is then subtracted. These calculations allow
the return of both orchard systems to be compared at their present value. In addition, the internal
rate of return (IRR) is evaluated for each NPV calculation. IRR is the rate of return of an
investment when the NPV of all cash flows is equal to zero (Skinner, 1999). This rate identifies
the maximum percentage return a grower could expect from each orchard investment.
3.4 Asset Replacement
This study uses the marginal net revenue (MNR) technique to determine optimal timing
of asset replacement, given investments in the current technology. In previous research the MNR
approach has been used to evaluate asset replacement decisions in a dairy cattle breeding and
asset replacement program (Groenendall, Galligan, and Mulder, 2004). Inputs for specific farm
conditions are entered in the MNR model to determine the retention pay-off (RPO) value. For
example, the RPO value of a cow is equal to the total additional profits that a producer could
expect from trying to keep the cow until her optimal age, taking into account the probability of
involuntary removal due to, most likely, the death of the cow, and ultimately, asset replacement
(Groenendall, Galligan, and Mulder, 2004).

18

Similarly, the RPO value for an existing tart cherry orchard is equal to the total additional
profits that a grower can expect from trying to keep the orchard until its optimal age, taking into
account variation in yields. In this study all net revenues were calculated as an annuity per year
based on the economic life-cycle of each orchard system (Harsh, Connor, and Schwab, 1981).
Utilizing the MNR framework, the RPO value for each orchard system is calculated by equation
(9).

where:
= annualized retention pay-off in decision period
= optimal time period for replacement (when

<

),

= period, at the end of which the orchard can be replaced,
= length of period (years), orchard life-cycle,
= anticipated marginal net revenue in period
= expected maximum net present value of replacement system,
= the discount rate.
The RPO value assumes that the only opportunity, other than keeping the existing
orchard, is replacement with the high-density orchard system. Optimal time period for
replacement is determined by comparison of the anticipated annual MNR from the present
orchard with the expected annual discounted NPV from the proposed high-density orchard
system. This asset replacement model is used to compare (1) annualized anticipated returns from
the remaining life of an existing orchard (i.e. from the evaluation year to tree removal) and (2)
the present value of expected annualized returns from the proposed high-density orchard system.

19

CHAPTER FOUR
DATA COLLECTION

This chapter is divided into three separate sections. The first section provides a discussion
of the data collected from primary sources; fruit growers, academic researchers, and industry
participants. The second section presents the data collected from secondary sources of
information, including agricultural economic reports, extension bulletins, and academic journals.
The final section illustrates the collective results of the data assembled from both primary and
secondary sources.
4.1 Primary Data Collection
Primary data was collected in 2011 and 2012 in order to approximate net returns from
each orchard system and evaluate the asset replacement decision. This data was collected from
grower interviews with tart cherry growers in Michigan, sour cherry growers in Canada, and
citrus growers in Florida. Horticultural specialists, academic researchers, and industry members
were also interviewed. The information gathered from these interviews was used to develop cost
of production tables and the stochastic estimation of yield outcome for each orchard system.
4.1.1 Michigan Interviews
Grower interviews included three tart cherry operations in the northwest, two in west
central, and one in the southwest region of Michigan. As much as possible, interviews included
both the current and future decision makers of an operation. Knowledge shared by the individual
tart cherry growers was used (1) to verify parameters for the existing orchard system, (2) to
determine the constraints for orchard redesign, and (3) to provide cost and yield expectations for
the proposed high-density orchard system. Although this study is primarily concerned with the
economic decision on the conversion of one orchard system to the next, understanding the
20

critical components of horticulture and agricultural engineering is critical to the analysis.
Therefore, interviews also took place with academic specialists from Michigan State University.
A key component derived from these interviews was an estimate of yield per acre for the
existing orchard system as well as the expected planting density for the proposed high-density
orchard system. The average historical yield per acre in Michigan from 1984 to 2010 was 6,760
pounds per acre (National Agricultural Statistical Service, 2011). Average yield per acre in the
U.S. during the same 27 year period was 6,475 pounds per acre (National Agricultural Statistical
Service, 2011). Preliminary analysis indicates negative net returns to tart cherry production,
given historical average yields per acre.
Grower interviews indicated that the reported historical yield per acre published is lower
than yields actually received in many cases. Several Michigan growers claimed that an average
of 10,000 pounds per acre during peak production is actually a closer estimate of the actual yield
per acre received (Michigan Grower Interviews, 2011). With an average yield per acre during
peak production of 10,000 pounds, average yield per acre over the life of the orchard (before,
during, and after peak production) is approximately 8,200 pounds. An average of 8,200 pound
per acre is only 18 percent higher than the reported State yield in Michigan of 6,760 pounds.
Michigan yields can vary drastically from one orchard site to the next based on localized
weather and site selection. Two different orchards owned by the same grower may produce a
different average yield per acre over the life of each orchard. It is assumed that the first adopters
of the high-density orchard system will be those growers with more favorable orchard sites and a
historically higher average yield per acre. This assumption is based on the idea that these
growers may be in better financial positions to make the increased capital investments required
by the high-density orchard system.

21

Additional data collected from tart cherry growers in Michigan provided support for the
estimate of yield per acre and expected planting density for the proposed high-density orchard
system. Though in the early trial stages, the concept of a high-density tart cherry orchard in
Michigan has been tested by a few growers. One grower had previously tested a higher density
tart cherry orchard system by increasing the number of trees per acre to 240; approximately
double that of the standard orchard system. During the orchard trial, yield per acre doubled
between years six and 12, compared to that of a standard orchard on a similar site. However, the
vigor of the Mahaleb rootstock was not controlled and during peak production, yield per acre
was less than that of a comparable standard orchard (Michigan Grower Interviews, 2011). This
decrease in yield per acre was due in part to the fact that the trees grew together, limiting light
distribution essential for fruit production. Without proper light distribution a tart cherry orchard
will not reach its peak yield per acre, thus limiting the economic return to the grower. Another
grower is currently testing a high-density tart cherry orchard using a bush like system, instead of
the traditional central leader tree system used in Michigan. This grower is testing the dwarfing
sour cherry variety, Carmine Jewel, from the University of Saskatchewan in Canada. Similarly,
another grower is planting Montmorency tart cherry on Mahaleb rootstock at approximately 350
trees per acre. This grower plans to maintain a bush-like or fruiting wall system by utilizing a
variety of pruning techniques (Michigan Grower Interviews, 2011).
Interviews with horticultural specialists from Michigan State University provided the
basis to approximate the critical age points of the proposed high-density orchard system.
Consensus was that with the proposed high-density orchard system harvest would begin between
years three and five, the orchard would reach peak production between years eight and 10, and
the orchard would start to decline around year 20 (Northwest Horticultural Research Station,

22

Personal Communication, 2011). These critical age points were consistent with results from the
Michigan grower interviews.
There was greater disagreement over the year in which a high-density orchard would be
removed. Some believed that the orchard would be removed later on in the life-cycle based on
the level of care expected from a grower made a larger initial investment. Others held the belief
that the orchard would be removed in an earlier time period based on the stress inflicted from a
grower who pushed the orchard to capacity earlier in its life-cycle. (Michigan Grower Interviews,
Northwest Horticultural Research Station, Personal Communication, 2011). It is important to
note that the current study assumes a 20 year bearing life-cycle for the high-density orchard.
In 2010, at the Northwest Horticultural Research Station, the dwarfing rootstock Gisela,
grafted with Montmorency tart cherry, was planted at a high-density. Additional varieties on
Michigan State University dwarfing rootstocks and a few of the University of Saskatchewan sour
cherry dwarfing varieties were planted in 2011. Although these high-density plantings are too
early in their life-cycle to provide substantial evidence on cost of production or potential yield
trajectory, the trials do provide some information on establishment costs including an irrigation
cost of approximately $2,000 per acre and a dwarfing and standard tree cost of approximately
$11 and $7 per tree, respectively (Rothwell, N., Northwest Horticultural Research Station,
Personal Communication, 2011).
Interviews also took place with horticultural specialists at the Michigan State University
Clarksville Horticultural Research Center where several tart cherry rootstock trials are currently
underway, including dwarfing rootstocks that could eventually be planted in high-density
orchards in Michigan. A dwarfing rootstock is usually less vigorous and more precocious than a
standard orchard rootstock, such as Mahaleb. Precocious, when defining the nature of a tree,

23

identifies a tree that will develop and produce fruit earlier than expected. Early experiments
indicate that Montmorency on Mahaleb rootstock could be used in a high-density orchard system
with proper pruning. For example, renewal pruning is one approach that removes any limbs that
are over three years old. This allows the trees to maintain their space in a dense planting while
simultaneously maintaining the willowing nature of fruiting limbs that is desirable for continuous
mechanical harvesting (Clarksville Research Center Personal Communication, 2011).
Once a high-density orchard is planted the existing trunk harvesting technology, currently
in use, is no longer a viable mechanical harvesting option in the orchard because it requires more
space to maneuver the equipment and harvest the trees. However, there are alternative harvesting
technologies available for closely planted fruit systems.
A recent Michigan State University project examined an over-the-row harvester,
designed for blueberries, for use in high-density tart cherry orchards. Results from a trial in 2010
indicate that the rotary tower harvesting mechanism on an over-the-row harvester was efficient
and effective in fruit removal and recovery with an average of approximately 80 percent of the
fruit harvested (Perry et al., 2010). Tart cherries harvested during these trials were USDA tested
5

for quality and graded at 94 out of a possible score of 100. While using the rotary tine over-therow harvester, harvest speed was limited to one mile per hour in this orchard of four-year-old
Montmorency tart cherry trees (Perry, R. Personal Communication, 2011). In contrast to the
existing harvesting technology, discussions with tart cherry growers in Michigan estimated that
the trunk harvester operates at a maximum speed of four-tenths of a mile per hour, less than half
the speed of the over-the-row rotary tine harvester (Michigan Grower Interviews, 2011). It

5

These results were from a single observation. However, it appears from this observation and
others that the over-the-row harvester, utilizing a rotary tine harvest mechanism, can achieve
efficient fruit removal and deliver high quality fruit (without extensive mechanical damage).
24

appears possible that speeds could be increased to two or three miles per hour resulting in
additional economic efficiencies. If the speed per acre of harvest was to increase, it is assumed
that cost of production per acre would have somewhat of a corresponding decrease providing
additional economic return to the grower.
4.1.2 Canada Interviews
6

A super high-density, dwarf, bush-like sour cherry orchard system has been developed
by researchers at the University of Saskatchewan. This orchard system in Saskatchewan may be
the only sour cherry high-density orchard system in North America used for commercial
production. These sour cherry bushes only grow six to eight feet tall allowing mechanical overthe-row or side-row harvesting. Interviews focused on planting density, yield trajectory, and
harvesting technology. Within-row spacing ranged from three to six feet and between-row
spacing ranged from 12 to 16 feet, or approximately 800 bushes per acre. A rotary tine side-row
harvester was tested on a 60-foot row of 18 Carmine Jewel sour cherry bushes to harvest 135.6
pounds, or approximately seven and a half pounds per bush. Extrapolated results indicate that a
five-year-old high-density sour cherry orchard could produce approximately 6,000 pounds per
acre. Some fruit growers in Saskatchewan are reported to be producing yields, during full
production, as great as 20 to 30 pounds per bush or approximately 16,000 to 24,000 pounds per
acre (Bors, Personal Communication, 2011).
4.1.3 Florida Interviews
Florida citrus growers are also considering conversion from the traditional grove system
to a high-density grove system and a transition in harvesting technology from hand harvest to
6

There is no significant difference between a sour and tart cherry. In the United States the term
“tart” is used, while in other cherry producing regions of the World the term “sour” is used. Here
the term sour is used to distinguish between the cherry variety in Canada and the cherry variety
in Michigan.
25

continuous mechanical harvest of juice oranges (Florida Grower Interviews, 2011). The standard
juice orange grove includes approximately 150 trees per acre. Compared with the proposed highdensity grove system with an estimated 1,500 trees per acre (Florida Grower Interviews, 2011).
Several operations are experimenting with continuous mechanical harvest on a percentage of
their acreage using a continuous rotary tine harvester developed for harvesting existing groves
(Roka, Personal Communication, 2011).
In Michigan there are currently no active high-density tart cherry orchards that are
harvested with continuous or over-the-row equipment, other than the aforementioned orchards
used solely for research. Grower interviews in Florida focused on the actual constraints a grower
faces in a system redesign. Results identified expected yield per acre, projected cost of
production, and anticipated economic return as critical parameters of the asset replacement
decision.
4.2 Secondary Data Collection
Past research and on-going research provided additional data for the comparative
valuation of the standard and high-density orchard systems. A significant amount of information
related to the existing standard orchard system is available in these publications. In contrast, little
information is available on the proposed high-density tart cherry orchard system. Data collected
from other fruit industries, including past academic research trials, provided valuable insight into
the parameter estimates of the proposed high-density orchard system.
4.2.1 Cost of Production
Recent cost of production data, including critical information on labor, material, and
equipment costs for the standard orchard system in three regions of Michigan is reported in a
Michigan State University agricultural economics report (Black et al., 2010). The northwest

26

region is used as a basis to construct establishment and annual costs for both orchard systems. In
northwest Michigan there is a higher population of specialized tart cherry operations, generally
higher annual yields, and a potential higher probability of adoption of a high-density orchard.
A tart cherry life-cycle, like other perennial tree crops, includes an establishment stage,
ramping up to peak production stage, peak production stage, and a declining production stage
(Black et al., 2011). Each one of these production stages is associated with a cash outflow. In
Figure 1, stage A indicates the establishment cost, stage B the ramping up to peak production
cost, stage C the peak production cost, and stage D reflects the decline in production cost. Cost
of production must be adjusted during periods when yield is not at peak production.
Figure 1: Life-Cycle of a Tart Cherry Orchard

7

12000

C

Yield (Lbs./Acre)

10000

A

D

8000

B
6000
4000
2000

A
0
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
Year

Source: Authors calculation, 2012
In 2012, tart cherry costs were updated as part of a USDA Risk Avoidance Mitigation
8

Program (RAMP) (Dartt, 2012). Updated production, labor, equipment, and material costs from

7

This figure identifies the cost stages in the life-cycle of a tart cherry orchard; the establishment
years, the pre-peak production years, peak production years, and post-peak production years.
8
This RAMP project was designed to develop, implement, and evaluate reduced-risk and
alternative pest management strategies for U.S. tart cherry producers.
27

the 2012 report were included in the development of the cost of production tables for both the
standard and high-density orchard system.
Cost of production data was also obtained from an earlier Michigan State University
Extension Bulletin (Nugent et al., 2003). Production costs were collected from focus group
discussions with tart cherry growers in the three major producing counties of northwest
Michigan. Cost of production data collected from this extension bulletin provided unit cost
information for the standard orchard system, transferrable to the proposed high-density orchard
system. The unit cost information that was transferrable to the high-density orchard system had
been calculated on a per tree basis.
The cost of production per acre in years six through 11 is adjusted to account for the
reduced yield per acre as the trees develop. Cost per acre is also reduced for years 23 through 25,
when yield per acre decline has begun. An early comparative economic analysis of the Michigan
standard tart cherry industry and the high-density sour cherry industry in Poland provided
detailed percentage adjustments to cost per acre for the years before and after peak production
(Wright, 2005). The percentage adjustments in cost per acre before and after peak production for
the standard orchard system are shown in Table 1.
Table 1: Estimated Percentage Reduction in Production Costs Due to Less than Full
Production in a Standard Orchard System.
Year
6
7
8
9
10
11
23
24
25
Percent 12.5% 11.1%
8.3%
5.5%
3.3%
1.67% 1.167% 2.3%
3.5%
Source: Wright, 2005
Similarly, the percentage adjustments in cost per acre before and after peak production
for a high-density orchard system are shown in Table 2.

28

Table 2: Estimated Percentage Reduction in Cost per Acre Due to Less than Full
Production in a High-Density Orchard System.
Year
4
5
6
7
8
21
22
23
Percent 18.2%
14.5%
10.9%
7.2%
3.6%
2.1%
4.3%
6.5%
Source: Wright, 2005
4.2.2 Yield Trajectory
Other perennial fruit industries, including apple and sweet cherry, have designed highdensity orchard systems. A motivation for moving to higher density orchards is evidence that
yield per acre in perennial fruit orchards is strongly linked to tree planting density. Often lower
yields from traditional apple and sweet cherry orchards can be significantly improved by
planting high-density orchard systems (Robinson et al., 2007). Research studies have shown
increased competitive advantages of higher density fruit orchards, from an increased yield per
acre, even after considering the constraints a grower must overcome to convert from a lower
density orchard system.
In a study at Cornell University, six sweet cherry orchard systems were tested using a
range of different tree densities over eight years (Robinson, Andersen, and Hoying, 2007). Five
high-density production systems on both standard and dwarfing rootstocks for sweet cherries
were compared to determine the highest cumulative yield per acre. Results indicate that there
was a three-fold difference in total crop yield between the highest density system (i.e. vertical
axis) and the traditional low-density central leader system. Researchers concluded that, with
current rootstocks, new sweet cherry orchards should be planted at densities of at least 300 trees
per acre and possibly up to 800 trees per acre with new advances in dwarfing rootstocks.
Researchers at Oregon State University conducted a comparative economic analysis of
both a standard and high-density sweet cherry orchard (Seavert, Long, and Freeborn, 2008).
Yield per acre in the standard orchard was less than the yield of 14,000 pounds per acre at full

29

production for the high-density sweet cherry orchard, although establishment cost of the highdensity orchard was higher. Results indicate that the break-even in a high-density orchard occurs
in almost half the time of the standard sweet cherry orchard, given expected yields.
Conclusions of a recent horticultural and economic analysis on high-density apple
orchard systems are that the optimal tree density for New York apple growers is around 1,000 to
1,200 trees per acre (Robinson et al., 2007). In the past, apple orchards were planted at densities
as low as 35 trees per acre; however, in recent years tree density has increased, in some cases to
upwards of 2,500 trees per acre. In addition to the increased yield, high-density apple orchards
increase fruit quality as well as reduce per unit costs of production (Robinson et al., 2007). New
high-density orchard systems have also assisted in the partial mechanization of pruning, tree
training, and harvesting in the apple orchard, providing growers with additional economic
efficiencies.
4.3 Data Results
Primary and secondary data are used to develop cost of production tables and estimate the
yield trajectory for both orchard systems. The following information describes the data used in
the capital budgeting evaluation and asset replacement decision.
4.3.1 Standard Cost of Production
Cost of production, discounted establishment cost, and annual cost per acre values for a
standard orchard system were developed by updating published budgets (Nugent et al., 2003;
Black et al., 2010) using numbers gathered from interviews with tart cherry industry participants.
Costs represent a standard orchard with 16 feet by 20 feet spacing, or approximately 136 trees
per acre. The following information provides an overview of the cost of production for the
standard orchard system (Table C1 a & b).

30

The total discounted cost to establish a standard orchard system is estimated as $4,354
per acre. This cost includes a site preparation year and five additional growing years prior to first
harvest. Total establishment cost is the initial investment amount for the NPV calculation, in the
capital budgeting model as the first six years of net cash outflows. Figure 2 illustrates the
estimated cost to establish a standard orchard by year.
Figure 2: Standard Orchard Establishment Cost

9,10

$1,600
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
Site
preparation

Year 1

Year 2

Year 3

Year 4

Year 5

Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012
Total annual nominal cost per acre during peak production for a standard orchard is
$1,426. Cost per acre is adjusted for years before and after peak production based on the
percentage adjustments described in the previous section. Total cost of production includes both
cash and non-cash (capital or depreciation costs) associated with tart cherry operating, harvest,
and production. Total cost per acre is comprised of time, machinery costs, labor costs, and
material costs for each operational task. Some costs, such as borer control, applied every fourth

9

Site preparation costs include (1) removing an existing orchard and (2) preparing the land to be
replanted.
10
Years 1 through 5 include the costs associated with planting and growing the tart cherry
orchard up to the point of first harvest, in year 6.
31

year, are accounted for on an annual basis. Three harvest costs, shipping, cooling pad operations,
and the tart cherry assessment, are calculated by multiplying the average yield per acre of the
orchard, or 8,200 pounds per acre, by set annual cost rates. Additionally, the cost of interest on
operating capital is calculated at eight percent on the operating and harvest cash outflow (Dartt,
2012). Figure 3 identifies the allocation of the costs per acre for each operation of a standard
orchard.
Figure 3: Standard Orchard Annual Cost per Acre

11

$600
$500
$400
$300
$200
$100
$0

Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012
Harvest and crop protection costs make up the majority of the total annual cost per acre
for the standard orchard system. Total annual cost per acre is subtracted from the revenue per
acre to calculate the NCF each year of the orchards life.
4.3.2 Standard Yield Trajectory
The standard orchard will reach first harvest in year six, reach peak production in year 12
and have diminishing production returns from years 23 to 25 (Beedy, Nyambane, and Black,

11

Pruning, mowing, crop protection, and so on, is the cost categories that make up the total
annual cost per acre. These costs are all included at the nominal annual value.
32

2005). Table 3 identifies the percentage yield adjustments from peak production for years six
through 11 and years 23 through 25 for the standard orchard system.
Table 3: Estimated Percentage Adjustment in Production Yield for Years Before and
After Peak Production for the Standard Orchard System:
Year
6
7
8
9
10
11
23
24
25
Percent 14.30% 28.30% 42.90% 57.10% 71.40% 85.70% 90.00% 80.00% 70.00%
Source: Beedy, Nyambane, Black, 2005
However, tart cherry growers in Michigan cannot rely on yields following this
deterministic path over the life-cycle of the orchard. It is for this reason that yields are varied to
account for annual uncertainty in economic returns to a standard orchard for the NPV calculation.
The actual yield per acre of a standard tart cherry orchard between 1981 and 2004 is illustrated in
Figure 4, where the diamond character is realized yield per acre from an existing tart cherry
orchard at the Northwest Horticultural Research Station. The square character represents the set
yield per acre trajectory based on a deterministic life-cycle over the same time period.
Figure 4: Standard Tart Cherry Orchard Actual Yield per Acre Outcome

12

Yield (Lbs./Acre)

25,000
20,000
15,000

Actual Yield
per Acre

10,000

Set Yield per
Acre

5,000
0
1975

1980

1985

1990
Year

1995

2000

2005

Source: Rothwell, 2011

12

In 1981 a tart cherry orchard was planted at the Michigan State University Northwest
Horticultural Research Station. This figure illustrates an actual yield outcome compared to the
yield trajectory discussed by this study.
33

Yield outcome for the standard orchard system, used in this study, was developed to
capture the realized year-to-year variation in yield illustrated by Figure 4. This stochastic
estimation of yield per acre captures the true nature of a yield outcome for the standard orchard.
Multiple standard orchard yield outcomes are drawn using Microsoft @Risk (Palisade Corp.,
Newfield, NY, 2010) (Table C5). Each distribution could represent a different orchard site,
manager’s performance, or climate scenario. Figure 5 identifies both the set yield distribution
and an example stochastic yield outcome for the life-cycle of the orchard. The stochastic
estimation of yield outcome is used to calculate the NPV for the standard orchard system.
Figure 5: Standard Orchard Yield Trajectory and Outcome

13

Yield (Lbs./Acre)

20,000

15,000
10,000

Set Yield
Varied Yield

5,000
0

0

5

10

15
Year

20

25

30

Source: Authors Calculation, 2012
4.3.3 High-Density Cost of Production
Cost of production for the proposed high-density orchard was developed by adapting
each item in cost of production for the standard orchard. Grower and researcher interviews and
publications on the costs of production from other high-density perennial fruit systems provide

13

Years 0 through 5 represent the establishment period with no harvestable production, while
years 6 through 25 identify both the estimated varied yield outcome and set yield trajectory.
34

adjustments to cost of production based on tree density per acre. Discounted establishment cost
and annual costs per acre values were developed for a high-density orchard system with six feet
by 16 feet row spacing, or approximately 453 trees per acre (Table C6 a & b). Estimated average
yield per acre is 20,000 pounds during peak production.
Total discounted cost to establish the proposed high-density orchard system is $9,024 per
acre including a site preparation year and three years of growing costs prior to first harvest. An
irrigation system is included for the high-density orchard system at a cost of $2,000 per acre.
Planting almost three times as many trees per acre will likely mandate an irrigation

14

system as

the tree roots draw more moisture from the soil. Costs that vary with tree numbers, such as
pruning and management hours, are increased to reflect the necessary hours for managing a highdensity orchard system. Figure 6 illustrates the cost to establish a high-density orchard by year.
Estimated costs represent the initial investment amount for the NPV calculation and are included
in the capital budgeting model as the first four years of production costs.
Figure 6: High-Density Orchard Establishment Cost

15

$4,500
$4,000
$3,500
$3,000
$2,500
$2,000
$1,500
$1,000
$500
$0

Site preparation

Year 1

Year 2

Year 3

Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012
14

An irrigation system could also be used in a high-density orchard as frost protection.

15

Years 1 through 3 include the costs associated with planting and growing the tart cherry
orchard up to the point of first harvest, in year 4.
35

Total annual nominal cost during peak production for a high-density orchard is estimated
to be $2,185 per acre. Modifications are made for the years before and after peak production
based on the percentage adjustments described in the previous sections. Annual cost includes
both cash and non-cash costs associated with tart cherry operating, harvesting, and production
(Figure 7). For the proposed high-density orchard system, time, equipment costs, and material
costs are adjusted for the increased number of rows and trees planted per acre. The machinery
cost is altered to reflect new equipment for harvesting the closely planted orchard. However, the
labor costs and base material costs were not adjusted. Total cost per acre is still comprised of
time, equipment costs, labor costs, and material costs for each operation. The three harvest costs
of shipping, cooling pad operations, and the tart cherry assessment, are calculated by multiplying
the average yield per acre, or 16,900 pounds per acre, by set annual cost rates. Interest is
calculated at eight percent on the operating and harvest cash outflows (Dartt, 2012). In Figure 7
harvest and crop protection costs are again the two largest cost components of the total annual
cost per acre.
Figure 7: High-Density Orchard Annual Cost per Acre

16

$900
$800
$700
$600
$500
$400
$300
$200
$100
$0

Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012
16

Pruning, mowing, crop protection, and so on, is the cost categories that make up the total
annual cost per acre. These costs are all included at the nominal annual value.
36

4.3.4 High-Density Yield Trajectory
Like the standard orchard system, the yield outcomes for the high-density orchard system
reflect variability from year-to-year. Again, yield trajectory values are positioned along a normal
distribution curve. This trajectory follows the yield pattern of steady increase to peak production,
12 years of peak production, and decline for three years until the orchard is removed (Table 4).
Table 4: Estimated Percentage Adjustment in Production Yield for Years Before and
After Peak Production for the High-Density Orchard System:
Year
4
5
6
7
8
21
22
23
Percent 16.70% 33.30% 50.00% 66.70% 83.30% 90.00% 80.00% 70.00%
Source: Beedy, Nyambane, Black, 2005
Historically, perennial fruit production yield does not maintain this deterministic path but
instead includes variations for conditions in individual years as well as tree age. Figure 8
identifies both the set yield trajectory and an example stochastic yield for the high-density
orchard system that is used as one component in the calculation of the NPV for the high-density
orchard system (Table C8).

Yield (Lbs./Acre)

Figure 8: High-Density Orchard Yield Trajectory and Outcome

17

50,000
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
0

Set Yield
Varied Yield

0

5

10

15

20

25

Year

Source: Authors Calculation, 2012
17

Years 0 through 3 represent the establishment period with no harvestable production, while
years 4 through 23 identify both the estimated varied yield outcome and set yield trajectory.
37

CHAPTER FIVE
RESULTS

This chapter presents the results of the calculations of cost of production, NPV, and asset
replacement. Through the use of a sensitivity analysis the yield, price, and discount rate were
adjusted to consider different scenarios that an individual tart cherry grower could encounter.
The results obtained for both the standard and high-density orchard, under each scenario, are
discussed for their economic relevance.
5.1 Cost of Production
One of the crucial economic questions posed by this research is whether or not the
proposed high-density orchard system is likely to generate better economies of scale than the
existing orchard system. To answer this question, the expected cost of production per pound was
calculated for both orchard systems. Table 5 provides a detailed description of the calculation of
cost per pound for the standard and high-density orchard system.
Table 5: Cost of production per pound for both the standard and high-density orchard system
Standard Orchard ($/Acre) High-density Orchard ($/Acre)
Amortized Establishment Cost
Establishment cost
$437
$905
Establishment land control cost
$184
$122
Annual Bearing Cost
Cost per acre
$1,426
$2,185
Land cost
$306
$306
$2,447
$3,616
Total Cost
Yield per acre
8,200
16,900
$0.29
$0.21
Average Cost per Pound
Source: Black et al., 2010, Author Calculation, 2012
The annual amortized cost to establish a standard orchard was $437 per acre, while the
annual amortized cost to establish a high-density orchard was $905 per acre. A standard
orchard’s amortized cost to establish was lower than the amortized cost to establish a high-

38

density orchard based on the previously discussed factors influencing the lower establishment
cost of a standard orchard. The annual amortized land control cost for a standard orchard for the
six year orchard establishment was $184 per acre, while the annual amortized land control cost
of a high-density for the four year orchard establishment was $122 per acre. A grower with a
high-density orchard system gains economic efficiencies, with a lower land control cost during
establishment, by entering the orchard for harvest in year four instead of year six. The cost per
acre during peak production was $1,426 for the standard orchard and $2,185 for the high-density
orchard. The annual land control cost during the bearing years of both orchards was $306 per
acre. With an average yield per acre of 8,200 pounds, the standard orchard cost of production per
pound was approximately $0.29. The cost of production per pound for a high-density orchard
was approximately $0.21 with an average yield per acre of 16,900 pounds.
The estimated cost of production per pound indicates that a grower would receive
approximately $0.05 per pound above the adjusted 27 year average price per pound with a highdensity orchard system. If a tart cherry grower continues to operate a standard orchard system
and the production costs and yield per acre are similar to those discussed above, it is possible that,
on average, a grower will lose approximately $0.03 per pound.
5.2 Net Present Value
For each orchard system a capital budgeting model was developed to calculate NPV.
Price per pound was multiplied by yield per acre to determine revenue per acre. Revenue per
acre was subtracted from the cost per acre to estimate a NCF for each year in the life-cycle of the
orchard. The stream of NCFs for the production years were discounted at a rate of 10.30 percent
and the discounted establishment costs were subtracted to calculate NPV for each orchard system.

39

A tax rate is not assessed on the revenue per acre in this calculation. Growers, even
within the northwest Michigan region, pay significantly different tax rates. The economic
question in this study is whether or not growers should invest in one orchard system or the other,
not whether or not growers should invest in tart cherry production. Tax rate it is not an important
component in the decision on which orchard system to choose once the production decision has
been made.
The base NPV for the standard orchard system, with an average yield per acre of 8,200
pounds, was -$247 per acre (Table D1). At an IRR of 6.76 percent the NPV was equal to zero for
all cash flows. This estimation of NPV was calculated before including the stochastic estimation
of yield and thus is not representative of any specific tart cherry grower in Michigan, but rather
an average of the many possible scenarios that exist.
With an average yield per acre of 16,900 pounds, the base NPV for the proposed highdensity orchard system was $6,477 per acre (Table D2). The NPV was equal to zero for all cash
flows at an IRR of 12.53 percent. This estimated return is representative of expected
performance of the proposed high-density orchard system before yield was stochastically
estimated.
The comparison of these two base scenarios suggests that a tart cherry grower in
Michigan should replant all new orchard sites with the proposed high-density orchard system.
The NPV rule states, if the NPV of an investment project is positive, accept and if negative,
reject. Therefore, the results obtained from these base scenarios answers the first question posed
by this study, should a high-density orchard be planted in place of the existing standard orchard?
As a result, it is clear economically, that a tart cherry grower, who is confronted with the
decision to plant either orchard, should choose the high-density orchard system.

40

In addition to stochastically estimating the yield outcome, Microsoft @Risk has the
capability to evaluate 10,000 iterations of the NPV calculation for each orchard system (Palisade
Corp., Newfield, NY, 2010). This allows an analysis of certain statistics, including the mean,
median, mode, maximum, minimum, and standard deviation of the NPV for both orchard
systems (Table 6). These iterations analyze different yield trajectories, costs of production, and
resulting NCF. The resulting cash flows are used to calculate 10,000 different NPV iterations
that are used to evaluate the statistics described.
Table 6: Analytical statistics of the NPV calculation for both the standard and high-density
orchard system
Standard Orchard ($/Acre)
High-density Orchard ($/Acre)
Minimum
-$13,966
-$11,032
Maximum
$18,879
$31,116
Mean
-$217
$7,351
Mode
-$1,398
$6,752
Median
-$301
$7,066
Standard Deviation
$4,528
$5,326
Values
10,000
10,000
Source: Palisade Corp., Newfield, NY, 2010, Author Calculation, 2012
These results indicate that although there is more variation from the mean NPV for the
high-density orchard system, there is a statistically significant advantage from a high-density
orchard system when compared to a standard orchard system. This is related to a much higher
expected maximum return from the high-density orchard system as well as a smaller potential
minimum return. On average, across all 10,000 iterations, the high-density orchard system has
the potential to provide better returns to the grower than the existing standard orchard system.
5.3 Sensitivity Analysis
The set parameters described in the previous NPV calculation provide the closest
approximation of these values. However, certain components of the capital budgeting model may
be adjusted, using a sensitivity analysis, to consider how a change in these parameters affects the

41

results obtained. Several parameters, including the yield per acre, price per pound, and the
discount rate, have a significant impact on the economic outcome. These parameters were altered
to realistically provide the most accurate information on the possible scenarios these orchard
systems could encounter. These adjustments are just a few of the many possible alternative
solutions available for the existing standard orchard and proposed high-density orchard system.
5.3.1 Yield Adjustment
Through the use of Microsoft @Risk, many different yield trajectories for both the
standard and high-density orchard system can be projected. It was in this analysis that yield per
acre was varied to capture the true economic returns of each orchard system (Palisade Corp.,
Newfield, NY, 2010). In the first yield adjusted scenarios, for both orchard systems, the average
yield per acre draw was approximately one standard deviation

greater than the average yield

per acre estimated by the base scenarios. The second yield per acre draw was approximately one
lower than the average yield per acre evaluated in the base scenarios of both orchard systems.
A one

increase or decrease in average yield per acre was greater for the high-density orchard

system based on its higher average yield per acre. The one

increase and decrease represents

an accurate unit movement between the base scenario and the yield adjusted scenarios analyzed.
A one unit adjustment in yield was designed to provide a precise comparative illustration. The
stochastic estimation of yield outcome within the NPV calculation allows this study to analyze
realistic yield outcomes in representative scenarios for both orchard systems.
The NPV was $3,901 per acre for a standard orchard with a one

increase in average

yield per acre from 8,200 to 10,857 pounds (Table D3). With an IRR of 11.38% the NPV was
equal to zero for all cash flows. As described by Table 7, the NPV with a one

increase in

average yield per acre and variability was positive and significantly higher than the NPV in the

42

base scenario. This increased yield per acre could describe a very good orchard site, manager’s
performance, or climate scenario.
Table 7: NPV Results of Sensitivity Analysis Compared to Base Scenario
Standard Orchard
High-density Orchard
($/Acre)
($/Acre)
Base Scenario
-$247
$6,477
$3,901
$12,836
1 average yield increase with variability
-$3,748
-$2,236
1 average yield decrease with variability
25 percent price increase
$3,635
$14,725
25 percent price decrease
-$4,130
-$1,645
Risk-free discount rate
$3,901
$18,864
Source: Authors Calculation, 2012
With a one

increase in average yield per acre to 21,862 pounds, the NPV for the

proposed high-density orchard system was $12,836 per acre (Table D4). The NPV was equal to
zero for all cash flows at an IRR of 15.13 percent. In this simulated scenario, there were actually
two crop failures, one in year six and one in year 12. This was due to the higher coefficient of
variation for the high-density orchard system that creates the potential for a higher yield as well
as a higher chance of crop failure. A higher coefficient of variation was included for the highdensity orchard system to account for some of the potential variation created by this new orchard
system.
Results suggest that a tart cherry grower in Michigan should replant any new orchard
sites with the proposed high-density orchard system. These results support the conclusion from
the base NPV calculation that a high-density tart cherry orchard should be planted in place of the
existing standard orchard system. Both orchard systems have a positive NPV, however, the NPV
for the high-density orchard system is significantly higher. A grower should replant with a highdensity system due to the higher return over the life of the orchard.
The NPV was -$3,748 per acre for a standard orchard with a one

decrease in average

yield per acre from 8,200 to 5,525 pounds (Table D5). In this situation the IRR was negative.
43

This scenario may describe a poor orchard site, manager’s performance, or climate scenario. The
average yield per acre was less than the historical average yield per acre in Michigan from 1984
to 2010 of 6,760 pounds per acre (National Agricultural Statistical Service, 2011). In this
scenario NPV was significantly influenced by the decrease in average yield per acre as NPV
decreased by over $3,000 per acre.
With a one

decrease in average yield per acre to 11,979 pounds, the NPV for the

proposed high-density orchard system was -$2,236 per acre (Table D6). However, the IRR was
positive in this scenario at 6.05 percent. There were two crop failures, one in year four and
another in year twelve. This scenario describes a situation where the high-density tart cherry
orchard system did not properly function due to a possible poor orchard site, manager’s
performance, or other potential components that are currently unknown.
These results suggest that a tart cherry grower in Michigan should not plant either
orchard system. Both the present value for the standard orchard and high-density orchard system
are negative, so both investment projects should be rejected. However, a high-density orchard
system should be planted if a grower’s expected rate of return is less than 6.05 percent.
5.3.2 Price Adjustment
In this study, price was held constant at $0.262 per pound based on a calculated historical
real average price per pound received by growers in the United States. However, price fluctuates
from year-to-year depending on several factors, including those such as how much tonnage is
held in the reserve by the federal marketing order, the prior year’s production level, global and
national demand for tart cherries, and the current year’s production estimate. Tart cherry growers
expect and receive different prices based on the quality of their fruit, the existing market for tart
cherries, and the type of processor to whom they sell their fruit. To account for different price

44

distributions across industry members, price per pound was increased 25 percent to $0.328 per
pound and decreased by 25 percent to $0.197 per pound. The 25 percent increase and decrease
reflects a realistic three year price swing in the price per pound for tart cherries, as the price in
18

2009 was $0.192 per pound, 2010 $0.221 per pound, and 2011 approximately

$0.32 per pound

(National Agricultural Statistics Service, 2011).
The NPV for the standard orchard system was $3,635 per acre with an average yield per
acre of 8,200 pounds and a price per pound of $0.328 (Table D7). With an IRR of 11.17 percent,
the NPV was equal to zero for all cash flows. In this scenario an increase in price per pound
creates a positive NPV for the standard orchard with the same yield, cost of production, and
discount rate parameters used in the base scenario.
With an average yield per acre of 16,900 pounds and price per pound of $0.328, the NPV
for the proposed high-density orchard system was $14,725 per acre (Table D8). The NPV was
equal to zero for all cash flows at an IRR of 16.96 percent. Again, price was a significant factor
in the expected return by increasing the present value from the base NPV calculation.
These results suggest that a tart cherry grower in Michigan should replant any new
orchard sites with the proposed high-density orchard system. The results support the conclusion
from the base NPV calculation that a high-density tart cherry orchard should be planted in place
of the existing standard orchard system. Again, both orchard systems have a positive NPV
however, the NPV for the high-density orchard system was significantly higher. In this scenario,
a grower should replant with a high-density system due to the higher expected return over the life
of the orchard.

18

At the time of this thesis defense, U.S. price per pound had not yet been released by the
National Agricultural Statistics Service. The $0.32 per pound is an approximate price paid to
some Michigan tart cherry growers in 2011.
45

The NPV for the standard orchard system with an average yield per acre of 8,200 pounds
and a price per pound of $0.197 per pound was -$4,130 per acre (Table D9). In this scenario, the
IRR was negative. The decrease price per pound significantly lowers the present value in this
scenario from the base NPV.
With an average yield per acre of 16,900 pounds and a price per pound of $0.197 per
pound, the NPV for the proposed high-density orchard system was -$1,645 per acre (Table D10).
The NPV was equal to zero for all cash flows at an IRR of 6.48 percent. Once more, the price per
pound distribution has a significant impact on the present value of this orchard scenario.
These results suggest that a tart cherry grower in Michigan should not plant either
orchard system. Both the present value for the standard orchard and high-density orchard system
are negative, so both investment projects should be rejected. However, a high-density orchard
system should be planted if a grower’s expected rate of return is less than 6.48 percent.
5.3.3 Discount Rate Adjustment
For both orchard systems a discount rate of 10.30 percent was used to discount the NCF
flows to their present value. The discount rate represents the risk-free rate of return, expected by
a grower from an investment with no risk, plus a risk premium for planting the trees and waiting
on a return over the life of the orchard. However, it is possible that some growers do not consider
the risk premium of Michigan farmland in their investment decision. For this reason, the
following NPV calculations use a discount rate of 4.30 percent, the risk-free rate to discount the
NCFs to their present value.
The NPV for the standard orchard system with an average yield per acre of 8,200 pounds
and a discount rate of 4.30 percent was $3,901 per acre (Table D11). The IRR remains at 6.76

46

percent. In this situation with a lower discount rate, the NPV was positive when compared with
the negative base NPV calculation with a discount rate of 10.30 percent.
With an average yield per acre of 16,900 pounds and a discount rate of 4.30 percent, the
NPV for the proposed high-density orchard system was $18,864 per acre (Tables D12). The IRR
remains at 12.53%. In this situation the lower discount rate increased the NPV drastically from
the base present value calculation.
Once more results suggest that a tart cherry grower in Michigan should replant any new
orchard sites with the proposed high-density orchard system. These results support the
conclusion from the base NPV calculation that a high-density tart cherry orchard should be
planted in place of the existing standard orchard system. Though, both orchard systems have a
positive NPV, the NPV for the high-density orchard system is considerably higher. This NPV
result and all previous NPV results are used to determine the optimal asset replacement decision
for an individual tart cherry grower.
5.4 Asset Replacement
The optimal time period for orchard replacement was determined by comparison of the
annualized RPO value anticipated from the existing orchard with the annualized RPO value
expected from the proposed high-density orchard system.

19

The following information provides

an asset replacement decision for each NPV scenario evaluated between the existing orchard and
proposed high-density orchard system.
When comparing the first two base scenarios, the optimal replacement period to
transition an existing orchard with a yield of 8,200 pounds per acre to a high-density orchard
system with an expected yield per acre of 16,900 pounds (Tables D1 & D2) was after harvest in
19

For details on this calculation, please see the section on asset replacement in the methods
chapter.
47

year 22 (Table D13). After harvest in year 22 the anticipated annual MNR of $716 from the
existing orchard was less than the expected annual discounted NPV of $737 from the proposed
high-density orchard system (Table 8). In this situation a grower should forgo the anticipated net
returns from years 23 through 25 in pursuit of the higher expected NPV of the proposed orchard
system.
Table 8: Asset Replacement Results Compared to Base Scenario
Replacement
Standard
Year Orchard
Base Scenario
22
$716
21
$1,318
1 average yield increase with variability
25 percent price increase
18
$1,643
Risk-free discount rate
Immediate
$1,115
Source: Authors Calculation, 2012

High-density
Orchard
$737
$1,461
$1,676
$1,275

The optimal replacement period to transition an existing orchard with a yield of 10,857
pounds per acre to a high-density orchard system with an expected yield per acre of 21,862
pounds (Tables D3 & D4) was after harvest in year 21 (Table D14). After harvest in year 21 the
anticipated annual MNR of $1,318 from the existing orchard is less than the expected annual
discounted NPV of $1,461 from the proposed high-density orchard system. Therefore, a grower
should forgo the anticipated net return from years 22 through 25 in pursuit of the higher expected
return from the proposed orchard system. With the stochastic estimation of yield outcome, the
results indicate that asset replacement should occur one year before the optimal replacement
period under the base scenario.
When average yield per acre decreases from the base approximation to 5,525 pounds per
acre for the standard orchard and 11,979 pounds per acre for the high-density orchard system
(Tables D4 & D5), there is no

20

optimal time period for asset replacement. As discussed, with

20

This study did not calculate an asset replacement decision for the two scenarios where the
NPV was negative for both orchard systems.
48

these negative NPVs, there should not be an investment in either the standard or high-density
orchard system. A grower with anticipated low yields in the existing orchard and an expectation
for a continuation of lower than average yields in the high-density orchard should reconsider the
investment decision in tart cherry production. This scenario also provides information for
growers who expect to plant the proposed high-density orchard system on their poorest orchard
sites. A grower may not have a positive return from the high-density orchard system based solely
on the site disadvantage the orchard encounters before it is even planted.
In scenarios where price increased 25 percent to $0.328 per pound (Tables D7 & D8), the
optimal time period to replace the existing orchard with the high-density orchard system was
after harvest in year 18 (Table D15). After harvest in year 18 the anticipated annual MNR of
$1,643 from the existing orchard was less than the expected annual discounted NPV of $1,676
from the proposed high-density orchard system. In this asset replacement decision price has a
significant influence on the decision of when to replace an existing orchard system. A grower
should forgo the returns from years 19 through 25 to pursue the opportunity of a higher return
from the high-density orchard system.
If a grower received a price per pound of $0.197 with an average yield per acre of 8,200
pounds from the standard orchard and 16,900 pounds from the high-density orchard (Tables D9
& D10), there would again, be no asset replacement decision. In these two situations the NPV for
both orchard systems are negative. Growers must seriously consider their ability to generate
positive returns based not only on higher yields and a lower cost of production per unit, but also
on a realistic price per pound estimate.
In the final two scenarios where the discount rate was reduced to 4.30 percent (Tables
D11 & D12) the optimal time period for a grower to replace the existing orchard system was

49

recommended to be immediately (Table 16). The anticipated annual MNR from the existing
orchard was less in every period when compared to the expected annual discounted NPV from
the proposed high-density orchard system. Therefore, in whatever time period the orchard is in,
if the orchard characteristics are similar to the base parameters described, except for a lower
discount rate of 4.30 percent, a tart cherry grower should remove the existing orchard
immediately and replant with a high-density orchard system.
The pattern of results in this section is driven by the change in critical economic
parameters. As average yield per acre for both orchard systems increased one , or
approximately 23 percent, the asset replacement decision changed from year 22 to year 21. In the
scenario where price increased 25 percent, optimal orchard replacement changed from year 22 in
the base scenario to year 18. As economic returns increased from a lower discount rate, the asset
replacement decision changed drastically from year 22 to whichever year the orchard currently
resides. These results appear to indicate that as economic returns increase for both orchard
systems the asset replacement decision occurs in a year that is earlier than the traditional orchard
removal time period.

50

CHAPTER SIX
CONCLUSION

This chapter is divided into three sections. The first section presents a summary of the
asset replacement, stochastic estimation, cost of production, and NPV results from this study. In
the second section specific variables that require some solidifying data are discussed. Finally, the
third section offers a few general recommendations for future research on this topic.
6.1 Summary
The primary objective of this research was to utilize an asset replacement model to
determine the optimal replacement period to transition the existing orchard system to the
proposed high-density orchard system. A replacement model was designed to consider the
constraints faced by an individual tart cherry grower in his or her decision framework. Six
comparative scenarios were discussed in this study. In four of the six scenarios, asset
replacement was optimal before the traditional removal time period for the standard orchard
system. The optimal replacement time period was determined for each orchard scenario by
comparing the annualized anticipated MNR of the existing orchard with the annualized expected
NPV of the proposed high-density orchard system. The orchard scenarios analyzed in this study
portray a few of the many possible situations that could exist for an individual tart cherry grower.
The replacement model designed for this project has the ability to bring insight and clarity to the
asset replacement decision for each individual grower’s orchard characteristics.
One of the crucial components of this research was to determine a method to
stochastically estimate yield outcome to provide the most accurate approximation of yield per
acre for both orchard systems. In addition, with the limited amount of primary data available for
the proposed high-density orchard system, the stochastic estimation of yield outcome provided
51

an approximation of variability in the projection of yield per acre for the proposed orchard
system. Stochastic estimation also accounted for some of the variation in production
performance of the asset. A criticism of the MNR approach is that it does not easily take into
account the variation in the expected performance of the asset. Therefore, stochastic estimation
was used to account for this criticism and provide the most accurate yield outcome for the
evaluation of the asset replacement decision.
Within the tart cherry industry a great deal of uncertainty remains around the expected
yield per acre and price per pound of any system in any given year. When two of the primary
components for determining profitability are highly uncertain, growers often look to a variable
they can control, in most cases, cost of production. Cost of production tables were developed to
approximate the costs associated with the inherent features of each orchard system. Although
costs do increase with the proposed high-density orchard system, these costs are spread over a
higher level of production. Results indicate that there was a significantly lower unit cost of
production for the high-density orchard system when compared to the cost of production per
pound for the standard orchard system.
The NPV was estimated to compare the economic returns of each orchard system to
determine if an existing orchard system should be replaced with the proposed high-density
orchard system. Furthermore, by evaluating specific variables under different scenarios, this
study provides an in-depth analysis of the possible net returns from each orchard system. In four
of the six scenarios analyzed, results indicated that an orchard site should be replanted with a
high-density orchard system. The NPVs for both orchard systems were also used to determine
the optimal replacement time period as one of the variables in the asset replacement model. This

52

NPV analysis represents the first component in the evaluation of asset replacement between the
standard orchard system and the proposed high-density orchard system.
6.2 Variable Consideration
The results of this research indicate that an individual tart cherry grower should, in most
situations, replant with a high-density orchard system, given the returns from the standard
orchard and expected returns from the high-density orchard system. In addition, the optimal
replacement time period for an existing orchard is often before the traditional removal period.
However, there are still several variables that must be seriously considered by the grower before
the decision is made to replace an existing orchard.
There is uncertainty related to the expected yield of the proposed high-density orchard
system. The available primary and secondary data was collected and applied to approximate the
expected yield trajectory of the high-density orchard system. Additionally, the expected yield
outcome was estimated through stochastic estimation to account for some of the uncertainty
present with the proposed high-density orchard system. In spite of this economic analysis there
remains a level of uncertainty in the projection of yield per acre for the proposed high-density
orchard system. In addition to the yield per acre, there are other variables in this study that are
also supported by a limited amount of available data. To verify these variables, the research
results would need to be obtained from fully developed research trials or active producing
orchards. Currently, some of this necessary research is underway to define these variables and
bring clarity to the uncertain parameters. When the primary data is available for the proposed
high-density orchard system, the asset replacement model developed by this study will be able to
be used to solidify the results obtained. Although these results appear conclusive on if, and when

53

to replace an existing orchard, growers should carefully consider their ability to handle the risk
associated with some of these variables before replacing any existing orchards.
6.3 Future Research
This research project is just one component of a large on-going effort to evaluate the
feasibility of a comprehensive redesign of the tart cherry orchards in Michigan. There are
currently some trial high-density tart cherry orchards being planted across Michigan. By 2020,
the primary data collected from these and other possible high-density plantings will provide
clarity to the uncertain parameters discussed throughout this study. When the primary data from
research and grower trials is collected, there will be several opportunities to continue the
economic research on this topic. A few of the potential research initiatives available for
transition towards a high-density tart cherry orchard system are outlined below.
1. Analyze the asset replacement decision with a dynamic programming model. At the
point at which a number of the state variables are less uncertain, use a dynamic
programming model to sequence through the life-cycle of each orchard system and
determine again the optimal time period for asset replacement.
2. Determine the optimal life-cycle of the high-density orchard system. One may
discover that the optimal life-cycle of the high-density orchard is shorter or longer
than expected, depending on the actual economic returns.
3. Conduct an economic price analysis to determine the impact a high-density tart cherry
orchard has on average grower price-per-pound for tart cherries. Similarly, consider
the impact, on price, of a high-density orchard at both the market and processor level.

54

APPENDIX A

Figure A1: Existing Orchard System

21

Source: Authors Photo, 2012
Figure A2: High-Density Orchard System

Source: Clarksville Research Center, Michigan State University, Authors Photo, 2011
21

“For interpretation of the reference to color in this and all other figures, the reader is referred
to the electronic version of this thesis.”
55

APPENDIX B

Table B1: Standard orchard parameters describing yield trajectory

Age

Percentage
Adjustment

5
6

Yield
0
1,430

crop

7

2,860

28.60%

3 crop

rd

8

4,290

42.90%

th

9

5,710

57.10%

th

10

7,140

71.40%

th

11

8,570

85.70%

12
23

10,000
9,000

100.00%
90.00%

24

8,000

80.00%

25

7,000

Yield
RV

Expected
Expected
Mean:
SD:
N(0,1) (Lbs./Acre) (Lbs./Acre)

70.00%

Before harvest
st

1 crop
nd

2

4 crop
5 crop
6 crop
Peak Production
st
1 crop decline
nd

2 crop decline
Rapid crop decline
Pull trees

14.30%

10,000 0.00

10,000

CV of yield trajectory
Annual yield is I.I.D
Source: Black, 2011, Authors Calculation, 2012

56

3147

0.384

Table B2: Standard orchard base yield trajectory
Expected Expected Expected
Yield
Yield
Total
Avg.
Age
Lbs./A
Lbs./Tree
Yield
Yield
1
0
0
0
2
0
0
0
3
0
0
0
4
0
0
0
5
0
0
0
6
1,430
11
1,430
1,430
7
2,860
21
4,290
2,145
8
4,290
32
8,580
2,860
9
5,710
42
14,290
3.573
10
7,140
53
21,430
4,286
11
8,570
63
30,000
5,000
12
10,000
74
40,000
5,714
13
10,000
74
50,000
6,250
14
10,000
74
60,000
6,667
15
10,000
74
70,000
7,000
16
10,000
74
80,000
7,273
17
10,000
74
90,000
7,500
18
10,000
74
100,000
7,692
19
10,000
74
110,000
7,857
20
10,000
74
120,000
8,000
21
10,000
74
130,000
8,125
22
10,000
74
140,000
8,235
23
9,000
66
149,000
8,278
24
8,000
59
157,000
8,263
25
7,000
51
164,000
8,200
Source: Black, 2011, Authors Calculation, 2012

57

N(0,1)

0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0

SD

549
1098
1647
2193
2742
3291
3840
3840
3840
3840
3840
3840
3840
3840
3840
3840
3840
3456
3072
2688

Estimated
Yield
Lbs./A
0
0
0
0
0
1,430
2,860
4,290
5,710
7,140
8,570
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
10,000
9,000
8,000
7,000

Estimated
Total
Yield
0
0
0
0
0
1,430
4,290
8,580
14,290
21,430
30,000
40,000
50,000
60,000
70,000
80,000
90,000
100,000
110,000
120,000
130,000
140,000
149,000
157,000
164,000

Table B3: High-Density orchard parameters describing yield trajectory
Percentage Yield
Expected Yield
Age Yield Adjustment
RV
Peak Production
Before harvest
3
0
Minimum
15,000
st
4
3,340 16.70%
Most Likely
20,000
1 crop
nd

crop

5

6,660

3 crop

rd

6

10,000 50.00%

th

7

13,340 66.70%

th

8

16,660 83.30%

9
21

20,000 100.00%
18,000 90.00%

22

16,000 80.00%

23

14,000 70.00%

2

4 crop
5 crop
Peak Production
st
1 crop decline
nd

2 crop decline
Rapid crop decline
Pull trees

33.30%

Maximum

20,000

CV of yield trajectory
Annual yield is I.I.D
Source: Black, 2011, Authors Calculation, 2012

58

25,000

0.652

Table B4: High-Density orchard base yield trajectory
Expected Expected Expected
Yield
Yield
Total
Avg.
Age Lbs./A Lbs./Tree
Yield
Yield
N(0,1)
1
0
0
0
2
0
0
0
3
0
0
0
4
3,340
7
3,340
3,340
0
5
6,660
14
10,000
5,000
0
6
10,000
22
20,000
6,667
0
7
13,340
29
33,340
8,335
0
8
16,660
36
50,000
10,000
0
9
20,000
44
70,000
11,667
0
10
20,000
44
90,000
12,857
0
11
20,000
44
110,000
13,750
0
12
20,000
44
130,000
14,444
0
13
20,000
44
150,000
15,000
0
14
20,000
44
170,000
15,454
0
15
20,000
44
190,000
15,833
0
16
20,000
44
210,000
16,154
0
17
20,000
44
230,000
16,429
0
18
20,000
44
250,000
16,667
0
19
20,000
44
270,000
16,875
0
20
20,000
44
290,000
17,058
0
21
18,000
39
308,000
17,111
0
22
16,000
35
324,000
17,052
0
23
14,000
30
338,000
16,900
0
Source: Black, 2011, Authors Calculation, 2012

59

SD

2,178
4,342
6,520
8,698
10,862
13,040
13,040
13,040
13,040
13,040
13,040
13,040
13,040
13,040
13,040
13,040
13,040
11,736
10,432
9,128

Estimated
Yield
Lbs./A
0
0
0
3,340
6,660
10,000
13,340
16,660
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
20,000
18,000
16,000
14,000

Estimated
Total
Yield
0
0
0
3,340
10,000
20,000
33,340
50,000
70,000
90,000
110,000
130,000
150,000
170,000
190,000
210,000
230,000
250,000
270,000
290,000
308,000
324,000
338,000

APPENDIX C

Table C1 (a): Standard orchard establishment cost
Site preparation prior to year 1 Cost/Acre($)
Growing cost (year 3)
Orchard removal and clean-up
$600.00
Pruning
Plowing and cover crop
$300.00
Tree replacement
Custom nematicide application
$500.00
Pest control sprays
Property tax
$30.00
Herbicide sprays
Total
$1,430.00
Mowing
Planting year (year 1)
Fertilizer
Ground preparation
$27.22
Mouse control
Marking and surveying
$13.24
Deer control
Tree cost
$1,030.88
Management
Tree planting
$61.20
Property tax
Mulch application
$102.00
Total
Pest control sprays
$88.68
Growing Cost (year 4)
Herbicide sprays
$55.74
Pruning
Mouse control
$10.22
Tree replacement
Deer control
$68.00
Pest control sprays
Management
$67.54
Herbicide sprays
Property tax
$30.00
Mowing
Total
$1,554.72
Fertilizer
Growing cost (year 2)
Mouse control
Pruning
$14.09
Deer control
Tree replacement
$54.60
Management
Pest control sprays
$88.64
Property tax
Herbicide sprays
$55.74
Total
Mowing
$20.37
Growing cost (year 5)
Fertilizer
$51.93
Pruning
Mouse control
$10.22
Pest control sprays
Deer control
$68.00
Herbicide sprays
Management
$50.66
Mowing
Property tax
$30.00
Fertilizer
Total
$444.28
Mouse control
Deer control
Management
Property tax
Total

Total Establishment Cost
Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012

60

Cost/Acre($)
$28.18
$32.76
$88.68
$55.74
$20.37
$109.70
$10.22
$68.00
$50.66
$30.00
$494.30
$42.27
$6.31
$110.85
$55.74
$30.55
$164.54
$10.22
$68.00
$50.66
$30.00
$569.14
$56.36
$110.85
$55.74
$30.55
$219.39
$10.22
$68.00
$67.54
$30.00
$648.65

$5,141.10

Table C1 (b): Standard orchard cost per acre
Time Labor Material
Equipment
Cash
Non(Hrs/ Cash
Cash
Cash
Cash
Operation
Acre) ($/Hr) ($/Hr)
($/Hr) ($/Hr)
Pruning (every 2 years)
Pruning: chain saw
4
$14
$0.25
Brush disposal: 85 HP tractor 0.50
$14
$21.03 $9.88
Flail chopper
0.50
$4.37
$4.84
Summer hedge: 85 HP
0.50
$14
$21.03 $9.88
tractor
Summer hedging: sickle bar
0.50
$5.51
$9.13
Mowing (3 times)
60 HP tractor
0.60
$14
$15.14 $6.42
Rotary mower
0.60
$3.80
$11.46
Crop Protection (4 times)
85 HP tractor
0.80
$26
$21.03 $9.88
Orchard sprayer
0.80
$9.65
$11.31
Insecticide
$83.60
Fungicide
$140.26
Plant growth regulator
$10.32
th
Borer control (every 4 year)
85 HP tractor
0.03
$14
$21.03 $9.88
Orchard sprayer
0.03
$9.65
$11.31
Insecticide
$0.50
Herbicide (2 times 50% of land)
60 HP used tractor
0.80
$26
$21.26 $2.03
Weed sprayer
0.80
$0.84
$5.47
Herbicide
$10.87
Fertilizer
60 HP tractor: Nitrogen
0.15
$26
$15.14 $6.42
Spin spreader
0.15
$0.90
$3.32
60 HP tractor: Potash
0.15
$26
$15.14 $6.42
Spin spreader
0.15
$0.90
$3.32
Nitrogen
$63.70
Potash
$20.00
60 HP tractor: Lime
0.03
$26
$15.14 $6.42
Spin spreader
0.03
$0.90
$3.32
Lime
$10.00
$18.15
Bee rental
$25.00
Pest management service
$20.00 $4.00
Pickup (40 miles/A @
0.60/mile)
Total Operating Cost
Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012
61

Total
Cash
($/Hr)
$97.39
$57.34
$17.56
$2.18
$17.56

NonCash
($/Hr)
$16.87
$0.00
$4.94
$2.42
$4.94

$2.76
$19.82
$17.54
$2.28
$279.91
$38.01
$7.72
$83.60
$140.26
$10.32
$1.34
$0.60
$0.24
$0.50
$49.74
$38.20
$0.67
$10.87
$107.73
$6.24
$0.13
$6.24
$0.13
$63.70
$20.00
$1.25
$0.03
$10.00
$18.15
$25.00
$20.00

$4.57
$10.73
$3.85
$6.88
$16.95
$7.90
$9.05
$0.00
$0.00
$0.00
$0.53
$0.25
$0.28
$0.00
$6.01
$1.63
$4.38
$0.00
$3.21
$0.96
$0.50
$0.96
$0.50
$0.00
$0.00
$0.19
$0.10
$0.00
$0.00
$0.00
$4.00

$619.08

$58.29

Table C1 (b): Standard orchard cost per acre cont.
Time Labor Material
Equipment
Cash
Non(Hrs/
Cash
Cash
Cash
Cash
Operation
Acre) ($/Hr)
($/Hr)
($/Hr) ($/Hr)
Harvest
85 HP tractor
0.20
$26
$21.03 $9.88
Orchard sprayer
0.20
$9.65
$11.31
Ethrel
$4.20
Double incline shaker 1 1.1
$33
$40.97 $30.31
Double incline shaker 2 1.1
$26
85 HP tractor
1.1
$14
$21.03 $9.88
60 HP tractor
1.1
$14
$15.14 $6.42
60 HP used tractor
1.1
$14
$21.26 $2.03
Skimmer (Misc. labor)
2
$12
Shipping
Cooling pad operation
Tart cherry assessment
$33
Management & Labor 4
Supervision
Interest on operating
capital @ 8%
Property tax
Production costs/acre
Total cost/acre
Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012

62

Total
Cash
($/Hr)
$485.91
$9.50
$1.93
$4.20
$84.70
$30.02
$38.63
$32.16
$38.88
$24.50
$131.20
$49.20
$41.00
$135.08

NonCash
($/Hr)
$58.76
$1.98
$2.26
$0.00
$34.36
$0.00
$10.87
$7.06
$2.24
$0.00
$0.00
$0.00
$0.00
$0.00

$39.50

$0.00

$30.00
$1,309.57
$1,426.62

$0.00
$117.05

Table C2: Standard orchard estimated yield outcomes per acre
Year
Set Yield
Iteration 1
Iteration 2
Iteration 3
1
0
0
0
0
2
0
0
0
0
3
0
0
0
0
4
0
0
0
0
5
0
0
0
0
6
1,430
2,365
1,211
1,823
7
2,860
2,525
2,304
4,339
8
4,290
7,515
7,277
3,693
9
5,710
8,213
8,038
3,619
10
7,140
5,018
11,941
4,218
11
8,570
2,356
14,609
12,638
12
10,000
11,368
15,211
8,597
13
10,000
11,336
18,574
3,725
14
10,000
26,171
13,009
12,749
15
10,000
4,509
11,141
10,967
16
10,000
20,131
13,478
11,760
17
10,000
23,180
10,779
9,110
18
10,000
20,178
2,927
5,876
19
10,000
19,144
15,423
12,451
20
10,000
16,621
5,401
15,780
21
10,000
23,871
11,023
9,275
22
10,000
17,551
7,280
11,342
23
9,000
5,936
10,110
14,681
24
8,000
13,302
5,846
8,374
25
7,000
9,011
6,880
9,444
Draw
10,000
13,938
Average
8,200
12,515
Source: Authors Calculation, 2012

14,192
9,623

63

10,117
8,723

Iteration 4

Iteration 5

0
0
0
0
0
1,805
5,280
7,345
9,700
8,702
9,961
0
16,802
9,737
6,101
19,200
8,214
10,780
9,374
12,136
8,661
16,570
11,408
8,431
7,222

0
0
0
0
0
2,524
3,361
6,688
12,564
7,563
8,299
15,703
16,709
6,846
10,763
6,933
27,208
19,772
21,561
11,510
19,207
3,155
15,154
1,769
11,930

11,328
9,371

15,797
11,461

Table C3 (a): High-Density orchard establishment cost
Site preparation prior to year 1
Orchard removal and clean-up
Plowing and cover crop
Irrigation system
Custom nematicide application
Property tax
Total
Planting year (year 1)
Ground preparation
Marking and surveying
Tree cost
Tree planting
Mulch application
Pest control sprays
Herbicide sprays
Mouse control
Deer control
Management
Property tax
Total
Growing cost (year 2)
Pruning
Pest control sprays
Herbicide sprays
Mowing
Fertilizer
Mouse control
Deer control
Management
Property tax
Total
Growing cost (year 3)
Pruning
Pest control sprays
Herbicide sprays
Mowing
Fertilizer
Mouse control
Deer control
Management
Property tax
Total
Total Establishment Cost
Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012
64

Cost/Acre($)
$600.00
$300.00
$2000.00
$500.00
$30.00
$3,430.00
$27.22
$19.87
$3,433.74
$203.85
$339.75
$164.95
$66.96
$10.22
$226.50
$84.43
$30.00
$4,607.48
$49.32
$164.95
$66.96
$40.73
$160.06
$10.22
$226.50
$67.54
$30.00
$816.28
$56.36
$164.95
$66.96
$40.74
$338.85
$10.22
$226.50
$67.54
$30.00
$1,002.12
$9,855.88

Table C3 (b): High-Density orchard cost per acre
Time Labor Material
Equipment
Cash
Non(Hrs/
Cash
Cash
Cash
Cash
Operation
Acre) ($/Hr)
($/Hr)
($/Hr) ($/Hr)
Pruning
Pruning: hand tools
10
$14
$0.10
Brush disposal: 85 HP tractor 1
$14
$21.03 $9.88
Flail chopper
1
$4.37
$4.84
Summer hedging: 85 HP
0.15
$14
$21.03 $9.88
tractor
Summer hedging: sickle bar 0.15
$5.51
$9.13
Mowing (3 times)
60 HP tractor
0.80
$14
$15.14 $6.42
Rotary mower
0.80
$3.80
$11.46
Crop Protection (4 times)
85 HP tractor
1
$26
$21.03 $9.88
Orchard sprayer
1
$9.65
$11.31
Insecticide
$104.50
Fungicide
$175.33
Plant growth regulator
$12.90
th
Borer control (every 4 year)
85 HP tractor
0.31
$14
$21.03 $9.88
Orchard sprayer
0.31
$9.65
$11.31
Insecticide
$0.50
Herbicide (2 times 50% of land)
60 HP used tractor
1
$26
$21.26 $2.03
Weed sprayer
1
$0.84
$5.47
Herbicide
$13.59
Fertilizer
60 HP tractor: Nitrogen
0.30
$26
$15.14 $6.42
Spin spreader
0.30
$0.90
$3.32
60 HP tractor: Potash
0.30
$26
$15.14 $6.42
Spin spreader
0.30
$0.90
$3.32
Nitrogen
$191.10
Potash
$60.00
60 HP tractor: Lime
0.06
$26
$15.14 $6.42
Spin spreader
0.06
$0.90
$3.32
Lime
$20.00
$18.15
Bee rental
$25.00
Pest management service
$20.00 $4.00
Pickup (40 miles/A @
0.60/mile)
Total Operating Cost
Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012
65

Total
NonCash
Cash
($/Hr)
($/Hr)
$181.36 $14.72
$141.88 $0.00
$35.11 $9.88
$4.37
$4.84
$5.27
$1.48
$0.83
$26.43
$23.39
$3.04
$349.89
$47.51
$9.65
$104.50
$175.33
$12.09
$11.00
$7.49
$3.02
$0.50
$62.17
$47.74
$0.84
$13.59
$299.17
$12.49
$0.27
$12.49
$0.27
$191.10
$60.00
$2.50
$0.05
$20.00
$18.15
$25.00
$20.00

$1.37
$14.31
$5.13
$9.17
$21.19
$9.88
$11.31
$0.00
$0.00
$0.00
$6.62
$3.09
$3.53
$0.00
$7.51
$2.03
$5.47
$0.00
$6.43
$1.93
$1.00
$1.93
$1.00
$0.00
$0.00
$0.39
$0.20
$0.00
$0.00
$0.00
$4.00

$993.16 $74.77

Table C3 (b): High-Density orchard cost per acre cont.
Time Labor Material
Equipment
Cash
Non(Hrs/
Cash
Cash
Cash
Cash
Operation
Acre) ($/Hr)
($/Hr)
($/Hr) ($/Hr)
Harvest
85 HP tractor
0.25
$26
$21.03 $9.88
Orchard sprayer
0.25
$9.65
$11.31
Ethrel
$4.20
Continuous Harvester
1.6
$26
$28.35 $29.22
85 HP tractor
1.6
$14
60 HP tractor
1.6
$14
60 HP used tractor
1.6
$14
Skimmer (Misc. Labor)
2
$12
Shipping
Cooling pad operation
Tart cherry assessment
6
33
Management & Labor
Supervision
Interest on operating
capital @ 8%
Property tax
Production costs/acre
Total cost/acre
Source: Nugent et al., 2003, Black et al., 2010, Author Calculation, 2012

66

Total
Cash
($/Hr)
$742.35
$11.88
$2.41
$4.20
$86.25
$55.23
$45.98
$55.60
$24.50
$270.40
$101.40
$84.50
$202.62

NonCash
($/Hr)
$80.10
$2.47
$2.83
$0.00
$45.97
$15.54
$10.10
$3.20
$0.00
$0.00
$0.00
$0.00
$0.00

$62.87

$0.00

$30.00
$2,031.00
$2,185.86

$0.00
$154.87

Table C4: High-Density orchard estimated yield outcomes per acre
Year
Set Yield
Iteration 1
Iteration 2
Iteration 3
Iteration 4
1
0
0
0
0
0
2
0
0
0
0
0
3
0
0
0
0
0
4
3,340
1,379
4,039
4,220
656
5
6,660
2,421
4,077
15,254
10,955
6
10,000
10,402
8,337
14,165
10,711
7
13,340
20,630
23,092
7,236
7,889
8
16,660
18,904
19,171
0
36,930
9
20,000
0
43,175
14,863
0
10
20,000
20,264
15,475
24,745
39,289
11
20,000
19,908
15,093
25,795
36,758
12
20,000
7,175
1,749
8,372
1,359
13
20,000
17,500
43,555
6,806
21,083
14
20,000
200
31,564
14,662
26,956
15
20,000
15,293
9,170
17,179
26,370
16
20,000
25,201
0
7,105
19,441
17
20,000
36,804
16,791
10,919
32,310
18
20,000
20,000
27,192
17,660
26,738
19
20,000
37,381
13,729
6,811
7,822
20
20,000
12,360
32,201
24,779
0
21
18,000
14,743
4,546
3,454
14,512
22
16,000
1,685
7,183
0
18,622
23
14,000
5,838
3,001
9,972
9,561
Draw
20,000
17,040
Average
16,900
14,404
Source: Authors Calculation, 2012

19,840
16,157

67

15,617
11,700

22,988
17,398

Iteration 5
0
0
0
5,749
11,345
3,977
2,081
35,906
34,095
36,009
1,587
23,400
14,584
18,361
40,202
25,017
29,199
29,405
4,300
55,637
44,336
27,654
15,562
24,101
22,920

APPENDIX D

Table D1: Standard orchard base NPV calculation
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre
0
-$1,430.00
10.30%
$0.262
0
$0.00
1
-$1,554.72
$0.262
0
$0.00
2
-$444.28
$0.262
0
$0.00
3
-$494.30
$0.262
0
$0.00
4
-$569.14
$0.262
0
$0.00
5
-$648.65
$0.262
0
$0.00
6
-$872.97
$0.262
1,430
$375.33
7
-$517.62
$0.262
2,860
$750.65
8
-$182.24
$0.262
4,290
$1,125.98
9
$150.52
$0.262
5,710
$1,498.68
10
$494.46
$0.262
7,140
$1,874.00
11
$825.09
$0.262
8,570
$2,249.33
12
$1,198.03
$0.262
10,000
$2,624.65
13
$1,198.03
$0.262
10,000
$2,624.65
14
$1,198.03
$0.262
10,000
$2,624.65
15
$1,198.03
$0.262
10,000
$2,624.65
16
$1,198.03
$0.262
10,000
$2,624.65
17
$1,198.03
$0.262
10,000
$2,624.65
18
$1,198.03
$0.262
10,000
$2,624.65
19
$1,198.03
$0.262
10,000
$2,624.65
20
$1,198.03
$0.262
10,000
$2,624.65
21
$1,198.03
$0.262
10,000
$2,624.65
22
$1,198.03
$0.262
10,000
$2,624.65
23
$937.23
$0.262
9,000
$2,362.19
24
$705.91
$0.262
8,000
$2,099.72
25
$460.56
$0.262
7,000
$1,837.26
26
NPV
IRR

-$247.85
6.67%

Avg. Yield
Source: Authors Calculation, 2012

8,200

68

Cost/Acre
$1,430.00
$1,554.72
$444.28
$494.30
$569.14
$648.65
$1,248.30
$1,268.27
$1,308.21
$1,348.16
$1,379.54
$1,424.24
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,424.96
$1,393.81
$1,376.69

Table D2: High-Density orchard base NPV calculation
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre Cost/Acre
0
-$3,430.00
10.30%
$0.262
0.00
$0.00 $3,430.00
1
-$4,607.48
$0.262
0.00
$0.00 $4,607.48
2
-$816.28
$0.262
0.00
$0.00
$816.28
3
-$1,002.12
$0.262
0.00
$0.00 $1,002.12
4
-$912.96
$0.262
3,340
$875.08 $1,788.03
5
-$123.99
$0.262
6,660
$1,744.92 $1,868.91
6
$672.40
$0.262
10,000
$2,620.00 $1,947.60
7
$1,466.60
$0.262
13,340
$3,495.08 $2,028.48
8
$2,257.75
$0.262
16,660
$4,364.92 $2,107.17
9
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
10
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
11
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
12
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
13
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
14
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
15
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
16
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
17
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
18
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
19
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
20
$3,054.14
$0.262
20,000
$5,240.00 $2,185.86
21
$2,576.04
$0.262
18,000
$4,716.00 $2,139.96
22
$2,100.13
$0.262
16,000
$4,192.00 $2,091.87
23
$1,624.22
$0.262
14,000
$3,668.00 $2,043.78
24
NPV
IRR

$6,477.52
12.53%

Avg. Yield
Source: Authors Calculation, 2012

16,900

69

Table D3: Standard Orchard NPV calculation: 1 average yield increase with variability
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre Cost/Acre
0
-$1,430.00
10.30%
$0.262
0
$0.00 $1,430.00
1
-$1,554.72
$0.262
0
$0.00 $1,554.72
2
-$444.28
$0.262
0
$0.00
$444.28
3
-$494.30
$0.262
0
$0.00
$494.30
4
-$569.14
$0.262
0
$0.00
$569.14
5
-$648.65
$0.262
0
$0.00
$648.65
6
-$686.50
$0.262
2,383
$625.40 $1,311.90
7
-$1,138.46
$0.262
741
$194.43 $1,332.89
8
-$328.19
$0.262
3,988
$1,046.68 $1,374.87
9
$979.16
$0.262
9,129
$2,396.01 $1,416.85
10
$2,994.25
$0.262
16,932
$4,444.09 $1,449.84
11
$1,926.12
$0.262
13,041
$3,422.93 $1,496.81
12
-$606.29
$0.262
3,402
$893.02 $1,499.31
13
$848.06
$0.262
8,944
$2,347.38 $1,499.31
14
$2,171.69
$0.262
13,987
$3,671.00 $1,499.31
15
$1,936.34
$0.262
13,090
$3,435.65 $1,499.31
16
$1,752.85
$0.262
12,391
$3,252.16 $1,499.31
17
$2,868.05
$0.262
16,640
$4,367.36 $1,499.31
18
$3,439.30
$0.262
18,816
$4,938.62 $1,499.31
19
$979.89
$0.262
9,446
$2,479.20 $1,499.31
20
$2,388.10
$0.262
14,811
$3,887.42 $1,499.31
21
$3,275.57
$0.262
18,192
$4,774.89 $1,499.31
22
$2,792.68
$0.262
16,353
$4,292.00 $1,499.31
23
$426.45
$0.262
7,331
$1,924.01 $1,497.56
24
$1,874.52
$0.262
12,723
$3,339.35 $1,464.83
25
-$187.58
$0.262
4,798
$1,259.26 $1,446.84
26
NPV
IRR

$3,901.73
11.38%

Avg. Yield
Source: Authors Calculation, 2012

10,857

70

Table D4: High-Density orchard NPV calculation:1 average yield increase with variability
Year
NCF
Discount Rate Price/Lb.
Yield/Acre Revenue/Acre Cost/Acre
0
-$3,430.00
10.30%
$0.262
0
$0.00 $3,430.00
1
-$4,607.48
$0.262
0
$0.00 $4,607.48
2
-$816.28
$0.262
0
$0.00
$816.28
3
-$1,002.12
$0.262
0
$0.00 $1,002.12
4
-$1,365.21
$0.262
0
$0.00 $1,365.21
5
-$1,367.16
$0.262
2,358
$617.83 $1,985.00
6
-$1,365.21
$0.262
0
$0.00 $1,365.21
7
$1,631.46
$0.262
14,450
$3,785.93 $2,154.47
8
-$622.95
$0.262
6,165
$1,615.10 $2,238.05
9
$11,568.04
$0.262
53,014
$13,889.67 $2,321.63
10
$629.32
$0.262
11,263
$2,950.95 $2,321.63
11
$8,922.14
$0.262
42,915
$11,243.77 $2,321.63
12
-$1,365.21
$0.262
0
$0.00 $1,365.21
13
$6,204.00
$0.262
32,541
$8,525.63 $2,321.63
14
$6,908.59
$0.262
35,230
$9,230.22 $2,321.63
15
$4,008.95
$0.262
24,163
$6,330.58 $2,321.63
16
$3,597.10
$0.262
22,591
$5,918.73 $2,321.63
17
$9,728.56
$0.262
45,993
$12,050.19 $2,321.63
18
$9,832.51
$0.262
46,390
$12,154.14 $2,321.63
19
$2,212.95
$0.262
17,308
$4,534.59 $2,321.63
20
$3,745.57
$0.262
23,157
$6,067.20 $2,321.63
21
$4,605.61
$0.262
26,254
$6,878.49 $2,272.88
22
$3,659.19
$0.262
22,447
$5,880.99 $2,221.80
23
$713.58
$0.262
11,009
$2,884.31 $2,170.73
24
NPV
IRR

$12,836.39
15.13%

Avg. Yield
Source: Authors Calculation, 2012

21,862

71

Table D5: Standard orchard NPV calculation: 1 average yield decrease with variability
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre Cost/Acre
0
-$1,430.00
10.30%
$0.262
0
$0.00 $1,430.00
1
-$1,554.72
$0.262
0
$0.00 $1,554.72
2
-$444.28
$0.262
0
$0.00
$444.28
3
-$494.30
$0.262
0
$0.00
$494.30
4
-$569.14
$0.262
0
$0.00
$569.14
5
-$648.65
$0.262
0
$0.00
$648.65
6
-$811.47
$0.262
1,420
$372.77 $1,184.25
7
-$31.87
$0.262
4,463
$1,171.32 $1,203.19
8
-$301.91
$0.262
3,578
$939.18 $1,241.09
9
-$673.57
$0.262
2,307
$605.42 $1,278.99
10
-$763.99
$0.262
2,076
$544.77 $1,308.76
11
$384.53
$0.262
6,613
$1,735.70 $1,351.16
12
$810.63
$0.262
8,245
$2,164.06 $1,353.42
13
$507.19
$0.262
7,089
$1,860.62 $1,353.42
14
$1,414.06
$0.262
10,544
$2,767.48 $1,353.42
15
$2,071.47
$0.262
13,049
$3,424.90 $1,353.42
16
$962.91
$0.262
8,825
$2,316.33 $1,353.42
17
-$170.88
$0.262
4,506
$1,182.54 $1,353.42
18
-$35.00
$0.262
5,023
$1,318.42 $1,353.42
19
$908.68
$0.262
8,619
$2,262.10 $1,353.42
20
-$283.79
$0.262
4,075
$1,069.63 $1,353.42
21
-$880.99
$0.262
0
$0.00
$880.99
22
$570.23
$0.262
7,329
$1,923.66 $1,353.42
23
-$880.99
$0.262
0
$0.00
$880.99
24
-$234.30
$0.262
4,145
$1,087.99 $1,322.29
25
$947.17
$0.262
8,585
$2,253.22 $1,306.05
26
NPV

-$3,748.87

IRR

-

Avg. Yield
Source: Authors Calculation, 2012

5,525

72

Table D6:High-Density orchard NPV calculation:1 average yield decrease with variability
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre Cost/Acre
0
-$3,430.00
10.30%
$0.262
0
$0.00 $3,430.00
1
-$4,607.48
$0.262
0
$0.00 $4,607.48
2
-$816.28
$0.262
0
$0.00
$816.28
3
-$1,002.12
$0.262
0
$0.00 $1,002.12
4
-$1,361.65
$0.262
0
$0.00 $1,361.65
5
$1,043.14
$0.262
10,675
$2,796.93 $1,753.79
6
-$983.98
$0.262
3,220
$843.65 $1,827.63
7
$190.87
$0.262
7,994
$2,094.39 $1,903.53
8
$2,975.11
$0.262
18,903
$4,952.48 $1,977.37
9
-$1,117.88
$0.262
3,562
$933.33 $2,051.21
10
$81.00
$0.262
8,138
$2,132.22 $2,051.21
11
$5,153.50
$0.262
27,499
$7,204.71 $2,051.21
12
-$1,361.65
$0.262
0
$0.00 $1,361.65
13
$3,634.38
$0.262
21,701
$5,685.60 $2,051.21
14
-$1,537.91
$0.262
1,959
$513.30 $2,051.21
15
$2,022.58
$0.262
15,549
$4,073.79 $2,051.21
16
$2,335.37
$0.262
16,743
$4,386.58 $2,051.21
17
$1,727.80
$0.262
14,424
$3,779.02 $2,051.21
18
$3,509.94
$0.262
21,226
$5,561.15 $2,051.21
19
$1,638.80
$0.262
14,084
$3,690.01 $2,051.21
20
$2,735.34
$0.262
18,269
$4,786.55 $2,051.21
21
$467.67
$0.262
9,450
$2,475.81 $2,008.14
22
$1,383.46
$0.262
12,773
$3,346.47 $1,963.01
23
$1,593.71
$0.262
13,403
$3,511.59 $1,917.88
24
NPV
IRR

-$2,236.14
6.05%

Avg. Yield
Source: Authors Calculation, 2012

11,979

73

Table D7: Standard orchard NPV calculation with 25 percent price increase
Year
NCF
Discount Rate Price/Lb.
Yield/Acre Revenue/Acre
0
-$1,430.00
10.30%
$0.328
0.00
$0.00
1
-$1,554.72
$0.328
0.00
$0.00
2
-$444.28
$0.328
0.00
$0.00
3
-$494.30
$0.328
0.00
$0.00
4
-$569.14
$0.328
0.00
$0.00
5
-$648.65
$0.328
0.00
$0.00
6
-$779.14
$0.328
1,430.00
$469.16
7
-$329.96
$0.328
2,860.00
$938.31
8
$99.26
$0.328
4,290.00
$1,407.47
9
$525.19
$0.328
5,710.00
$1,873.34
10
$962.96
$0.328
7,140.00
$2,342.50
11
$1,387.42
$0.328
8,570.00
$2,811.66
12
$1,854.19
$0.328
10,000.00
$3,280.81
13
$1,854.19
$0.328
10,000.00
$3,280.81
14
$1,854.19
$0.328
10,000.00
$3,280.81
15
$1,854.19
$0.328
10,000.00
$3,280.81
16
$1,854.19
$0.328
10,000.00
$3,280.81
17
$1,854.19
$0.328
10,000.00
$3,280.81
18
$1,854.19
$0.328
10,000.00
$3,280.81
19
$1,854.19
$0.328
10,000.00
$3,280.81
20
$1,854.19
$0.328
10,000.00
$3,280.81
21
$1,854.19
$0.328
10,000.00
$3,280.81
22
$1,854.19
$0.328
10,000.00
$3,280.81
23
$1,527.77
$0.328
9,000.00
$2,952.73
24
$1,230.84
$0.328
8,000.00
$2,624.65
25
$919.88
$0.328
7,000.00
$2,296.57
26
NPV
IRR

$3,635.26
11.17%

Avg. Yield
Source: Authors Calculation, 2012

8,200

74

Cost/Acre
$1,430.00
$1,554.72
$444.28
$494.30
$569.14
$648.65
$1,248.30
$1,268.27
$1,308.21
$1,348.16
$1,379.54
$1,424.24
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,424.96
$1,393.81
$1,376.69

Table D8: High-Density orchard NPV calculation with 25 percent price increase
Year
NCF
Discount Rate
Price/Lb. Yield/Acre Revenue/Acre
0
-$3,430.00
10.30%
$0.328
0.00
$0.00
1
-$4,607.48
$0.328
0.00
$0.00
2
-$816.28
$0.328
0.00
$0.00
3
-$1,002.12
$0.328
0.00
$0.00
4
-$692.52
$0.328
3,340.00
$1,095.52
5
$315.57
$0.328
6,660.00
$2,184.48
6
$1,332.40
$0.328
10,000.00
$3,280.00
7
$2,347.04
$0.328
13,340.00
$4,375.52
8
$3,357.31
$0.328
16,660.00
$5,464.48
9
$4,374.14
$0.328
20,000.00
$6,560.00
10
$4,374.14
$0.328
20,000.00
$6,560.00
11
$4,374.14
$0.328
20,000.00
$6,560.00
12
$4,374.14
$0.328
20,000.00
$6,560.00
13
$4,374.14
$0.328
20,000.00
$6,560.00
14
$4,374.14
$0.328
20,000.00
$6,560.00
15
$4,374.14
$0.328
20,000.00
$6,560.00
16
$4,374.14
$0.328
20,000.00
$6,560.00
17
$4,374.14
$0.328
20,000.00
$6,560.00
18
$4,374.14
$0.328
20,000.00
$6,560.00
19
$4,374.14
$0.328
20,000.00
$6,560.00
20
$4,374.14
$0.328
20,000.00
$6,560.00
21
$3,764.04
$0.328
18,000.00
$5,904.00
22
$3,156.13
$0.328
16,000.00
$5,248.00
23
$2,548.22
$0.328
14,000.00
$4,592.00
24
NPV
IRR

$14,725.36
16.96%

Avg. Yield
Source: Authors Calculation, 2012

16,900

75

Cost/Acre
$3,430.00
$4,607.48
$816.28
$1,002.12
$1,788.04
$1,868.91
$1,947.60
$2,028.48
$2,107.17
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,139.96
$2,091.87
$2,043.78

Table D9: Standard orchard NPV calculation with 25 percent price decrease
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre
0
-$1,430.00
10.30%
$0.197
0.00
$0.00
1
-$1,554.72
$0.197
0.00
$0.00
2
-$444.28
$0.197
0.00
$0.00
3
-$494.30
$0.197
0.00
$0.00
4
-$569.14
$0.197
0.00
$0.00
5
-$648.65
$0.197
0.00
$0.00
6
-$966.80
$0.197
1,430.00
$281.49
7
-$705.28
$0.197
2,860.00
$562.99
8
-$463.73
$0.197
4,290.00
$844.48
9
-$224.15
$0.197
5,710.00
$1,124.01
10
$25.96
$0.197
7,140.00
$1,405.50
11
$262.75
$0.197
8,570.00
$1,686.99
12
$541.87
$0.197
10,000.00
$1,968.49
13
$541.87
$0.197
10,000.00
$1,968.49
14
$541.87
$0.197
10,000.00
$1,968.49
15
$541.87
$0.197
10,000.00
$1,968.49
16
$541.87
$0.197
10,000.00
$1,968.49
17
$541.87
$0.197
10,000.00
$1,968.49
18
$541.87
$0.197
10,000.00
$1,968.49
19
$541.87
$0.197
10,000.00
$1,968.49
20
$541.87
$0.197
10,000.00
$1,968.49
21
$541.87
$0.197
10,000.00
$1,968.49
22
$541.87
$0.197
10,000.00
$1,968.49
23
$346.68
$0.197
9,000.00
$1,771.64
24
$180.98
$0.197
8,000.00
$1,574.79
25
$1.25
$0.197
7,000.00
$1,377.94
26
NPV
IRR

-$4,130.96
-

Avg. Yield
Source: Authors Calculation, 2012

8,200

76

Cost/Acre
$1,430.00
$1,554.72
$444.28
$494.30
$569.14
$648.65
$1,248.30
$1,268.27
$1,308.21
$1,348.16
$1,379.54
$1,424.24
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,424.96
$1,393.81
$1,376.69

Table D10: High-Density orchard NPV calculation with 25 percent price decrease
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre
0
-$3,430.00
10.30%
$0.197
0.00
$0.00
1
-$4,607.48
$0.197
0.00
$0.00
2
-$816.28
$0.197
0.00
$0.00
3
-$1,002.12
$0.197
0.00
$0.00
4
-$1,130.06
$0.197
3,340.00
$657.98
5
-$556.89
$0.197
6,660.00
$1,312.02
6
$22.40
$0.197 10,000.00
$1,970.00
7
$599.50
$0.197 13,340.00
$2,627.98
8
$1,174.85
$0.197 16,660.00
$3,282.02
9
$1,754.14
$0.197 20,000.00
$3,940.00
10
$1,754.14
$0.197 20,000.00
$3,940.00
11
$1,754.14
$0.197 20,000.00
$3,940.00
12
$1,754.14
$0.197 20,000.00
$3,940.00
13
$1,754.14
$0.197 20,000.00
$3,940.00
14
$1,754.14
$0.197 20,000.00
$3,940.00
15
$1,754.14
$0.197 20,000.00
$3,940.00
16
$1,754.14
$0.197 20,000.00
$3,940.00
17
$1,754.14
$0.197 20,000.00
$3,940.00
18
$1,754.14
$0.197 20,000.00
$3,940.00
19
$1,754.14
$0.197 20,000.00
$3,940.00
20
$1,754.14
$0.197 20,000.00
$3,940.00
21
$1,406.04
$0.197 18,000.00
$3,546.00
22
$1,060.13
$0.197 16,000.00
$3,152.00
23
$714.22
$0.197 14,000.00
$2,758.00
24
NPV
IRR

-$1,645.36
6.48%

Avg. Yield
Source: Authors Calculation, 2012

16,900

77

Cost/Acre
$3,430.00
$4,607.48
$816.28
$1,002.12
$1,788.04
$1,868.91
$1,947.60
$2,028.48
$2,107.17
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,185.86
$2,139.96
$2,091.87
$2,043.78

Table D11: Standard orchard NPV calculation with risk-free discount rate
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre
0
-$1,430.00
4.30%
$0.262
0.00
$0.00
1
-$1,554.72
$0.262
0.00
$0.00
2
-$444.28
$0.262
0.00
$0.00
3
-$494.30
$0.262
0.00
$0.00
4
-$569.14
$0.262
0.00
$0.00
5
-$648.65
$0.262
0.00
$0.00
6
-$872.97
$0.262
1,430.00
$375.33
7
-$517.62
$0.262
2,860.00
$750.65
8
-$182.24
$0.262
4,290.00
$1,125.98
9
$150.52
$0.262
5,710.00
$1,498.68
10
$494.46
$0.262
7,140.00
$1,874.00
11
$825.09
$0.262
8,570.00
$2,249.33
12
$1,198.03
$0.262
10,000.00
$2,624.65
13
$1,198.03
$0.262
10,000.00
$2,624.65
14
$1,198.03
$0.262
10,000.00
$2,624.65
15
$1,198.03
$0.262
10,000.00
$2,624.65
16
$1,198.03
$0.262
10,000.00
$2,624.65
17
$1,198.03
$0.262
10,000.00
$2,624.65
18
$1,198.03
$0.262
10,000.00
$2,624.65
19
$1,198.03
$0.262
10,000.00
$2,624.65
20
$1,198.03
$0.262
10,000.00
$2,624.65
21
$1,198.03
$0.262
10,000.00
$2,624.65
22
$1,198.03
$0.262
10,000.00
$2,624.65
23
$937.23
$0.262
9,000.00
$2,362.19
24
$705.91
$0.262
8,000.00
$2,099.72
25
$460.56
$0.262
7,000.00
$1,837.26
26
NPV
IRR

$3,901.19
6.76%

Avg. Yield
Source: Authors Calculation, 2012

8,200

78

Cost/Acre
$1,430.00
$1,554.72
$444.28
$494.30
$569.14
$648.65
$1,248.30
$1,268.27
$1,308.21
$1,348.16
$1,379.54
$1,424.24
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,426.62
$1,424.96
$1,393.81
$1,376.69

Table D12: High-Density orchard NPV calculation with risk-free discount rate
Year
NCF
Discount Rate Price/Lb. Yield/Acre Revenue/Acre Cost/Acre
0
-$3,430.00
4.30%
$0.262
0.00
$0.00 $3,430.00
1
-$4,607.48
$0.262
0.00
$0.00 $4,607.48
2
-$816.28
$0.262
0.00
$0.00
$816.28
3
-$1,002.12
$0.262
0.00
$0.00 $1,002.12
4
-$912.96
$0.262
3,340.00
$875.08 $1,788.04
5
-$123.99
$0.262
6,660.00
$1,744.92 $1,868.91
6
$672.40
$0.262
10,000.00
$2,620.00 $1,947.60
7
$1,466.60
$0.262
13,340.00
$3,495.08 $2,028.48
8
$2,257.75
$0.262
16,660.00
$4,364.92 $2,107.17
9
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
10
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
11
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
12
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
13
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
14
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
15
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
16
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
17
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
18
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
19
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
20
$3,054.14
$0.262
20,000.00
$5,240.00 $2,185.86
21
$2,576.04
$0.262
18,000.00
$4,716.00 $2,139.96
22
$2,100.13
$0.262
16,000.00
$4,192.00 $2,091.87
23
$1,624.22
$0.262
14,000.00
$3,668.00 $2,043.78
24
NPV
IRR

$18,864.74
12.53%

Avg. Yield
Source: Authors Calculation, 2012

16,900

79

Table D13: Asset replacement base scenario
Age Year Left Discount Rate Standard
Year NPV
HD
15
10
10.30%
$1,099.22
24 $6,477.52
$737.30
16
9
$1,081.86
$737.30
17
8
$1,059.85
$737.30
18
7
$1,031.18
$737.30
19
6
$992.53
$737.30
20
5
$937.91
$737.30
21
4
$855.32
$737.30
22
3
$716.78
$737.30
23
2
$589.25
$737.30
24
1
$460.56
$737.30
25
0
Source: Authors Calculation, 2012
Table D14: Asset replacement: 1 average yield increase with variability
Age Year Left Discount Rate Standard
Year NPV
HD
15
10
10.30%
$2,103.37
24 $12,836.39 $1,461.10
16
9
$2,164.96
$1,461.10
17
8
$2,031.73
$1,461.10
18
7
$1,739.74
$1,461.10
19
6
$1,915.74
$1,461.10
20
5
$1,790.18
$1,461.10
21
4
$1,318.54
$1,461.10
22
3
$722.63
$1,461.10
23
2
$893.97
$1,461.10
24
1
-$187.58
$1,461.10
25
0
Source: Authors Calculation, 2012
Table D15: Asset replacement with 25 percent price increase
Age Year Left Discount Rate Standard
Year NPV
HD
15
10
10.30%
$1,729.32
24 $14,725.36 $1,676.11
16
9
$1,707.38
$1,676.11
17
8
$1,679.56
$1,676.11
18
7
$1,643.33
$1,676.11
19
6
$1,594.49
$1,676.11
20
5
$1,525.45
$1,676.11
21
4
$1,421.07
$1,676.11
22
3
$1,245.99
$1,676.11
23
2
$1,082.97
$1,676.11
24
1
$919.88
$1,676.11
25
0
$1,676.11
Source: Authors Calculation, 2012
80

Decision
Maintain
Maintain
Maintain
Maintain
Maintain
Maintain
Maintain
Replace
Replace
Replace

Decision
Maintain
Maintain
Maintain
Maintain
Maintain
Maintain
Replace
Replace
Replace
Replace

Decision
Maintain
Maintain
Maintain
Replace
Replace
Replace
Replace
Replace
Replace
Replace

Table D16: Asset replacement with risk-free discount rate
Age Year Left Discount Rate Standard
Year NPV
HD
1
24
4.30%
$365.00
24 $18,864.74 $1,275.57
2
23
$421.11
$1,275.57
3
22
$486.28
$1,275.57
4
21
$563.60
$1,275.57
5
20
$655.19
$1,275.57
6
19
$774.53
$1,275.57
7
18
$879.10
$1,275.57
8
17
$968.38
$1,275.57
9
16
$1,040.14
$1,275.57
10
15
$1,090.25
$1,275.57
11
14
$1,115.85
$1,275.57
12
13
$1,107.47
$1,275.57
13
12
$1,097.65
$1,275.57
14
11
$1,086.01
$1,275.57
15
10
$1,071.99
$1,275.57
16
9
$1,054.81
$1,275.57
17
8
$1,033.27
$1,275.57
18
7
$1,005.51
$1,275.57
19
6
$968.43
$1,275.57
20
5
$916.42
$1,275.57
21
4
$838.29
$1,275.57
22
3
$707.92
$1,275.57
23
2
$585.82
$1,275.57
24
1
$460.56
$1,275.57
25
0
Source: Authors Calculation, 2012

81

Decision
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace
Replace

REFERENCES

82

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