Technical Report #88 March 1991

Growing Greenhouse Tomatoes on Gua·m: History, Prospects and Risks

·-.. - .;..:··--·

John W. Brown, David Saiia and John Blanchard

Technical Report #88

Agricultural Experiment Station • College of Agritulture and Life Sciences • University of Guam

John W. Brown, Agricultural Experiment Station, College of . Agriculture and Life Sciences, University of Guam, UOG Station, Mangilao, Guam 96923 USA

David Saiia and John Blanchard, College of Business and Public Administration, University of Guam, UOG Station, Mangilao, Guam 96923 USA

CONTENTS

Page Introduction 1 History 2 Current Situation and Costs of Production 4 FUsks 15 Summary and Conclusion 18 References 20

Acknowledgements

We would like to thank the following people for their assistance with our project: Charles Griffin, Chisato Ando, Mike Kuhlmann, Chin-Tian Lee, R. Muniappan, Frank Cruz and Jose Cruz.

The research on which this report is based was funded in part by the Research Council of the University of Guam and in part by the United States Department of Agriculture Hatch Grant GUA00072.

Any opinions., findings, conclusions, or recommendations expressed in this publication are those of the authors and do not necessarily reflect the views of the U.S. Department of Agriculture or of the University of Guam.

Growing Greenhouse Tomatoes on Guam History, Prospects and Risks

INTRODUCTION

A. Purpose of the Report

In the current vegetable market on Guam, the vast majority of fresh produce is im­ported. This paper investigates greenhouse hydroponics as an option to increase the local production of fresh market tomatoes. A narrow focus on tomatoes will be maintained in this study, although the technique of hydro­ponics may be applicable and viable for a variety of alternative products. The report includes: 1.) a discussion as to why tomatoes were selected; 2.) a brief history of green­house operations on Guam; 3.) an analysis of the current economic situation and market for tomatoes; 4.) a feasibility analysis includ­ing a description of the methods, potential costs and production assumptions; and fi­nally, 5.) an assessment of risk from ty­phoons and price fluctuations.

B. Current Problems with Tomatoes on Guam

The environment on Guam creates dif­ficulties in growing tomatoes. While some varieties of tomatoes are successfully grown on Guam, both low yield and the quality of the fruit are problem areas (Lee, 1980). Compared to the normal, temperate, produc­tion range for tomatoes, the high night-time temperatures, humidity and fluctuating wa­ter stress found on Gu~m makes them expen­sive and risky to grow here.

. 29,500 pounds per acre. The 1989 average yield for tomatoes on the U.S. mainland was 25,652 pounds per acre (USDA,ERS, 1990).

The fluctuating water stress on Guam introduces splitting problems in field grown tomatoes. Vertical splits.develop when a rain comes after the fruits have ripened under water stress. Often the fruits have a scarred appearance around the stem-end from radial splitting which develops under milder condi­tions of stress (Lee, 1980). Both types of splitting make tomatoes unacceptable for the higher value markets such as restaurants and hotels, and they lower the marketable yield for all uses.

C. Potential Solution: Greenhouse Hydro­ponics.

The high humidities on Guam produce pollination-problems, while the high night­time temperatures cause problems in setting the fruits. Both problems lower the yield as compared to cooler, dryer climates. Kha­moui ( 1984) gives a yield on Guam of 9,500 _ pounds per acre and a yield on Hawaii of , . •

A greenhouse allows the farmer to con­trol certain aspects of the growing environ­ment. Hydroponics is a method in which no soil is used to cultivate plants. With hydo­ponics, a combination of a growing medium, a nutrient solution and a controlled environ­ment are used to provide the plant with opti­mal growing conditions. When properly administered, hydroponics have yielded up to 2.8 times as much produce per acre as field grown tomatoes under favorable, temperate conditions (Matsushita Corp. undated). Hydroponic tomatoes are filling niche mar­kets successfully throughout the temperate world. However, very little research has

' been published on growing tomatoes hydro­ponically under tropical conditions.

'1

HISTORY principal problems with tomatoes were 1)

One might reasonably ask: "If this op- low prices, 2) pH increases and 3) nema­portunity is so attractive, why isn't someone todes. Apparently, the project was moder­doingit already?" The answer is that hydro- ately successful, but when Gu~m was hit by ponies has been tried on Guam several times Typhoon Pamela, the project did not have in the past, and there is currently a renewed sufficient reserves to recover. Later, two interest in its potential here. Elsewhere in the other attempts on a smaller scale were made tropical Pacific Islands, there are currently on the same site. The first follow-up attempt hydroponic projects underway in the Mar- wasatgrowingornamentalplantsinhanging shals, American Samoa and Vanuatu; Hydro- pots. It was destroyed by a smaller typhoon. ponies were used on Wake and Midway The second large attempt of the early Islands to provide fresh produce for the 1970's was made by the Hawaiian Rock American Armed Forces during the Second Corporation which tried to start a hydropon­World War. ics project on their property. Significant

The following is a brief summary of investments were made in greenhouses and history of hydroponics on Guam. It was equipment. A major problem with this op­developed from interviews with several eration was the selection of the appropriate members of the College of Agriculture of the variety of tomato. Again, there seems to University of Guam. Also, interviews were have been a failure to generate sufficient conducted on Guam with Mr. Charles Grif- returns on the investment, and the project fin, Mr. Michael Kuhlmann and Mr. Chisato was abandoned as it was not generating Ando. It is not intended to be authoritative, enough cash. Supertyphoon Pamela may but rather to reflect the principal problems have played a role in this decision, but we with each of the attempts as perceived by our have little information about this project as sources. the investors did not work closely with any of

In the 1960's the first reported attempt our sources. athydroponiccultivationonGuamwasmade A smaller project of the early 1970's in the Ipan, Talofofo area. This operation was "Yigo Hydroponics." It was a one-man was located along the beach and suffered operation which used coral beds and rain­severe set-backs because of poor site selec- water. Apparently, the operation suffered tion. The principal reported problem was salt from pH increases from the coral matrix and spray damage or burning of the tomato plants. also from labor shortages. The principal The loss of yield and low prices made the production problems seemed to be due to the project infeasible, and it was abandoned. pH control problems and plant nutrition. The

The early 1970's saw two large and one farm also suffered from mite infestations. smaller attempts at hydroponic production Apparently it broke even, but failed to make on Guam. One of the larger attempts was by adequate profits, and the farm was eventu­an Arizona based group on a property in ally abandoned. Mangilao. Theyusedagravelculturemethod After Supertyphoon Pamela in 1976, a with basalt gravel imported from the Philip- Japanese concern started operations near the pines. Many different crops were tried, the Yigo Church. This project was meant to be most successful being a Dutch hybrid cu- a demonstration project to show a working, cumber. Tomatoes and leafy greens were profitable model in order to sell hydroponic also tried with only limited success. The • units. The plan was to grow high value

2

melons and Japanese cucmbers for the Japa­nese market. However, the Japanese quaran­tine barriers to importing the products were not overcome, and the melons could not be sold in Japan. Also, management problems plagued this attempt. Local problems were referred to Japan for solutions, and the delays and misinterpretations caused problems. The tomatoes suffered from pH control problems and mite infestations. This project was not profitable, and it was abandoned after a few years.

In the late 1970's, a local farmer started a hydroponic operation near Fadian point. He later moved the operation to the Talofofo area, where he grew the tomatoes in bags of peat and pearlite directly on the ground using drip irrigation. The contact with the ground allowed a massive nematode infestation, and the project was abandoned.

Two other smaller scale attempts were madein.theearly 1980's. OnewasinDededo and the other in Yigo. We have little infor­mation about these projects. It appears that they were of small scale and that they were abandoned after relative short periods of time.

In the middle 1980's, a project was funded by GEDA in Yigo. It used an open pit style operation to grow the plants in beds of coral. Theprojectwasdroppedfairlyquickly. The project appeared to be moderately suc­cessful, and our sources questioned the rea­son for abandoning the project.

At about the same time, a project was started on the back road to Anderson; the project's goal was to·grow ornamentals and tomatoes. The project ran out of money before an appropriate nutrient formulation , could be established.

Ando, an experienced hydroponic operator, to run their operation. He has produced the only results from a hydroponic production trial on Guam to which the authors have access.

However, the land on which the BABA Corp. experiment is located is slated to be used in the construction of new condomini­ums which are anticipated to bring a greater return than the greenhouse operation. Thus, this hydroponic project· will also be discon­tinued. It is currently under lease to an second investor who is operating it on an experimental basis pending its disassembly.

Finally, Thomas Hinkle in Santa Rita has an operation which is not "true" hydro­ponics but is very similar. He grows some herbs and greens, but mostly beari sprouts. He has successfully operated his business for seven years, and has done so by operating with very low over-head and low to moderate capital investment while using very simple technology.

This brief history of hydroponics on Guam points out some of the pitfalls and problems that must be overcome if one is to run a profitable hydroponics operation. These problems are:

o Lowyield: o Low prices; o Lack of cash reserves and insufficient eash flow; o High start-up costs; o Labor shortages; o Maintaining proper pH and nutrient balances in

the solution; o Pest and disease infestations; o Destructive high winds/typhoon risk; o Coral gravel not a viable growing medium; o Japanese quarartine barriers against imports; o Need for Guam based hydroponics expertise.

The only currently standing greenhouse In summary, if we use a criterion of hydroponics operation on Guam is owned by continuous commercial production over a BABA Corporation. It is a system created by period of many years, then none of the early the Matsushita corporation and sold as a ;attempts at true hydroponics on Guam were hydroponics kit. The BABA Corp. hired Mr, ·· · successful. Biological problems were due to

3

--~. -:-1

the temperatures and humidities on Guam, mite and nematode infestations, and pH control problems due to the hardness of Guam's water supply. Low yields, high costs including losses to typhoons, and low output prices have prevented the develop­ment of an industry here.

Mr. Hinkle's recent success has been accomplished against the general trend. It may be indicative of an improved potential for hydroponics on Guam, if careful manage­ment of the cost of operation and investment is maintained.

CURRENT SITUATION AND COSTS OF PRODUCTION

tively little over a comparable period. At the end of 1983, they were selling at retail for approximately $1.60 per pound, while at the end of 1989, they had risen to about$2.00per pound (Crop and Market Price Report, vari­ous issues). This is an increase of only twenty percent. Figure 1 shows the retail price of U.S. tomatoes on Guam and on the U.S. mainland. The difference between the two retail prices is primarily due to the addi­tional marketing costs of shipping fresh tomatoes to Guam. Because of the vast distances imported tomatoes must travel to Guam, a substantial shipping cost premium is incurred when they are air-freighted to Guam.

There are also quality problems. When A. Current situation and markets on Guam. shipped by sea, the additional time in· transit

magnifies the problems inherent in the nor-In the past few years, the economy of malmarketingprocessfortomatoes. Inorder

Guam has improved markedly. Driven by a for tomatoes to travel from their point of boom in the tourist industry, unemployment origin - California, Mexico, or Florida to the has fallen to historic lows and per capita market, they are picked green and hard, and income has risen rapidly. According to the the ripening in transit or at the market site Economic Research Center, Department of must be carefully controlled (Morrison, Commerce (ERC), the number of air arrivals 1962). Frequently, imported tomatoes are of increased from 316,746 in 1982 to 658,883 unacceptable quality by the time they reach in 1989. Concurrently, unemployment the Guam consumer. dropped from a high of 12.2 percent in July Locally grown tomatoes are potentially 1982 to a low of 1.9 percent as of March 1990 a high volume crop. They could be used in (ERC, annual and quarterly reports). large quantities by both the resident popula-

In the meantime, the consumer price tion and the restaurant industry. The 1988 index has increased from 170.5 in the fourth U.S. annual per capita consumption of fresh quarter of1982 to 254.7 in the fourth quarter market tomatoes was 17.8 pounds (Pearrow, of 1989, which is a 49.3 percent increase. 1990). However, high prices and poor qual­The comparable figures for the food compo- ity limit the current of consumption of toma­nent of the Guam CPI ate 191.1 in the fourth toes on Guam. quarter of 1982 and 348.8 in the fourth quar- Locally grown tomatoes have histori­ter of 1989, which is a 82.5 percent increas~ cally sold at a discount to the U.S. mainland (ERC annual and quarterly reports). Thus, tomatoes as Figure 2 demonstrates. Thus, the price of food has increased to a greater there are strong indications from the market extent relative to the other components of the prices that the locally grown field- tomatoes CPI Market Basket in the past seven years. are considered inferior to the imported to-

The price of fresh tomatoes imported rpato. We then have a situation in which the from the U.S. mainland has increased rela- ·imported tomatoes are frequently of poor

4

TOMATO PRICES (SLICING)

3.-----------------------------------------------~------.

0 2.5 z :::> 0 2 a_

a: g: 1.5 (/) a: :5 _J

0 0 0.5

~983 1984 1985 1986 1987 1988 1989 YEAR

1---- US IMPORTS ON GUAM -+- US RETAIL PRICE

Figure 1. Retail prices of slicing tomatoes on guam and on the U.S. Mainland.

TOMATO PRICES (SLICING)

3.-------------------------------------------------------.

~983 1984 1985 1986 1987 1988 1989 YEAR

1---- US IMPORTS ON GUAM -+- LOCALLY PRODUCED

Figure 2. Retail prices of slicing tomatoes imported from the U.S. mainland and of locally grown slicing tomatoes .. .

I

quality, and the locally grown tomatoes are likely of poorer quality.

If hydroponic tomatoes can be produced with superior quality on Guam, then one would expect them to sell at a premium to both imported and local field-grown toma­toes. Exactly how much of a premium could be commanded is difficult to predict. We anticipate that a specialty market could be developed catering to higher priced restau-

. rants oriented primarily to the tourist market. Careful attention will have to be paid to achieving a consistent supply and to the marketing strategy. A rough estimate is that small quantities could be sold at a price of $2.00 per pound delivered to these hotels and restaurants. However, this figure is more of a guess or a consensus estimate, than it is a figure verified by marketing research.

The size of the tourist -oriented market is relatively small, say on the order of 5 pounds per room per month, or currently about 200,000 pounds per year.

The market to restaurants serving a local clientele for such a premium product is unknown, but it could be substantial as could be the local retail market. Fast food restau­rants use substantial amounts of tomatoes, but our informal discussions with the man­agement of two sets of franchises on Guam indicate that while they are unhappy with the quality oftomatoes presently available, they are quite price sensitive. Hydroponically produced tomatoes would have to be lower in price than $2.00 per pound to penetrate. this market.

At the upper end, the total market on Guam could be as large as 2,367,000 pounds per year, if the price was low enough, and if all residents of Guam followed US mainland eating habits. This figure is calculated by using the US mainland consumption rate of 17.8 pounds per person per year times an estimated population of 133,000.

However, it appears that the Guam market may be much smaller primarily be­cause of the differences in eating habits be­tween Guam and the US mainland. In 1980, the imports of tomatoes from th.e US main­land were worth $606,634 (Khamoui, 1984 ), and the US wholesale price was $0.368 per pound for Florida tomatoes. If we double the price and use a 1980 population of 105,816, the per capita imports approximated 7.8 pounds per year. Currently, with a popula­tion of 133,000, the consumption on Guam would amount to about 1,037,000 pounds per year. Thus, we have a rough guess that at a price of $2.00 per pound the market for tomatoes might approximate 200,000pounds per year, and at a price of $1.00, it might approximate 1,000,000poundsperyear. The primary reason for such an elastic demand curve is the availability of tomatoes from the US mainland, which are a very close substi­tute for the hydroponic tomatoes.

B. Costs of Production

1. Physical Plant:

The main objective of using a structure to grow tomatoes is to provide an optimal environment for highly productive cultiva:­tion. Design, therefore, is critical. Several designs and variations were considered, based on the necessity to reduce heat, protect the plants from torrential rains, withstand wind loads common to Guam and provide the tomato plants with a consistent nutrient solu­tion.

Most common greenhouse designs are engineered to retain heat. Where cooling is necessary evaporative methods are used. Both of these design parameters are inappropriate for Guam. The major concern for Guam is to reduce heat and humidity build-up in the greenhouse to ranges below the stress levels

for tomatoes. The ·history of greenhouse operations on Guam, and the most recent literature, indicate that the popular quonset huts and shallow gabled roof designs do not ventilate easily, and therefore retain too m~ch heat. Evaporative cooling depends on much drier air than exists in Guam, so it does not offer an alternative. The most viable option for our environment seems to be the "saw­tooth" roof design.

The "saw-tooth" configuration consists ;of one half a shallow gable roof with the ridge 1

0f the roof occurring at the outer edge of the building. When two of these structures are placed side by side with the slope of the roof facing the prevailing winds, a low-pressure area i"s formed at the top of the roof, and this pulls the hot, humid air out through the roof vents. This design combined with "bug-net" walls and electrical air circulation fans may be the most effective way to deal with the heat and humidity build-up.

Another concern is the possibility of pest and disease infestation of the plants. Some designs encourage the use of a con­crete floor to help maintain a more sanitary and controllable environment. The cost of construction on Guam, however, makes the use of concrete pads cost-prohibitive. The design that appears to be most economical would use a thick co-extruded polyethylene groundcover as the pest barrier with a crushed gravel covering. The roof would also be

require 5 square feet of greenhouse floor area. Thus, there is room for 4,000 plants under roof. Each plant will be in a seperate bag . filled with a composite growing me­dium.

The nutrient delivery system will be a simple gravity feed, drip irrigation system. Unlike most hydroponic systems, the drip irrigation does not require constant energy input or continuous solution monitoring. By using the drip system, ·the nutrient solution can be mixed once a week and pumped into an elevated tank, then gravity fed to the plants on a continuous basis.

The costs of the physical plant are shown in Table 1. The total investment required for a twenty thousand square foot greenhouse operation is $184,613.00or$9.23 per square foot. The cost of site preparation, drawings, legal fees, permits and utility hook-up is $13,811. The cost of the greenhouses, stor­age buildings and assembly is $107,495. The cost of the plumbing, electrical systems, benches, growing medium and bags is $44, 107. Miscellaneous tools, a truck and mowing equipment are estimated at $15,600. These figures are rough estimates. They will vary with the specific site and design used. . Also, they assume that the hydroponic opera­tor will act as his own contractor. Contingen­cies, overhead and a contractor's fees could add as much as thirty percent to these figures.

covered with a high quality clear plastic film 2. Production Assumptions: which could be removed in extreme weather.

The frame of the structure would be The initial projections of yield from any constructed out of 14 gauge galvanized steel hydroponics project are always a bit uncer­and aluminum set in concrete footings. Used tain. Under optimal conditions (warm days, shipping containers would be used for stor-, cool nights, proper nutrient mix and aera­age and utility space. tion), up to 40 lbs of tomatoes have been har-

The dimensions of the buildings in this vested from one plant. This is not the expe­model are 30'x 83 '4" and would include 8 riencdn the tropics, at this point. Excessive structures, paired in four groups. The total heat day and night combined with high would be 20,000 square feet of greenhouse humidity and pest problems seriously reduce space. Each tomato plant is assumed to·· output.

7

Construction Site preparation legal fees, permits and ins. ground cover

Utilities electric service phone lines

Table 1 Required Investments

Quantity Unit Cost

24,QOO 0.30 2,600.00

40,620 0.05

Total

$7,200 2,600 2,031

septic system or sewage lines

240.00 90.00

1,650.00

240 90

1,650

Buildings office and storage greenhouse gravel or cement plastic and shade cloth fencing

Equipment raceway/irrigation system lighting system benches medium and pots

Farm Equipment trucks sprayer mower tools

Total Investment

Cost per square foot

320 20,000 20,000 20,000

620

2,667

2,667 4,000

~ ..

12.50 3.62 1.00 0.27

15.00

4.30 8,640.00

6.00 2.00

12,000.00 1,200.00

900.00 1,500.00

4,000 72,400 20,000

5,400 9,295

11,467 8,640

16,000 8,000

12,000 1,200

900 1.500

$184,613

$9.23

Philipp et al. (1976) estimate a yield figure of 8 pounds of marketable tomatoes per crop cycle and 2.2 cycles per year for a total yield of 17.6 pounds per plant per year in Hawaii. Lim and Chen (1989) produced up to 5.44 pounds of tomatoes in a four month growing cycle in Malaysia using hydroponic techniques. This would corre­spond to an annual production of 16.3 pounds per plant.

The production estimates used in this study are based on figures from the Baba corporation's experimental hydroponics project. Their output ranged from 7 to 9 lbs per plant with an average of 7.8 pounds over a 120 day growing cycle. This would equal 23.4 pounds per plant per year. The green­houses have a capacity of 4000 plants at any one time. Thus, the total, estimated yield is 93,600 pounds per year.

Our analysis assumes a low rate of unusable or damaged fruit of ten percent. This would indicate a marketable production of 21.06 pounds per plant per year. The marketable production from the farm would then be 84,240 pounds per year, and at a price of two dollars per pound, the gross sales would be $168,480 per year.

3. Costs of Production:

The project is assumed to be completely self-financed. This assumption is made to simplify the analysis of costs. The effects of different financing options will be examined in the next section. Thus, ther~ are no interest costs included in Table 2 which summarizes the cost structure of the farm's operations.

The farm operation is assumed to re­quire a manager's services at $30,000 per year including overhead. It is also assumed that each plant will require one hour of hired labor per year. Philipp et al. (1976) estimate a total labor requirement of 45 minutes per plant per year. We used the higher figure to be conservative. The cost of labor is esti­mated as $6.00 per hour with a 15 percent overhead or $6.90 per hour. Total hired labor is then 4,000 hours per year at. a cost of $27,600.

Maintenance and depreciation costs are $15,022 and $13,954, respectively. Other operating costs are for new medium, chemi­cals and water- $12,810 per year, insurance, phone and electricity - $4,000 per year, and packaging at $3.00 per 30 pound lug- $8,424 per year. For further details, see Table 2.

The costs of production total $119,730 or $1.42 per pound. The fixed costs are $70,896 or $0.84 per pound. The variable · costs are $48,834 or $0.58 per pound. The

The costs of production are based on the use largest component of the fixed cost is the of land leased under agricultural rates from manager's salary at $30,000 per year. Hired theGovemmentofGuam. Thecurrentlease labor at $27,600 is the largest part of the rate is six percent of market value per year. It variable costs. Thus, the labor bill is $57,600 is estimated that 6,000 square meters will be per year or approximately forty percent of leased with a market value of $22.00 per the total costs. The second largest campo­square meter. Thus, the lease payment will nentofcostisdepreciationat$15,022or12.5 be $7,920 per year. There are provisions for percent of the total. This is closely followed discounting the market price base of the land by maintenance expenses at $13,954 or 11.7 by up to $25,000 per acre according to the percent of the total costs. These three items level of capital investment. This analysis total nearly two-thirds of the costs of produc­does not make any use of this discounting tion. Theirmagnitudeemphasizestheimpor­provision. This provides a cushion for an in- tance of the labor component and of the crease in land value of roughly $6.20 per . capital costs of building and equipping the square meter as a conservative measure. • greenhouses.

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Table 2 Fixed and Variable Costs

Fixed Costs

Manager's salary and costs Land lease Phone and electricity Insurance Maintenance Depreciation

Total fixed costs

Variable Costs

Hired Labor New medium ($ 2.00 per plant) Chemicals Fertilizer ($ 0.90 per plant) Pesticides ($ 0.25 " " )

Water

Sales Packaging ($ 0.10 per pound)

Total Variable Costs

Total Costs

Cost per Pound Sold

$30,000 7,920 2,500 1,500

13,954 15,022

$70,896

$27,600 8,000

3,600 1,000

210

8,424

$48,834

$119,730

$1.42

... .w .. A I

1 j

4. Profits and cash flows

The total sales of the farm is predicted to equal $168,480 with the total costs amount­ing to $119,730 per year. This leaves an operatingprofitbeforetaxesof$48,750. The rate of return on the initial investment of $360,000 is 13.5 percent. The net present value of the cash flows from the project over a ten year planning period is $5,208 when discounted at a rate of twenty percent. Table 3 summarizes the cash flows, profits and in­vestment required of the project over the ten year planning period.

Thus, from this preliminary analysis the positive net present values would seem to indicate a positive investment opportunity, if a discount rate of twenty percent accurately reflects the opportunity costs of making the investment and the risks of the project. These risks will be further analyzed in the next section of this paper.

There are several limitations to the analysis as presented so far. We have not imputed a salvage value to the farm at the end of the ten year planning period. Not all items in the farm will be completely depreciated at this time, but the majority of the investment will be fully depreciated. The present value calculations that have been used here count the cash flow from depreciation as it accrues, so that most of the value of the equipment and greenhouses has been accounted for before the end of the ten year period. Valuing the salvage and the ongoing business is difficult, and omitting these items will make only small, conservative differences in the pres­ent values.

Also, we have not included income taxes or property taxes in the calculations. All calculations are on a before income tax basis. This was done because income taxes will vary considerably with the circumstances of the individual investor.

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If Table 3 is examined, it can be seen that there is a considerable cash reserve of $106,285 at the end of the first year. This was done to allow for the recovery of the farm from damages and losses from typhoons. However, this reserve also allows for the possibility of generating additional interest income from investing this cash. Eight per­cent interest on the first year's cash balance of $106,285 will increase the return on the $360,000 investment from 13.5 percent to 15.9percent. However, this was not included in the analysis for two reasons. The first reason was that the cash balances will de­pend upon the specific pattern of profit with­drawal from the farm. The second reason was to simply the risk analysis in the final section of this report.

C. Sensitivity Analysis

Yield per cycle and the price of toma­toes are the most important factors in the determination of the profitability of the hydroponic greenhouse operation. Figure 3 demonstrates the interaction of these two factors. A one pound increase in yield per cycle per plant will increase the gross pro­duction by 12,000 pounds and net production by 10,800 pounds per year. At a price of $2.00, this increases gross revenues by $21,600 and operating profits by $20,520. Using our base senario as an example, a one pound increase in yield (12.8 percent) will increase the operating profit from $48,7 50 to $69,720 (a 42.1 percent increase.) Con­versely, a one pound decrease in yield will reduce the operating profit by the same amount.

A ten percent decrease in projected prices to $1.80 per pound will decrease the base case gross revenues and operating profit by $16,848 per year. This would represent a 34.6 percent decrease in the base example to

I

0 z :::> 0 a.. a: w a.. f--U)

0 0

2.4

2.2

2

1.8

1.6

1.4

1.2

0.8

SENSITIVITY ANALYSIS INTEREST RATE AND YIELD-PER-CYCLE

6

INTEREST RATE

7 8 9 10 11 Yl ELO-PER-CYCLE

--- 4 -+- 6 ---- 8 -El- 10 ~ 12 __..... 14

12 13

Figure 3. The effects of changes in interest rates and yield -per cycle upon the total production cost per pound.

f--u::: 0

U) a: a.. '0

c CJ crl z en

:::J

~ 0 ..c

a: 1::. w a.. 0

SENSITIVITY ANALYSIS PRICE AND YIELD-PER-CYCLE

140 120 100 80 60 40 20 0

-20 -40 -60

1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 PRICE IN DOLLARS PER POUND

I

YIELD-PER CYCLE

--- 7 -+- 8 ---- 9 -El- 10 ~ 11 __..... 12

Fibure 4. The effects of price and yield-per-cycle upon operating profit. ,,

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2

1

' I

I I

I

J

.. ~'·

Year 0 Year 1

Production 0 93600

Sales in pounds 0 84240

Beginning cash 360000 106285

Income 0 168480

Capital Investment 184613

Operating Expenses Fixed less dep. 48897 55874 Variable 20205 48834 Interest 0 0

Operating Profit 48750

Cash Flow -253715 63772

End of year cash 106285 170057

Cum. Cash Flow -253715 -189943

Year 2 Year 3

93600 93600

84240 84240

170057 233829

168480 168480

55874 55874 48834 48834

0 0

48750 48750

63772 63772

233829 297601

-126171 -62 3 9 9

Table 3 Cash Flows

Year 4 Year 5

93600 93600

84240 84240

297601 361373

168480 168480

21000

55874 55874 48834 48834

0 0

48750 48750

63772 42772

361373 383145

1373 44145

The net present value of the cash flows at 20 percent is $ 5,208

.... •

Year 6 Year 7 Year 8 Year 9 Year 10

93600 93600 93600 93600 93600

84240 84240 84240 84240 84240

383145 446916 510688 574460 638232

168480 168480 168480 168480 168480

55874 55874 55874 55874 55874 48834 48834 48834 48834 48834

0 0 0 0 0

48750 48750 48750 48750 48750

63772 63772 63772 63772 63772

446916 510688 574460 638232 702004

107916 171688 235460 299232 363004

anoperatingprofitof$31,902. Lowerprices as was done earlier. Again, we discount the can be offset by higher yields. A fann that is time pattern of cash flows to the investor at a capable of producing 12 pounds per cycle per rate of twenty percent. The initial outlay is plant, or thirty-six pounds per year per plant, taken to be the $90,000 equity investment, will have roughly the same operating profit and the cash flows are the annual increases in at a price of $1.30 as our base case which has year-end, cash-on-hand. These increments a yield of 7. 8 pounds per cycle and a price of are equal to the operating profit plus depre­$2.00 per pound. Thus, great care must be ciation less the debt retirement. The net pres­given to determining both of these factors entvaluewhenfmancingtheprojectattwelve when making the initial feasibility study for percent is negative at $39,857, indicating a hydroponic project. that the project should not be undertaken at a

One way in which an investor in a hydro- twenty percent discount.factor. ponic greenhouse can increase the return on The Government of Guam has an agri­his equity investment is to borrow a portion cultural loan program through the Guam of the required investment. We kept the Economic Development Authority. The assumption that the project under analysis program offers financing for agricultural would require a $360,000 initial investment, projects at rate as low as four percent. Figure but we assumed that the investor would fi- 4 shows the effect of different interest rates nance 7 5 percent of this with a ten year loan. on total costs in the fifth year under differing Duringtheconstructionandestablishmentof yields per cycle. Again, one can see the the greenhouse in year zero, only interest dominating effect of the yield per cycle on would be paid. The principal and interest costs. would be repaid over the next ten years. However, the subsidies offered by fi­Annual operating profits will vary with the nancing the project at the lower interest rates fraction of the loan payment consisting of can make a significant difference in the via­interest. Attention is focused on. the fifth bility of the hydroponic project. During the year of operation because of the variations in fifth year with an interest cost of 4 percent, profitability. The fifth year is one half way the total interest due is $6,980 or $0.083 per through the loan period, and this presents a pound. The total cost is $1.50 per pound and set of average figures. the operating profit is $41,769 for the year.

In the fifth year, the interest costs at This would be a return of 11.6 percent on the twelve percent will be$23,576or$0.28cents total investment and 46.4 percent on the per pound. The total costs will be $1.70. The initial equity investment of $90,000. The net additional cost of interest cost will lower the present value of the cash flows is positive at operating profit to $25,17 4 in the fifth year. $20,922, indicating that the project should be This will lower the return on the total invest- undertaken, if an interest rate of 4 percent can ment of $360,000 to seven percent, but be- be obtained. cause the initial equity investment is $90,000, Under fairly optimistic assumptions the return on equity is increased to 28 per- about prices, and reasonable (but assumed to

I

cent. The fact that the interest costs, operat- be certain assumptions) about the yield per ing profit and cash flows vary over time cycle, the hydroponic operation seems to be makes the determination of the feasibility of a marginally acceptable investment when a financed investment more difficult. financed completely by equity. When the

The most common method of analy- project is financed partly by equity and partly sis is the use of the net present value method . .:DY loans, the viability depends upon the

14

•

' l

interest rate of the loans. However, all of the analysis done so far has been under condi­tions of certainty. In the next section, we look at the risks associated with such an undertaking. We will pay particular atten­tion to the risks associated with tropical storms. Risks associated with the yield and price variations will also be discussed.

RISKS

A. Typhoons and tropical storms

the Joint Typhoon Warning Center. In an attempt to estimate the probability

of observing winds of differing velocities on Guam, we· obtained from the National Weather Service Station at the Naval Air Station (NAS), Agana, Guam their records of the maximum sustained wind velocity during each month from April1958 to June 1990. From this dataset, we generated Fig­ure 5 which shows how many times over the period the maximum sustained winds fell into each of the velocity ranges.

Since damage from storms corresponds Historically, Guam has been plagued by more to the peak gusts occurring during the

tropical storms and typhoons. In November storm, we needed a method to convert the 1962, Typhoon Karen struck with winds sustained wind velocity to an estimate of the gusting to an estimated 150 to 160 knots peak gusts. To enable us to do this, we took (Weir, 1983). Theeyeofthe typhoon passed the peak gusts from Weir (1983) for each over the southern end of the island, and storm between 1958 and 1980,andregressed ninety-five percent of the homes on the is-. them upon the maximum sustained winds land were damaged or destroyed. In May· observed during the month at NAS, Agana. 1976, typhoon Pamela struck Guam. The A straight line passing through the intercept slow passage of the typhoon made it even and having a slope of 1.75 fit the data fairly more destructive than Karen. Peak wind well. Thus, each Knot of sustained wind ve­gusts were estimated to have reached 145 locity observed at NAS, Agana converts to knots, and winds over 100 knots were ob- 1.75 Knot of peak gust wind velocity ob­servedfor6hours. TotaldamagefromPamela served somewhere on Guam and not neces­was estimated to be near $500 million dollars saril y at N AS. (Weir, 1983). Neither of these storms was Admittedly, this is a rough estimate, but the most severe to strike Guam during the it is not outside the range of estimates found Twentieth Century. In November 1900, an in the literature. Atkinson (1974) estimates unnamed typhoon struck Guam. This storm that the ratio of peak gust to one minute killed 34 people, and it destroyed most of the sustained winds over open water falls in the crops and houses on the island. The pressure range of 1.20 to 1.25. He also states that "At dropped to 926.5 mb as compared to 931.7 any given elevation above the surface, the mb for Pamela and 931.9 mb for Karen rougher the surrounding terrain the higher (Weir, 1983). the gust factor." He also cites data taken

While these three storms were un- during Typhoon Rose in Hong Kong in 1973 usual events, lesser typhoons and tropical which gives gust factors from 1.50 to 2.08 for stormsarerelativelyfrequentonGuam. Weir those stations without the wind coming di­(1983) lists twenty-three storms between 1900 rectly off the water. While these gust factors and 1941 from newspaper reports of the are for 10 minute sustained winds, correcting period. He lists thirty-three storms between them for one minute sustained winds gives a 1945 and 1980 as having produced winds . range from 1.32 to 1.83. over 50 knots on Guam from the records of " Thus, we were able to draw Figure 6

15

-. ·-·-·-----~-----~l

b z w ::::>1 a w a: LL

0-10

MAXIMUM WIND HISTOGRAM ONE MINUTE WIND VELOCITY (1958-1990)

11-20 21-30 31-40 41-50 51-60 61-70 71-80

WIND VELOCITY (KNOTS) 80+

Figure 5. A histogram of the maximum sustained winds observed at NAS, Agana each month from 1958-1990.

w 0 z <( I 0 f­z w 0 a: w Q_

CHANCE OF GUSTS EXCEEDING A GIVEN SPEED BASED ON GUST RATIO OF 1.75 TO 1

17.5 35 52.5 70 87.5 105 122.5

WIND VELOCITY (KNOTS)

Figure 6. The estimated chance of having peak gusts somewhere on Guam exceeding a given velocity in a randomly chosen month. . _ ''

which shows our estimates of the probability of the peak gusts on Guam exceeding a specified velocity in any given month. We estimate that there is a one percent chance of a storm with peak gusts above 105 knots in any randomly chosen month. The chance of not having a such a storm in any randomly chosen year is then 0.886. Figure 7 shows how the probability of going without a storm with gusts over 105 knots falls off as the period lengthens. The longer the period, the the greater the chance of having at least one such storm.

Once the probability of a storm was esti­mated, we assumed that a storm with gusts over 1.05 knots would cause damage equal to 25 percent of the initial capital ivestment, and it would cause the loss of one third of the year's output. Also, it was assumed that the company would extract from its cash hold­ings an amount equal to its operating profit in any year without a typhoon. These assump­tions were made to allow examination of effect of the risk of a typhoon and the initial capital investment upon the viability of a greenhouse enterprise.

Two thousand simulations of a ten year cash flow history of our base case were run. If at any point during the ten years, the end of the year cash on hand was negative, then the company was declared bankrupt. Forty-one of the simulations went bankrupt. This indi­cates that under the assumptions of the simu­lations, the chance of going bankrupt is 2

of times the company went bankrupt was almost 45 percent. Once the initial level of cash reached $340,000, the number of times the company went bankrupt was less than 5 percent of the trials.

While the above example is primarily expository in nature, it illustrates a general principal that the better financed a risky venture is, the better its chances of succeed­ing are.

R Production and price risks

While production risks cannot be quan­tified as to their distribution as the typhoon risks were, they are potentially as important to the well being of the enter­prise. In the section on sensitivity analysis, it was seen that a 12.8 percent decrease in output led to a 42.1 percent decrease in the operating profit.

Earlier in the review of the history of greenhouses, several factors affecting the production were reported. These included thrips, nematodes, pH control problems, nutrient control problems, cultivar choice and salt spray damage. Some of these prob­lems such as the choice of cultivars and salt · spray damage and the resulting low produc­tion levels will be a function of the inital choices in setting-up the hydroponic farm. The production levels can be determined before undertaking large-scale investments, and these can be factored into the financial

percent. plans. Therefore, they do not constitute Next, we varied the initial cash holdings "risk" in the probabilistic sense. For the

of the enterprise from $260,000 to $400,000, other factors such as diseases, insect and and we ran 200 simulations for each initial nematode infestations, there is simply not cash level under the same assumptions. The enough of a production history available to results are diagramed in Figure 8. Examina- estimate the risk from them. tion of the figure shows that the chance of Prices for fresh market tomatoes on going bankrupt during the ten years falls off Guam are determined by the price of whole­rapidly with increasing levels of initial as- sale tomatoes on the US mainland, by the sets. At an initial cash level barely sufficient " costs of shipping the tomatoes to Guam, and to make it through the first year, the number· bythemarketingcostsincurredin theirtrans-

17

portation and distribution. The only factor which is highly variable in the determination of the Guam price is the US mainland whole­sale price. This price tends to be fairly regular in its seasonal variation with the highest prices occurring in late winter and the lowest prices in the mid-summer. The winter prices can reach quite high levels, if there is a freeze in the winter production areas, as happened in the 1989-90 winter sea­son.

However, the same factors which may allow hydroponic tomatoes to receive a price premium on Guam should insulate their price from most of the variations of the US main­land wholesale prices, but it should be re­membered that the two products are substi­tutes and the price of one may affect the price of the other.

SUMMARY AND CONCLUSIONS

The rocky history of greenhouse hydro­ponics on Guam does not bode well for its future. However, under certain conditions it may be possible for hydroponics to succeed here. The primary condition would be suc­cess in raising the yield to a higher level than has been demonstrated so far on Guam. The yield estimates should be confirmed prior to startingtheproject,preferablywithasmaller­scale pilot project. The estimates of prices and markets can and should be confirmed with the output from such a pilot project by the use of careful market research at the same time. Finally, the project will need to be sufficiently well financed to withstand sig­nificant variations in its output and income which may be caused by typhoons, insects and diseases.

t

w 0 z <( I 0 1-z w 0 a: w D...

w 0 z <( I 0 1-z w 0 a: w D...

CHANCE OF HAVING NO GUSTS EXCEEDING 1 05 KNOTS IN A GIVEN PERIOD

2 3 4 5 6 7 8 9 10 11 12 13 14 15

PERIOD IN YEARS

Figure 7. The chance of having no wind gusts in Guam exceeding 1Q-5 knots for periods of different lenghts.

SIMULATED CHANCE OF BANKRUPTCY 1 0 YEAR HISTORY

2.6 2. 7 2.8 2.9 3.1 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9

INITIAL INVESTMENT ($1 OO,OOO'S)

Figure.8. The chance of going bankrupt given different initial capitalization of a 70,000 square foot hydrophonic greenhouse growing tomatoes. ·

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Atkinson, Gary D. 1974. Investigation of Gust Factors in Tropical Cyclones. FLEWEACEN Tech Note JTWC 74-1, US Fleet Weather Central, Guam, US Dept.of the Navy, FPO San Francisco. 9 pp.

C.E.S. various issues. Cnm and Market Rq>ort. Cooperative Extension Service, College of Agriculture and Life Sciences, University of Guam, Mangilao, Guam.

E.R.S. various issues. Guam Annual Economic Review. Economic Research Service, Department of Commerce, Tamuning, Guam.

E.R.S. various issues. Quarterly Economic Review. Economic Research Service, Department of Com­merce, Tamuning, Guam.

Khamoui, Thao. 1984. Guam Agricultural and Related Statistics. Agricultural Experiment Station, College of Agricultural and Life Science, University of Guam, Mangilao. 102 pp.

Lee, Chin-Tain. 1980. Performance Studies on A VRDC Selections and Commercial Cultivars ofTomatoes in Guam. Technical report no. 9, Agricultural Experiment Station, University of Guam, Mangilao. 20 pp.

Lim, E.S. and S. T. Chen. 1989. "Hydroponic Production Studies on Lowland Tomato in Malaysia: The Effect of Pruning System and CHPA Application on Yield". pp. 358-363 in S.K Green, ed. Tomato and Pepper Production in the Tropics. Proceedings of an international symopsium on intergarted management praticies, Tainian, Taiwan, 21-26 March 1988. Asian Vegetable Research and Develop­ment Center, Taipei.

Masushita Electric Industrial Co. Ltd. N.D. Commercial Fresh Vegetable Cultivation in Tropical Areas by a Hydroponic Farming System. Osaka, Japan.

Morrison, W.W. 1962. Preparing FRESH TOMATOES for Market. Marketing Bul. no 19, USDA, Washington, DC. 13 pp.

Pearrow, Joan. 1990. "Fresh Market and Canned Tomatoes: Prices and Spreads, 1980-89". pp. 25-31 in TVS-250, Vegetables and Specialties: Situation and Outlook R!4}ort. USDA, ERS, Washington, DC.

Philipp, Perry E., Yukio Kitagawa, Yukio Nakagawa, Harris M. Gitlin, Roy K. Nishimoto and Rokuro Yamagushi. 1973. Economics of Growing Tomatoes in Plastic Greenhouses on Ohau. Departmental paper 11, Hawaii Agricultural Experiment Station, University of Hawaii, Honolulu. 17 pp.

Weir, Robert C. 1983. TrQI>ical Cyclones Affecting Guam 0671-1980). NOCC/JTWC Tech Note 83-1, Joint Typhoon Warning Center, US Dept. of the Navy, FPO San Francisco. 50 pp.

20·''

DISCLAIMER

The Guam Agricultural Experiment Station is an equal opportunity employer. All information gained through its research program is available to anyone without regard to race, color, religion, sex, age, or national origin.

Trade names of products are used to simplify the information. No endorsement of named products is intended.

Produced by CALS Media March 1991.

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