CMS Publications-Growing Macadamias in Southern CA

California Macadamia Society Publications

IS IT WORTH IT?
Jim Teeter

Published in 1994 CMS Yearbook

I have a question for my fellow southern Californians. Maybe this question is applicable to some of our other members as well, with slightly different assumptions. My question─Is it worth it?

What do I mean? Well, it started out at the beautiful Del Mar racetrack. Have any of you ever volunteered to staff the California Macadamia Society booth at the Del Mar Fair? It's a wonderful opportunity (and we'd love a volunteer, so if you're interested, call any of your CMS board members prior to June). As a newcomer to the industry, I thought I'd be overwhelmed by the questions fairgoers would ask. But other than the typical first two questions ("Oh, Macadamias can grow in California?" and "Where can I get one?") the next most often asked question I got was some form of "Should (or can) you grow Macadamia nuts (commercially)?"

My interest was developed further when Jack Ahlswede, a successful local avocado grower and nursery owner, started some research on Macadamias as he had done before with avocados. One question of his was particularly provocative (or was it annoying?). That question was, "Jim, how much does it cost to harvest your nuts?─or how much do you pay yourself to harvest your own nuts?" Jack may have lost interest in his research (perhaps due to his perception of the economics of Macadamias?), but his question still lingered. Should we be growing macadamias commercially in southern California? As a neophyte to the macadamia industry, I beg readers not to take my word as gospel; but as a concerned accountant (and I hope Mrs. Teeter didn't waste her money on San Diego State University tuition), I beg you to study this question for yourself.

So, why this "Poor man's analysis?" It would be nice if the University could do a professional job for each of us; but then again, the only person most of us will believe is ourselves, right?

An Accounting of Estimated Profit and Loss

For the rest of this article, let's assume that one acre of land is farmed for Macadamias exclusively. Conservatively planted at 20' x 20' or 400 ft², that leaves room for 109 trees (43,560 ft² per acre ¸ 400 ft²), assuming all land is usable and none is used for access roads.

To estimate income should be easy. Just take all our receipts and divide by the number of trees to come up with gross income per tree, or per acre. For the theoretical acre in my analysis, I used 30 pounds production per tree. "Hold it," some say, "I can produce 50 pounds on my trees." Production must be average, not what "may" happen on the best tree; and that can't realistically include culls, the weight of husks, nuts with 10%+ moisture, etc. To be accurate, divide sold macadamia nuts by the number of trees! In our example, that's 30 pounds times 109 trees, or 3,270 pounds per acre. Multiply that by last year's price for Grade B nuts at Gold Crown Macadamia Co-op and that's $4,251 gross income (see statement on next page). Sure, you could sell retail for a little higher than that, but then you've got marketing costs. And if you can sell retail without assuming more new costs than the price differential, I've got a few thousand pounds you can sell for me! Interested?

Macadamia Production Costs Southern California
Annual Cost
	109 TREES	PER TREE	PER POUND
Water	$1,200.00	$11.01	$0.37
Fertilizer	250.00	2.29	0.08
Weed control	320.00	2.94	0.10
Pesticides	200.00	1.83	0.06
Harvesting	640.00	5.87	0.20
Husk & sorting	160.00	1.47	0.05
Sales & Other	50.00	0.46	0.02
Subtotal	$2,820.00	$25.87	$0.86
Land (int. only)	1,050.00	9.63	0.32
Amortize start-up	200.00	1.00	0.06
Equip. depreciation	400.00	2.00	0.12
TOTAL EXPENSES	$4,470.00	$35.50	$1.37
Average Sales (lb.)	3,270	30	n/a
Sales Price	1.30	1.30	1.30
Income	4,251.00	39.00	1.30
Net Loss	-$219.00	$-2.01	$-0.07
Other assumptions: 109 trees/acre; Labor at $5/hour; Interest rate 7%

To determine your actual costs of doing business, you must ask yourself a few tough questions. Did you factor in the cost of your land? Depreciate your farm equipment? How about the start-up costs (you didn't get your irrigation system and trees free, did you)? Finally, we can get out the old shoe box and look up our bills to get a handle on ongoing annual costs.

So, what's the biggest cost? You don't need to look too hard to see what's happening to the price of water in southern California. Couple that with the recent decline in Macadamia prices and the first ever glut of macadamias on the market and our predicament is illustrated graphically in the accompanying tables and charts.

For this illustration, I used 36 inches of water per year for each tree; for one acre of land that's three acre-feet. Like the revenue estimate above, it's not appropriate to figure "40 gallons per tree each time I water, times x hours times x gph times ..." because that doesn't consider waste─or reality. Next, using $400 an acre-foot, besides startling our out of state neighbors, is probably ridiculous given Rainbow Water District's current above-$500 price and recent predictions of $1000+ water before the turn of the century. Then again, the politicians seem ready, willing and able to implement reinstatement of the agricultural water discount. This is a huge assumption, but even at $400 water is still our highest cost by far; and in this example it's $1,200 or $11.01 per tree per year.

Many of the labor costs are hard to estimate, especially for a small farmer. What wage rate are you willing to pay yourself? How much do we pay our workers? Does that include the cost of their housing? Social Security? If not, I hope you're not expecting an appointment to high office in the Clinton administration! Using $5 an hour for labor costs, harvesting can take as long as 8 hours a week for the 16-week season, or 128 hours, especially if you diligently pick up your nuts at least twice a week to prevent water and pest damage. Similar estimates can be made for husking, sorting, culling, and even the mileage driving to and from market (not included in this analysis).

Based on these estimates, it appears an acre of macadamias can be farmed for about $2,820 a year. So, how much does that make for us? Revenues of $4251 less operating expenses of $2820 looks like a gross profit of $1450, right?

Wait a minute! What about the costs it took to start up the grove? How do they get recovered? Let's say we bought our trees from the nursery for $10 each. And spent $9 or $10 per tree on irrigation pipe, valves, microsprinklers, etc. Amortized over 10 years, that's another $200 a year in costs, and if you don't think that's real, have you ever replaced a sprinkler or a valve since original planting? The same holds true for depreciation of farm equipment. Did you buy a truck to carry tools, people and your harvest? How about that chain saw and the weed eaters? A husker? Storage boxes? They all add up. I used $10,000 for the 5 acres, thus divided by 5, then straight-line depreciation over 5 years is another $400 a year. Finally, how about that land you plunked the trees down on? And southern California real estate is not exactly dirt cheap (sorry). At a value of $15,000 an acre, there is at least an opportunity cost for not using the land for another venture. On the other hand, I'll bet you're not a banker. Even at today's super low interest rates, I'll bet you're still paying 7% interest on the loan for that land, or another $1,050 a year.

Take the revised total expenses and it looks like we're actually losing a couple dollars a year. Sales of $4251 less expenses of $4470 gives us a net loss of $219 ($2.01 per tree). So should we quit? An awful lot of that decision depends on the future. If water prices continue to rise, so will the number of extinct farms. At today's prices, it makes sense to continue if you're already in business. The land and depreciation costs are already sunk; you can't get them back. So every dollar you make above operating expenses helps to pay back start-up costs. But to answer the question of the fairgoers, who wanted to know whether starting up a macadamia grove is a good idea, the answer is a resounding "NO!"

San Diego Water Prices
YEAR	PRICE
1970	$87
1980	179
1982	222
1984	306
1986	316
1988	316
1990	348
1992 ^*	400
1994 ^*	550
2000 ^*	1000
^* Projected, data not available

NOW, WHAT?

So, then, what about the future? A lot of that depends on what happens to the price of our most expensive resource, water. Prices for the last 10 years, and projections for the next 5 are depicted in the table to the right. While the level at which prices will settle is unknown, they appear to continue heading upward; too bad they don't follow Newton's law!

Macadamia nut prices, plotted in the graph below, appear to have discovered the law of gravity. The following table illustrates both the Hawaiian prices and the California prices for the last 20-odd years; the California prices (top) do a pretty good job of accenting the difference between a market dominated by a few buyers (Hawaii) and one run for the benefit of growers (Gold Crown Co-op).

MACADAMIA PRICES 1971-1992
	Hawaii			Gold Crown
Year	Gross	Adj'd	High	D	C	B	Seed
1971	0.247	0.272	0.424				0.424
1972	0.233	0.256	0.424				0.424
1973	0.255	0.281	0.487				0.487
1974	0.320	0.352	0.473				0.473
1975	0.316	0.348	0.715			Thin	0.715
1976	0.369	0.406	0.827			0.627	0.827
1977	0.408	0.449	0.854		In- shell	0.654	0.854
1978	0.538	0.592	0.752		0.552	0.602	0.752
1979	0.629	0.692	1.416	0.000	1.166	1.416	1.416
1980	0.724	0.796	1.346	0.000	1.096	1.346	1.346
1981	0.793	0.872	1.253	0.000	1.003	1.253	1.253
1982	0.739	0.813	2.005	0.000	1.505	1.755	2.005
1983	0.657	0.723	1.990	0.000	1.490	1.740	1.990
1984	0.692	0.761	1.438	0.000	0.938	1.188	1.438
1985	0.725	0.798	1.670	0.000	1.170	1.420	1.670
1986	0.800	0.880	1.490	0.000	0.990	1.240	1.490
1987	0.840	0.924	1.430	0.980	1.130	1.280	1.430
1988	0.900	0.990	1.420	0.970	1.120	1.270	1.420
1989	0.890	0.979	1.150	0.700	0.850	1.000	1.150
1990	0.820	0.902	1.260	0.810	0.960	1.110	1.260
1991	0.700	0.770	1.450	1.000	1.150	1.300	1.450
1992	0.680	0.748	1.650	0.000	0.000	1.650	1.500

* Hawaii prices adjusted for moisture content.

Hawaii prices were adjusted for the 10% moisture content of nuts when delivered (Gold Crown pays on dried or 1.5% moisture). Though it appears Gold Crown prices are not falling, they have not yet been adjusted for actual payments to growers. Besides that indicator, one can easily see that Macadamia prices are falling at the same time water prices are skyrocketing! It won't take long before the two intersect (see graph on next page), which means that the cost of applying water to our trees will exceed the price paid for nuts (forget about the cost of fertilizers and weed control).

From an accounting perspective, it does not make much sense to keep dumping water on trees when income won't even cover variable costs, let alone fixed costs. The only question is, when will the cost of water cause variable costs to exceed our income?

Assuming all other prices remain the same (and you know what happens when one uses the word ass-u-me), it will no longer make sense to grow macadamias in southern California, even for us who have established groves, by the turn of the century. While I jumped to this conclusion a couple years ago, I must leave the same caution I received─do not cut down your trees! Just shut the water off. The water at my grove was shut off completely for 5 years, and the trees cam back fairly quickly when I turned the water back on. That way if prices reverse, you can undo the damage (though you might want to write into Ripley's first). One other interesting observation I have made may convince you to muzzle your chainsaw. I made the mistake of cutting down about 10 trees (leaving a 2-foot stump) about two years ago, completely removing the irrigation system to those trees. Today, they have grown back to densely foliated, well-rounded trees that actually produced a few nuts.

CONCLUSION

About the time I was ready to draw my conclusion, I stumbled across the fact that Jim Russell had already made such a study as this and published his in the 1980 yearbook (no wonder he always knew the answers). My conclusion is no different than his. And it is made even more obvious by the chart below.

If you're already in the Macadamia business, stay in (at least until water hits the $1000 per acre-foot level). If you're not in the business, stay out! It is not worth it.

Finally, I know what to tell those fairgoers.

a service of

CALIFORNIA MACADAMIA SOCIETY
P. O. Box 1298
Fallbrook, CA 92088