Title: Should I buy a citrus grove?
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Title: Should I buy a citrus grove?
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Creator: Savage, Zach.
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Full Text
AE Series No. 51-2


Issued by
Agricultural Extension Service, University of Florida
Gainesville, Florida
In Cooperation with County Agents of Citrus Producing Counties






SHOULD I BUT A CITRUS GROVE?


By
Zach Savage
Associate Agricultural Economist
Agricultural Experiment Station


Entering any business enterprise as another means of making profits is not
so serious a matter as entering that business as a sole means of support. But any-
one who enters citrus production by investing all his assets in a grove, must
realize a profit from it. If only partial payment is made for the grove with a
mortgage for the balance, the situation is still more serious in that additional
income must be had for interest on the loan and.to amortize the debt.

( For some time groves have been selling at high prices when measured in
relation to previous sale prices of groves. To purchase a grove at a high price
and pay 25 percent, or even 50 percent, cash would place the purchaser in a bad
'financial position in the event of a drastic drop in grove prices. There has not
been many years since it was the exception for a grove to sell as high as $1000 pa--
acre. For such a grove to sell at $2500 now would mean that if purchased 50 per-
cent cash the purchaser would still owe more on his mortgage than the full price o:
the grove a few years ago.

It might be well to consider the earning power of citrus groves over the
past few years as an indication of what might be expected in the future in the way
of returns for a livelihood and debt payment. During the 194S-49 season the Agri-
cultural Extension Service, through the cooperation of citrus growers, obtained
costs and returns on 200 groves. The average age of these groves was 26 years, and
no grove with average age under 11 years was used in this tabulation. These groves
returned $254 per acre after paying operating costs. Such returns would.contribute
well towards living costs, interest on debt, and debt payment. Of the 18 years of
these records there were 4 seasons with better results than during the 1948-49 sea-
son. The following season, 1949-50, is expected to constitute the fifth season
with higher returns above operating costs when the tabulations are completed than
the 1948-49 season.

If a grove with the production and return record of the average grove in
the 1948-49 season had been purchased at the beginning of that season at $2500 per
acre with 25 percent of purchase price paid in cash, interest on the balance of
1875 per acre at 4 percent would amount to $75, plus a payment on a 20-year loa:.
of $94, would leave $85 per acre for living and producing the following crop. A


January 1951




u Ij.I U. I. M- .a 'fl, 4 r .V t 2


this rate of returns and expenses, 36 acres of grove vould be necessary to net
$3000 for living expenses. With no debt or interest load, 12 acres of grove would
net $3000.
Table 1 shows the percentage of groves of these records by seasons at
various levels of returns above operating costs. These figures represent the amount
of money left to the grower after paying operating, or cash costs, for payment of
interest, principal payment, living expenses, and/or for additional net income.

There has not been a season of this period of 18 years when there was not
one or more groves that failed to return operating costs. There were 4 seasons
when more than one-third of these groves failed to return operating costs, two sea-
sons when more than one-half, and one season when almost two-thirds of these groves
failed to return operating costs. In such seasons heavy debt obligations would be
extremely difficult to meet except on the very best groves.

There were 9 seasons when returns above operating costs per acre were less
than $100 on more than one-half these groves (Table 2). There were six seasons
when more than three-fourths of these groves returned less than $100 per acre above
operating costs and two seasons when more than 90 percent of the groves returned
less than this amount. There were eight, almost one-half, of the seasons, when in
excess of 90 percent of the groves returned less than $200 per acre above operating
costs. There were only three seasons of the 18 when more than 75 percent of these
groves returned more than $200 per acre above operating- costs and only 5 seasons
when more than 50 percent returned a similar amount.


Table 2. -- PERCENT OF GROVES BY SEASONS THAT RETUERTED
STIPULATED AMOUNTS ABOVE OPERATING COSTS, 1931-49

Percent of Groves with Returns Above Operating Costs of:
Season Less than $100 per acre Less than 'C00 per acre
1931-32 62.2 88.9
1932-33 95.0 99.0
1933-34 89.6 97.3
1934-35 83.9 94'3
1935-36 b3.8 85.8
1936-37 47.4 76.1
1937-38 84.1 97 4
1938-39 87.7 99.6
1939-40 82.5 93.5
1940-41 70.3 95.5
1941-42 38.9 71.0
1942-43 8.7 26,2
194 3- 4 1.0 73
1944-45 7.7 l18g
1945-46 4.9 15-1
1946-47 58.4 s4.o
1947-48 92.1 97.2
1948-49 16.5 37.0


54.5 70.9


Average 1931-49


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It can readily be noted from these figures that there has been much of
the time over the past 18 seasons when a sizable proportion of these groves did not
return enough above operating costs to contribute much towards living expenses for
the owner. A much smaller proportion would have contributed $100 per acre for
living expenses and $100 toward a debt load on the grove. If contributing $100 per
acre toward living expenses, 30 acres of grove would be necessary to supply $3000
as living expenses.

The average grove of these records over the past 18 years would have paid
operating costs, $56 interest payment on a $1400 loan at 4 percent, $70 payment on
a 20-year loan and only $2 per acre living expenses. With $50 reserved for living
expenses this rate of income would have paid 4 percent interest and liquidated a
loan of only $860 per acre.

The rate of returns above operating costs of $219 per acre would necessi-
tate 60 acres of grove to net $3000 after paying interest of $75 and $94 loan pay-
ment. The debt owed on this acreage at a purchase price of $2500 per acre and pay-
ment of 25 percent cash would be $112,500. With no interest or debt payments to be
made, 14 acres would be necessary under these conditions to supply $3000 for living
expenses.

The above figures are based on unusually good returns. Since average
figures on 221 groves for one season have been used, it would be well to apply the
returns realized from an average of 212 groves for the 10-year pre-war period of
1931-41. The average returns from fruit were $97 with an average cost of produc-
tion of $57, which left a net of $40 per acre. History may not repeat itself to
the extent that the average net returns for ten years will be that low, but it is
reasonable to assume that they might be that low, and the chances are that they
.will go considerably lower than at present. This net of $40 per acre would make
an interest payment at 4 percent and a principal payment on a twenty-year loan
amounting to only $444 per acre with nothing left for making the next crop nor any
-contribution to living expenses. At this performance rate, 75 acres would be
necessary to supply $3000 for living expenses with no debt load.

A Valencia-grapefruit grove on which the Extension Service has records for
twelve years was sold recently. This grove was not one of the best groves included
in these records, nor was it one of the poorest. Its average age at the time of the
sale was 27 years, and 41 percent of the treeswere grapefruit. The price at which
the grove was sold is not known by the writer, but an examination of its past record
reveals that it was not worth a very high price. It paid unusually well for the
last two seasons prior to the sale, when 48 percent of the returns from fruit and
62 percent of the net returns for the twelve seasons were received.

Stated another way, total receipts from fruit for the two seasons were 91
percent of the total receipts for the ten seasons prior to that time, and the net
receipts were one and two-thirds times that of the total for the ten previous sea-
sons, Receipts from fruit for these ten seasons, 1933-43, averaged $159 per acre.
Production costs were $93 for this period, leaving a net of $66 per acre. This net
figure would pay 4 percent interest and principal payment on a twenty-year loan on
a debt of only $730 per acre. If the purchaser bought this grove at $1000 per acre
and paid 27 percent in cash, this rate of income would service the debt and pay
production costs, but would contribute nothing towards living expenses. With no
debt load, this rate of performance would require 46 acres to net $3000.

Average figures for the 18-year period of 1931-49 for all record groves
were materially boosted by five seasons with returns above operating costs in excess


Paze 4


Should I Buy a Citrus Grove?









of $250 per acre each season. It is expected that the 1949-50 season will fall in
this classification also, making six of the past 19 seasons when the average returns
above operating costs for the groves included in these records exceeded $250 per
acre. The rare combination of good yields and good prices in relation to production
costs for 6 of the past 8 seasons contributed much to highly favorable net returns
from groves and Lo the increases in grove prices. Growers of these records did not
realize such favorable results for the 11 seasons of 1931-42. The seasons of 1946-
47 and 1947-48 were not favorable for the Florida citrus grower and the latter sea-
son was the worst of the 19 seasons of these records. Returns from fruit failed to
return operating costs in two of the past 19 seasons, the seasons of 1947-48 and
1932-33.

Groves that did not pay production costs during the six seasons, 1942-46
and 1948-50, were very poor groves. If the excellent financial returns of these
seasons could be maintained in the future there would be justification for present
prices of most groves. The above-mentioned Valencia-grapefruit grove netted an
average of $542 per acre for the two seasons, 1943-45. This rate of income would
pay interest and principal payment on a $6000 20-year loan if all the net were used
for that purpose. Or, it would service a debt of $1875 per acre and contribute
$373 per acre towards living expenses. If this rate of net income could be main-
tained, this grove would be a good buy at $2500 per acre.

Another grove sold in 1945 on which the Extension Service has records for
the four previous seasons, 1940-44. Both returns from fruit and the net returns
amounted to more in the 1941-44 season than the sun of these separate items for the
three previous seasons. This is a 12-acre Pineapple-Valencia grove averaging 19
years of age at the time it was sold. The net returns averaged $194 for the three
seasons of 1940-43. This rate of income, which was during seasons of good yields
and fruit 'prices generally, would service a debt of $700 and contribute $131 per
-acre or a total of $1572 from the grove, towards living expenses. Thus a purchase
price of $1000 per acre, paying 30 percent cash, might be justified at this rate of
net returns.

For a grove to pay high net returns it must yield well, and the fruit must
be sold at a good price. These two favorable factors rarely occur at the same time,
but such has been the case during six of the past eight seasons. Therefore, it is
not expected that both factors will continue so favorable for as much as half the
seasons of the future.

Several things might be pointed out that anyone who contemplates buying
a citrus grove should consider before purchasing.

1. Learn something--as much as possible--about citrus production
and marketing before buying a grove. It might pay well to spend a
year or more in the employ of a good caretaker or grower, or several
months each in the employ of several different such men.

2. Upon locating a grove that you contemplate purchasing, obtain
an accurate tree count by variety, age of tree, and tree condition.

3. Obtain the yield, gross returns, production costs, and net
returns each season for the past ten or twelve seasons. By so doing
four to six unusually good seasons would be had together with six or
eight seasons which were not so favorable. Study and analyze these
records season by season contrasting the averages for the favorable


Page 5


3fra\lld i Buv a Citrus Grovel





Page 6


4. Correlate the yield with age of trees over the entire period
of these records and contemplate increases in yield and grove value
if the grove is young in age.

5. Check for unusual soil conditions, dryness of soil, and grove
location with reference to likelihood of cold damage to the entire
acreage and/or cold spots in the grove.

6. Obtain irrigation history of grove and if it is decided
irrigation facilities are desirable, check availability of labor
and equipment for such, together with the water supply. The cost
of irrigation equipment, the cost of the application of water, and
the availability of the labor necessary during critically dry
periods should not be overlooked.

7. Check with the fruitmen who have been handling fruit from
this grove, as to its quality and salableness.

8. Selling fruit at a price advantageous to the grower is fully
as important as efficient production at a low cost. Therefore, it
is highly important that a good job of selling the fruit be done as
well as a good job of production. Much time and effort should be
spent in studying the various outlets and channels of citrus market-
ing in order to obtain the maximum price for fruit.

9. If it is contemplated that a caretaker will be employed to
do the grove work, check availability, reliability, and desirability
of such in the vicinity. Also check the rebate history of coopera-
tive caretakers in comparing rates of caretaker charges.

10. Do not buy a grove at an inflated price. But if you must
buy a grove, remember that the best groves usually come nearer
being worth inflated prices than the poor groves are. In other
words, you will have a better chance of making the best groves pay
out than you will poor groves, at present prices. Also bear in
mind that it is harder to pay debts if and when prices in general
are falling.

11. In buying grove property get sufficient acreage to supply
ample income to carry the debt load, if any, and to furnish a good
living for self and family. With a reasonable purchase price, it
is better to have a small equity in a good grove of ample acreage--
20 acres or more--than to have a larger equity in fewer acres.



IS THIS THE TIME TO BUY ADDITIONAL CITRUS ACREAGE?

Some growers who have been producing citrus for many seasons contemplate
purchasing additional acreages. Much of the material of this publication up to
this point will apply to such growers. Adequate volume or acreage is always an
important consideration and should not be overlooked.

Profits from grove ownership arise from profitable production of citrus
fruit, and from rising grove values if the grove is sold at the higher price. With
lagging costs and favorable weather conditions, profits from citrus production and


Should I Buy a Citrus Grove?









from grove ownership have been unusually good during the recent inflationary period.
'However, such periods of inflation come to an end, and weather conditions do not
continue so favorable indefinitely. Groves held past the inflationary period are
often a source of serious loss to the owner, because of continued high costs of
ownership, reduced profits from fruit production, and declining grove values. If
fruit prices remain low and costs continue to be high, profits from fruit growing
will decline.

There have been instances in recent years in which growers have bought
additional groves and paid for them with the returns of a few fruit crops, while the
groves increased in value. Both the general price situation and good yields have
been favorable for such successes. Growers now in a favorable credit position need
to beware lest their enthusiasm for recent successes lead them to set their own
stage for disastrous experiences later.

Groves that can be bought and paid for quickly under favorable circum-
stances sometimes can be lost just as quickly under unfavorable.conditions. With
increasing costs in relation to prices received, one or two years of low yields
because of unfavorable weather or any other reason, would make it increasingly diffi-
cult for growers to make payments on a mortgage. In some instances, groves already
free of debt are offered as partial security for the loan required to buy additional
grove property. Accumulated savings are used to make the down payment. The expec-
tation is that a few favorable seasons will put the grower in a safe position to
carry the increased investment. If the unfavorable seasons come first, the expecta-
tion may not be realized. It is always harder to pay debts if and when prices in
general are falling.

In growing citrus, a productive grove in the hands of a capable grower is
nearly always a good investment, but low-producing groves are seldom good invest-
ments in the long run. Average-producing groves become bad investments in an
economic depression. Low yields for any reason may create a depression for the
individual grower. If a good grove is free of debt, a capable owner-operator may
forego an interest income and successfully carry the investment through a depression.

Some people believe that an economic depression is impossible or at least
unlikely because of government efforts to support farm income and safeguard the
economy generally. They may be right, but pressure from rising production costs,
increasing taxes, and slackened demand for citrus products could place a severe
strain on the safeguards, requiring an ever increasing proportion of the taxpayer's
declining income for support. If unfavorable weather hazards should occur in com-
bination with economic hazards, the individual grower with his savings in a form
more liquid than groves would be in a much better financial position than the man
with a lot of groves and a big debt. An investment in better production methods
might be safer and more profitable than an investment in additional groves, particu-
larly if money is borrowed to buy the groves,









ZS ia-AgriEconZxt
12/22/50 500


-Should I Buy a Citrus Grove?


Page 7




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