Growing Christmas trees is an enterprise that has wide appeal as a land management alternative for many landowners in Virginia. Growing Christmas trees, however, is a moderately long-term investment that is time-consuming and labor intensive. A successful plantation requires a full commitment by the landowner and constant attention to culturing the trees. It also is fairly risky, with unpredictable potential for damage from insects, disease, weather, animals, weeds, and man-caused accidents.
What kind of returns can be expected from an investment in growing Christmas trees? The following is an example of costs and returns that could be expected from growing one acre of white pine Christmas trees in Virginia. The data were obtained by the Virginia Department of Forestry in a 1989 survey of 15 experienced Christmas tree growers in Virginia. This survey included a wide variety of growers, from small, part-time operations to large commercial enterprises. The costs and returns used in this report are typical of Virginia conditions, but are unlikely to ideally match any single operation. The economic analysis is for information only, and does not represent any individual grower or conditions in any specific county.
In order to conduct any economic analysis, it is necessary to make many assumptions about the nature of the enterprise, how cultural practices are conducted, how trees are marketed, etc. These assumptions, of course, greatly affect the results of the analysis. Labor costs vary widely from location to location, so it is unlikely that the costs used here will exactly fit the conditions in any given county. Furthermore, the data used in this report were based on average site conditions. There is evidence that production costs and returns may be higher on better quality sites and lower on poorer quality sites. These assumed costs and returns are presented in Table 1.
|Table 1. Estimated costs and returns from growing one acre of white pine Christmas trees in Virginia.|
|Herbicides & Application||65||20||65||20||65||20||--||--||--||--|
|Insecticides & Application||--||--||36||34||198||33||180||36||128||77|
|Selection & Coloring||--||--||--||--||--||--||94||150||150||94|
|TOTAL COST: $4047||351||124||221||232||437||260||635||631||698||458|
The following specific assumptions were made for the financial analysis reported here:
|Year||No. Trees/ac||Average Tree Height (ft.)||Cost|
|Transport to Loading Area||0.25|
|The actual costs for these operations range from $0.65 to $2.12 per tree.|
The results of the financial analysis are presented in Table 2. A variety of investment analysis attributes are presented, enabling one to look at several different factors at once, with a variety of discount rates.
|Table 2. Investment analysis results from growing one acre of white pine Christmas trees in Virginia.|
|Discount Rate (%)||6.00||8.00||10.00||12.00||14.00|
|Present Net Worth ($/acre)||1440.74||1131.96||863.13||654.28||470.17|
|Annual Equivalent Value ($/acre/year)||211.82||181.20||150.20||122.80||95.05|
|Internal Rate of Return (%)||21.48||21.48||21.48||21.48||21.48|
Present net worth is an investment analysis term that discounts the future income, minus costs, of an investment to the present. For example, at an 8% discount rate, the PNW of this investment is $1131.96 per acre. If the PNW is a positive number, it indicates that the investment will return money to you at a rate higher than the discount rate you selected.
The B/C ratio is a comparison of all returns and costs, discounted to the present. A favorable investment is one in which the B/C ratio is greater than 1.00. In this case the B/C ratio (at 8% discount rate) is 1.42, indicating a favorable return
The AEV combines all of the costs and revenues into a single sum that is divided equally among all of the years in the investment period. It is very useful for comparing Christmas tree production to annual crop production. For example, at the 8% discount rate, this investment will return an average of $181.20 per acre for each of the 10 years in the investment period. It is important to note, however, that in the early years of the investment no return will be realized, but after Year 7, when the first trees are harvested, the cash flow back to you begins.
The IRR is the average compound interest earned by an investment over its life. This analysis indicates that an investment in Christmas trees will return 21.48%. Only you can say whether or not this is an adequate return on investment for you. It is important to point out that the IRR is a real rate of return; that is, it does not reflect inflation that occurs during the investment period. If the IRR was adjusted for inflation, it would increase accordingly.
Christmas tree growing in Virginia can be a profitable venture. Profitability, however, depends on many different factors. In today's market, producing a quality product is the key to success. In Christmas trees, quality products don't just happen. Much thought and work must go into a project. Failing to carry out any of the practices during the rotation could cause a loss in marketable trees and hence, revenue.
Risk factors associated with Christmas tree production are numerous and they are present for a long period of time, unlike those for annual crops. Growers must constantly watch for potential problems such as fire, insects, or other pests, and react quickly. In addition, an important market risk exists that cannot be ignored. This financial analysis was based upon the sale of trees at $10.50 each. In some marketing areas over-supply can drive that price down substantially, thus resulting in lower values for PNW, B/C, AEV, etc.
The Christmas tree industry in Virginia is growing. The wholesale market value is estimated at $7 million per year. Its existence should be fostered and developed to increase its contribution to local and state economies.
Reviewed by Kyle Peer, Superintendent, Reynolds Homestead Forest Resources Research Center
Virginia Cooperative Extension materials are available for public use, reprint, or citation without further permission, provided the use includes credit to the author and to Virginia Cooperative Extension, Virginia Tech, and Virginia State University.
Issued in furtherance of Cooperative Extension work, Virginia Polytechnic Institute and State University, Virginia State University, and the U.S. Department of Agriculture cooperating. Edwin J. Jones, Director, Virginia Cooperative Extension, Virginia Tech, Blacksburg; M. Ray McKinnie, Interim Administrator, 1890 Extension Program, Virginia State University, Petersburg.
May 1, 2009