Immigration Reform and Citrus Harvest

Mechanization in a World of Uncertainty

Nobuyuki Iwai

Robert D. Emerson

Fritz M. Roka

International Agricultural Trade and Policy Center

Food and Resource Economics Department

University of Florida

Background

Foreign workers in Florida agriculture

According to NAWS data, over 7/8

of hired farm workers were foreign born

over the 1989-2004 period (Walters).

Over 70% of hired farm workers were

unauthorized in 2002-04, increasing

from under 40% in 1989-92 (Walters).

Background (Continued)

Labor intensive operations

At least 20-25% of the U.S. vegetable acreage and 40-45% of the U.S. fruit acreage is totally dependent on hand harvesting. (Sarig et al. 2000).

Wage gap

Average predicted wages for farm workers with green cards are 12% per hour higher than for unauthorized farm workers (Ise & Perloff 1995).

Immigration Policy Reform

Increased border and domestic enforcement, legalization and guest worker programs, E-verify system

Goal: legalize labor force

Concern that the reforms might lead to labor cost increase in US agriculture.

→ Need to study the impact of labor cost increase: Mechanization, Termination (Emerson 2007)

FL Citrus Operations

Concerns about labor availability for harvest.

Other difficulties from recent hurricanes to new

diseases (citrus canker and citrus greening) to

urban encroachment.

Increased international competition for citrus

products: US production of oranges fell by 18%

between the 1980-81 and 2010-11 seasons

while the Brazilian production of oranges

doubled (USDA 1985, 2012).

FL Citrus Operations (Continued)

Florida citrus producers are searching for ways to better compete in the global marketplace. Mechanical harvesting is one of possible ways.

The estimated cost of mechanical harvesting of Florida oranges for juice processing ranges between 10 and 30 cents per 90 pound box less than hand harvesting (Roka).

While an economic advantage appears to be present, the adoption of mechanical harvesting systems remains relatively low at about 7.1% of the Florida orange acreage in 2009-10 (UF).

Objective of Our Study

We measure value of each citrus operation mode

(manual and mechanical harvesting) using the

entity discounted cash flow (DCF) approach

(Copeland 2003, Koller et al. 2005).

First, we generate future sample paths for

unknown yield, price, and costs from which future

FCF will be calculated.

Then, Entity DCF approach discounts the

forecasted free cash flow (FCF) at the opportunity

cost of capital.

Methodology

Difficulty arises to model and estimate dependence

structure of factors when various types of

distributions coexist – some follow a standard bell-

shaped curve while others do not.

We use a new method (copula) to model

dependence structures among variables

separately from distributions of individual variables.

Data

The primary data source is “Budgeting Costs

and Returns for Southwest Florida Citrus

Production” which is available from 1993-4

season to 2004-5 season (Muraro et al.) and

“Summary of Citrus Budget for the Southwest

Florida Production Region” which is available

from 2003-4 season to 2010-11 season

(Muraro).

Data (Continued)

Extend citrus yield and price series using the

market data. So, we have yield and delivered-in

price from 1979-80 to 2010-11 season, and

production costs and harvesting costs from 1993-4

season to 2010-11 season for Hamlin orange

growers in Southwest FL.

Southwest FL has become a major citrus

production area representing 145,879 acres, over

26.9% of total FL citrus acreage in 2010-11 (USDA

2012). Furthermore, more than 90% of the

mechanically harvested acreage is in southwest FL.

Estimated Historical FCF

Season 2007-8 2008-9 2009-10 2010-11

Revenue 3,545.14 3,265.61 3,135.23 3,297.74

Production costs 1,486.47 1,300.04 1,285.36 1,323.28

Management 48.00 48.00 48.00 48.00

Overhead taxes,

regulatory cost 61.00 61.00 61.00 61.00

Harvesting costs 1,254.36 1,245.30 1,189.43 1,240.26

Depreciation 237.15 237.15 237.15 237.15

FCF 334.96 273.52 229.78 283.70

Estimated historical FCF for growing and harvesting Hamlin

orange for a model farm introduced above ($ per acre)

Forecasting Beyond 2010-11 Season

We estimate the historic time-paths for yield,

price, production costs, and harvest costs.

Appropriate transformations of yield, price,

production and harvest costs are done to

remove time-dependence within each of them

(stationary, random process).

Different distributions of yield, price, production

and harvest costs are identified from past data.

Citrus Data Implications for Modeling

Yield, price, production and harvest costs do

not all follow a bell-shaped curve distribution, so

standard procedures cannot model the

dependence among them.

We also have strong negative correlation

between yield and price and weak positive

correlation between the two cost series.

Leads us to the new (copula) method for

modeling the data.

Monte Carlo Simulation

Using the estimated model, a twelve-year

future sample path is generated for yield, price,

and production and harvest costs.

We repeat it and generate 100,000 sets of the

future paths of yield, price, and production and

harvest costs from which we calculate

100,000 sets of twelve-year future FCF paths

for the current operation. The average of

generated FCF is given next.

Forecasted FCF

Forecasted FCF for growing and harvesting Hamlin orange for

a model farm ($ per acre)

Season 2011-2 2012-3 2013-4 2014-5 2015-6

FCF 293.57 309.76 337.63 373.72 403.06

Season 2016-7 2017-8 2018-9 2019-20 2020-1

FCF 448.74 487.85 532.95 580.52 626.70

Season 2021-2 2022-3

FCF 655.89 718.24

Weighted Average Cost of Capital

where kd is the pretax cost of debt, T is effective tax rate, D is

the value of interest-bearing debt, and E is the value of equity,

and ke is the market-determined opportunity cost of equity

capital.

From market data we have kd=9.03%, T=26.89%,

D/(D+E)=33.33%, and ke=12.71% from CAPM, so that

WACC=10.67%.

ED

Ek

ED

DTkWACC ed

)1(

Since FCF are available for payment to both creditors and

equity holders, the discount rate must be a weighted

average costs of both sources of capital (Koller et al. 2005).

WACC is given by

PV Calculation

PV for year t for t<2022 is given as

where the second term is continuing value after the

explicit forecast period in which g is the expected

growth rate in FCF in perpetuity.

gWACCWACC

FCFEg

WACC

FCFEPV

tt

tt

2022

20222022

1 )1(

1

)1(

PV Calculation (Continued)

PV from growing and harvesting Hamlin orange for a model farm

($ per acre)

Season 2010-11 2011-2 2012-3 2013-4 2014-5

PV

(std. error) 8,666.84

(74.56)

9,298.29

(81.82 )

9,980.93

(89.05)

10,708.57

(96.37)

11,477.78

(103.60)

Season 2015-6 2016-7 2017-18 2018-19 2019-20

PV

(std. error)

12,299.74

(109.28)

13,163.75

(114.82) 14,080.86

(120.33)

15,050.76

(125.56)

16,076.60

(130.39)

Season 2020-1 2021-2 2022-3

PV

(std. error) 17,165.76

(134.62)

18,341.96

(134.83)

19,581.36

(135.40)

Mechanical Operation (standard scenario)

We repeat same procedures for mechanical

harvesting operation. The adoption typically has

the following impacts on citrus operation in

subsequent seasons (Roka). Harvest recovery rate becomes 98%.

Harvest cost decreases by 10%. That is, harvesting

cost reduction of 10% for 98% of fruit, zero harvesting

cost for 2% of fruit.

There is cost increase of $10/acre for skirting.

Additional cost for initial season. Cost increases by $20/acre for skirting, $40/acre for

pruning and $40/acre for irrigation.

Yield reduces by 2% due to skirting .

FCF and PV for Mechanical Operation

(standard scenario) FCF and PV from growing and harvesting Hamlin orange with

mechanical harvesting ($ per acre)

Season 2010-11 2011-2 2012-3 2013-4 2014-5

FCF 236.53 373.31 404.01 442.65

PV 9,069.48 9,800.94 10,473.68 11,187.53 11,938.92

Season 2015-6 2016-7 2017-8 2018-9 2019-20

FCF 474.54 522.46 564.07 611.56 661.62

PV 12,738.62 13,575.76 14,460.63 15,392.46 16,373.67

Season 2020-1 2021-2 2022-3

FCF 710.31 742.16 806.91

PV 17,410.92 18,527.02 19,697.50

Subtracting hypothetical investment cost of $520, NPV= $8,549.48

Mechanical Operation (lower fruit recovery,

higher cost reduction scenario)

In alternative scenario, adoption of mechanical

harvesting technology has the following impacts

in subsequent seasons (Roka). Harvest recovery rate becomes 90%.

Harvest cost decreases by 20%. That is, harvesting

cost reduction of 20% for 90% of fruit, zero harvesting

cost for 10% of fruit.

There is cost increase of $10/acre for skirting.

Additional cost for initial season. Cost increases by $20/acre for skirting, $40/acre for

pruning and $40/acre for irrigation.

Yield reduces by 2% due to skirting .

FCF and PV for Mechanical Operation (lower fruit

recovery, higher cost reduction scenario)

FCF and PV from growing and harvesting Hamlin orange with

mechanical harvesting ($ per acre)

Season 2010-11 2011-2 2012-3 2013-4 2014-5

FCF 185.17 323.28 352.06 388.36

PV 8,193.38 8,882.69 9,507.46 10,170.13 10,867.23

Season 2015-6 2016-7 2017-8 2018-9 2019-20

FCF 417.85 462.80 502.05 546.73 593.82

PV 11,609.24 12,385.49 13,205.34 14,068.02 14,975.67

Season 2020-21 2021-22 2022-3

FCF 639.57 668.56 729.28

PV 15,934.45 16,966.57 18,048.14

Subtracting hypothetical investment cost of $520, NPV= $7,673.38

Threshold Harvest Cost

We compute through simulation the threshold values of harvest

costs which would equalize NPV of mechanized operations with

PV of the current operation.

Scenario 1 Scenario 2

Harvest costs*

(% increase from

current level)

$1,361.58

(9.78% increase)

$1,672.24

(34.83% increase)

NPVmech = PVmanual $8,183.76 $5,167.05

*We assume the simulated change rate after the current period is same as before.

Conclusions

A new (copula) method was employed to

incorporate the different data patterns for

yield, price, production costs, and harvest

costs.

Using the parameters estimated by the copula

method, sample paths for future FCF are

generated from which PV is calculated for the

current and mechanized operations

respectively.

Conclusions (continued) Entity DCF approach applied for the Hamlin orange

operation in Southwest FL shows that:

hand harvesting operation has the highest PV of

$8,667 followed by the mechanical harvesting with

standard scenario with NPV of $8,549. The

alternative mechanical harvesting (lower recovery,

higher cost reduction) scenario has the lowest NPV

of $7,673.

Threshold values of harvest costs which would

equalize NPV of mechanized operations with PV of

the current operation: 9.78% increase for scenario

1 and 34.83% increase for scenario 2.

Conclusions (continued)

Further consideration is needed about option

value for the investment flexibility (real

options approach) which often suggests

further delay of the investment decision until

a higher cash flow is more likely for the

mechanized operation.

Offer

Seeking growers interested in testing the

software

Please contact us if you would like to

examine the results based on data from

your own operation.

Contacts

niwai@ufl.edu

remerson@ufl.edu