Economics of

Texas Citrus

CONTENTS• Descriptive Stuff

citrus industry facts citrus supply & demand situation citrus prices & production costs

• Economic Decisions orchard investment/disinvestment managing risks

Basic Point to Remember:• The important economic issues about citrus involve the long-term, perennial, fixed asset nature of orchards• Examples

The supply of citrus is relatively unresponsive to short-run changes in citrus prices The profitability of citrus operations must be measured in a multi-year investment framework

24%15%

15%

18%

11%

8%

7%

2%

Vegetables Cotton

Feed Crops Livestock

Fruits Other Crops

Nursery Ag. Related

Where does citrus fit within the LRGV agricultural economy?

Out of a total crop value of $600 million

Prices & Income• Fresh Market

grapefruit oranges insert graph

• Juice Market grapefruit oranges insert graph

Supply/Demand Shifts• Demand can shift from

changes in consumer income changes in consumer preferences changes in price of substitute or complementary commodities

• Supply can shift from changes in technology (prod. costs) changes in input prices (prod. costs) changes in no. of producers

Who Are Our Competitors?

FLORIDA

California/Arizona

Other Countries (Israel, Cuba)

Florida has the corner on both the Juice and Fresh Markets for Grapefruit

Grapefruit: Florida vs. Others

Florida has the corner on the Juice Market, but California owns the Fresh Market

Juice Market fruit is heavily discounted compared to Fresh Market

Prices & Income• Fresh market citrus gets higher price per box (or per acre) than juice market

• Since consumption is fairly stable, and acreage is fixed in short run, changes in prices result from supply shifts due to weather, for example…

Florida Supply & Prices

Thought Questions • Grapefruit prices are higher every winter & lower every spring. Is this a function of

Supply or Demand?

• Would new information about citrus health benefits affect Supply or Demand? How?

Industry Strategies

• TX Industry strategy is to differentiate Texas grapefruit via trademarks, brands, advertising, to create a separate (and hopefully higher) demand for our specific product

• Another strategy is to aggressively market in the times/locations where TX citrus is most available

• Another strategy is to regulate (via federal marketing order) the packaging and labeling of TX citrus

Grower Level Economics: Production Costs

• Orchard Establishment (Year 1 - Year 3)

• Young Bearing Trees (Year 4 - Year 8)

• Mature Bearing Trees (Year 8 and older)

Production Costs

Investment Decisions• Orchard investments require up-front commitments of land & financial capital for many

years

• Orchards have annual costs & returns over a number of years

• How can you decide today whether an orchard investment will pay over it’s lifetime?

Year 2 CostsGrapefruit Investment Summary: Grapefruit Investment Analysis: Gross Returns,============================================= Variable Cost, Fixed Cost, Allocated Items, andBreak-even Year: 7 years Net Returns, Year 1 - 20.

======================================================Net Present Value: $352 per acre GR VC FC AL NR discounted at Year 1 $0 $1,491 $47 $150 ($1,688)

5% Year 2 $17 $660 $257 $150 ($1,050)Year 3 $225 $675 $257 $150 ($857)Year 4 $450 $741 $257 $150 ($698)Year 5 $675 $741 $257 $150 ($473)Year 6 $930 $741 $257 $150 ($218)Year 7 $1,350 $741 $257 $150 $202Year 8 $1,775 $774 $257 $150 $594Year 9 $1,775 $774 $257 $150 $594Year 10 $1,775 $774 $257 $150 $594Year 11 $1,775 $774 $257 $150 $594Year 12 $1,775 $774 $257 $150 $594Year 13 $1,775 $774 $257 $150 $594Year 14 $1,775 $774 $257 $150 $594Year 15 $1,775 $774 $3 $150 $848Year 16 $1,775 $774 $3 $150 $848Year 17 $1,775 $774 $3 $150 $848Year 18 $1,775 $774 $3 $150 $848Year 19 $1,775 $774 $3 $150 $848Year 20 $1,775 $774 $3 $150 $848

Urban Growth Projections in 2050

Managing Risk• Natural Risks

tropical wind damage water shortages Hard freezes (avg. every 11 years!!)

• Economic DecisionsPurchasing insuranceInvesting in protective technologyHow much can I afford to pay for these?How does risk affect investment scenario?

Commodity Lost Crop Sales Full Time JobEquivalent Loss

Cotton $ 7.8 Million 318

Other Row Crops $ 1.9 Million 97

Citrus $ 5.1 Million 368

Sugarcane $ 7.9 Million 517

Fall Vegetables $55.0 Million 1,984

TOTAL $77.7 Million 3,284

Losses Attributable to Inadequate Losses Attributable to Inadequate Irrigation Water in 1998 DroughtIrrigation Water in 1998 Drought

Conclusion

• Texas citrus can be a good investment, but only with careful consideration of alternative investments and risks

• The Texas citrus industry will likely endure, both as a hobby activity as well as a small (low acreage), input intensive, high tech enterprise