Profitability of Greenhouse Tomato Production in Louisiana

Linda Benedict, Hinson, Roger A.  |  3/2/2010 9:48:09 PM

Roger A. Hinson

According to LSU AgCenter estimates in 2008, 20 greenhouse tomato producers in the state had a total of about 130,000 square feet in production, with sales of more than $1 million at an average price per pound of $1.50. Greenhouse capacity averaged 6,500 square feet or just over two of the 30-foot-by100-foot greenhouses, which are typical of these operations. With good management and marketing, greenhouse tomato production can be profitable.

Although greenhouse tomatoes are growing in popularity, the most common kind of tomato available to U.S. consumers is produced in unprotected outdoor fields and usually harvested at the mature green stage. These field tomatoes have been criticized by consumers because, while they can withstand storage and handling in wholesale distribution, that often is at the expense of taste. Producers of field tomatoes believe that neither retailers nor consumers understand the storage requirements of tomatoes and argue that the standard tomato provides acceptable quality and taste if handled properly. Field tomatoes are particularly well-suited to the food service market because they slice well, have a more predictable cost and acceptable color, and are cheaper than greenhouse tomatoes.

But the greenhouse tomato has garnered a growing niche market. Consumers have responded to superior quality characteristics offered by greenhouse tomatoes including taste and appearance. Some greenhouse tomatoes are sold on the vine in clusters of four to six individual tomatoes still on the vine. This preference is reflected in an expansion of the greenhouse tomato’s share of the overall tomato market, at the expense of field tomatoes. Greenhouse tomatoes are preferred because the modified climate in these structures produces more uniform tomatoes. Pests are more controlled, often leading to reduced pesticide use. And the tomatoes are harvested at a riper stage, which is perceived to offer a superior flavor than when picked at a mature green stage.

In Louisiana, far more field tomatoes are produced than greenhouse tomatoes. According to the latest LSU AgCenter estimates (2007), there are 278 producers of field tomatoes with 581 acres in production. The total output was 806,000 lugs (20-pound boxes) with an average price of $16.50 per lug for sales of more than $13 million.

U.S. greenhouse tomato production grows
Canada was ahead of the United States in adopting the greenhouse method of growing tomatoes, which the Canadians adopted from the Dutch, as a way of extending a short growing season. Canada remains an important exporter to the United States of greenhouse tomatoes in parts of the year. Canada’s success led to expanded greenhouse production in the northeast United States first and then along the eastern Rocky Mountains (Colorado, Arizona and New Mexico).

Mexico, an important exporter of field tomatoes to the United States in late fall, winter and early spring, has also adopted greenhouse production, often in less capital-intensive structures, compared to those in Canada and the United States.

Greenhouse tomatoes captured about 43 percent of the U.S. market in 2003, up substantially from the 1998 value of about 25 percent. Of that share, the Canadian product accounted for about 37 percent, the U.S. had 30 percent and Mexico, 28 percent. Canada is the dominant producer of greenhouse tomatoes for the U.S. market in the spring, summer and fall. The Canadian industry is efficient and has sufficiently high yields to put substantial pressure on U.S. tomato prices. Canadian tomatoes compete directly with the U.S. field-grown tomato for the retail grocer market. Noting that, U.S. and Mexican producers have responded by expanding greenhouse production to supplement their traditional role as suppliers of field tomatoes.

Commercial U.S. greenhouse production moved to the Southwest and West to pursue the higher-priced, cool-season market. The U.S. industry is technologically comparable to the Canadian industry, with high yields and consistent year-round product. Mexico’s combination of field and greenhouse tomatoes, however, competes across the entire year. Another of Mexico’s advantages is its varying levels of technology. Some production is from technologically up-to-date greenhouses, while other production is from lower quality houses and from structures that provide only shade. Overall, Mexican producers have lower costs, but yields are lower as well. While Mexico’s industry is challenged by lower-level technology and inconsistent product quality, its ability to supply all year and its productive area and volume of production make it a significant force in the industry.

Locally grown appeals to consumers  
Louisiana greenhouse tomato growers have a single or a few greenhouses. They target local markets, both direct to consumer and through grocers with one or a few stores. Their claim of locally grown is a product characteristic that an increasing number of consumers want. Local means many things to the consumer, including fresher, healthier, safer, environmentally friendly, and supportive of local business enterprise. The intent of sellers to the local market is to bypass some of the participants in the commercial system and get a price per unit closer to that paid by the consumer in the traditional large chain grocery store. The trade-off is that growers assume marketing functions that place a substantial claim on their time.

Greenhouse production offers the advantage of extending the season, making tomatoes of superior quality available for extended periods of the year. These factors contribute to premium prices for direct-to-consumer sales and offer a point of differentiation for the local greenhouse tomato. However, the volume of product going through these markets often is not large. Other direct markets include direct sales to grocers. To expand sales, growers must understand what buyers really want when they choose greenhouse tomatoes.

If a grower’s production volume exceeds the local direct market, alternatives include sales to regional assembly point markets such as cooperative wholesalers or institutional users such as restaurants, cafeterias or schools – and even bulk sales to the national markets. These are excellent components of some growers’ strategies. Price per unit is lower because wholesalers provide many supply chain services, so the grower hands marketing activities to others and can focus on production. Some growers may find that revenues and profit from an operation devoted to wholesale sales is preferable overall because the markets are much larger.

Profitability depends on yield and price  
Production of tomatoes in greenhouses along the Gulf Coast requires a house design that is modest in cost and that can provide protection against cold with reasonable efficiency. The greenhouse must be ventilated and cooled in warmer seasons, and it must facilitate efficient management of production activities and pest control. Generally, a two-season crop (spring and fall) has been the dominant system, though single-crop regimes are being evaluated. With good management, yields of 20 to 25 pounds per plant space in a combined spring and fall season are typical.

The LSU AgCenter published greenhouse tomato budgets in 2007, and these budgets were updated to 2009 levels using agricultural equipment price indexes and production input cost updates from 2009 budget projection files. These provided detailed cost estimates of each activity in the production system for fixed and variable costs. For some, or perhaps many, Louisiana growers, labor is provided by the grower and family members. If this labor is not paid, it may not be considered by the grower as a cash expense. In this budget, the opportunity cost for each hour of labor required for production is included, so the total cost estimate may be high from the point of view of some growers.

Production cost was estimated on the basis of one 30-foot-by-100-foot poly-covered greenhouse with standard ventilation, heating and irrigation equipment. Spring and fall crops are produced in grow bags set in rows with a total plant count of 660 per house, with appropriate irrigation and fertilization system, pest control, and with the assumption that management generally follows LSU AgCenter best practices. The detailed activity cost budget is available on request. With these assumptions, calculated total costs per greenhouse per year were $17,706. The base assumption for yield was 15 and 7 pounds per plant space for the spring and fall crops, respectively, for a total of 22 pounds. Total yield for the greenhouse was 920 boxes of 15 pounds each, after including post-farm loss of 5 percent.

Because Louisiana growers are assumed to sell this premium product primarily to the local direct market, prices generally reflect that situation. The U.S. Department of Agriculture reports tomato wholesale and retail prices and recently has included the premium greenhouse tomato in these price reports. The greenhouse tomato average price as reported by the LSU AgCenter was $1.50 per pound in 2008. To be conservative, the base price for this budget was chosen as $1.25 per pound to represent sales to a range of customers.

To address the issue of profitability, a procedure that shows an estimate of profit over a range of prices and yields is used. The base price of $15 per box was decreased and increased in $2 intervals from the base and is presented at the top of the table. Yield was assumed to be 920 lugs and was decreased and increased in 100 unit intervals. See Table 1.

The calculations in the body of the table are revenue (price times quantity) minus fixed and variable costs. When yield is below the base, the profit estimate is adjusted for lower labor and box costs, and those costs are adjusted upward when yield is above the base. This procedure results in an array of profit estimates based on ranges in price and yield.

Changing profit levels are illustrated in this section by varying price across ranges that might well occur in the marketplace, and the impact of yield on profitability is included by ranging above and below the base in increments of 100 boxes.

As indicated in Table 1, the base price and yield combination provides a small loss (almost $450) after total costs specified in the budget are paid. But a 100 box increase in yield increases profit to more than $1,200, and an increase of $2 per box provides profit of almost $1,400. On the other hand, lower yields and prices would decrease profit quickly. This table illustrates gross revenue and net return can be very volatile in this market.

A caution regarding this profitability analysis is that it does not include costs of preparing the product for market and marketing costs incurred by growers, particularly those who sell direct. These costs were not included because they vary greatly depending on the individual grower’s circumstances and choices. There can be substantial direct and implicit costs for direct sales at outlets away from the farm, such as farmer’s markets. Travel expenses in the form of vehicle costs, the opportunity cost of travel time to farmer’s markets, and the amount of grower time dedicated to selling at the market are examples. Hauling to a wholesale customer can be a significant expense. These costs should be identified for the individual situation and considered when choosing enterprises.

Given these considerations, there appear to be profitable opportunities in greenhouse tomato production. Before investing in a greenhouse or beginning production, growers should consider the size of their market and the degree of competition from other producers and from retailers in their market area. Growers should know where they expect to sell, and agreements with managers of those sales outlets should be discussed. Understanding the selling process and using effective marketing and promotion techniques, along with effective management of the production process, improve the odds of having a profitable enterprise.

Roger A. Hinson, Professor, Department of Agricultural Economics & Agribusiness, LSU AgCenter, Baton Rouge, La.

(This article was published in the winter 2010 issue of Louisiana Agriculture.)

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