March 1991
Technical Report #88
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
Introduction
History
Current Situation and Costs of Production
FUsks
Summary and Conclusion
References
Page
1
2
4
15
18
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.
.
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.
A greenhouse allows the farmer to control certain aspects of the growing environB. Current Problems with Tomatoes on Guam ment. Hydroponics is a method in which no
soil is used to cultivate plants. With hydoThe environment on Guam creates dif- ponics, a combination of a growing medium,
ficulties in growing tomatoes. While some a nutrient solution and a controlled environvarieties of tomatoes are successfully grown ment are used to provide the plant with option Guam, both low yield and the quality of mal growing conditions. When properly
the fruit are problem areas (Lee, 1980). administered, hydroponics have yielded up
Compared to the normal, temperate, produc- to 2.8 times as much produce per acre as field
tion range for tomatoes, the high night-time grown tomatoes under favorable, temperate
temperatures, humidity and fluctuating wa- conditions (Matsushita Corp. undated).
ter stress found on Gu~m makes them expen- Hydroponic tomatoes are filling niche markets successfully throughout the temperate
sive and risky to grow here.
The high humidities on Guam produce world. However, very little research has
pollination-problems, while the high night- ' been published on growing tomatoes hydrotime temperatures cause problems in setting ponically under tropical conditions.
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 , .•
'1
HISTORY
One might reasonably ask: "If this opportunity is so attractive, why isn't someone
doingit already?" The answer is that hydroponies has been tried on Guam several times
in the past, and there is currently a renewed
interest in its potential here. Elsewhere in the
tropical Pacific Islands, there are currently
hydroponic projects underway in the Marshals, American Samoa and Vanuatu; Hydroponies were used on Wake and Midway
Islands to provide fresh produce for the
American Armed Forces during the Second
World War.
The following is a brief summary of
history of hydroponics on Guam. It was
developed from interviews with several
members of the College of Agriculture of the
University of Guam. Also, interviews were
conducted on Guam with Mr. Charles Griffin, Mr. Michael Kuhlmann and Mr. Chisato
Ando. It is not intended to be authoritative,
but rather to reflect the principal problems
with each of the attempts as perceived by our
sources.
In the 1960's the first reported attempt
athydroponiccultivationonGuamwasmade
in the Ipan, Talofofo area. This operation
was located along the beach and suffered
severe set-backs because of poor site selection. The principal reported problem was salt
spray damage or burning of the tomato plants.
The loss of yield and low prices made the
project infeasible, and it was abandoned.
The early 1970's saw two large and one
smaller attempts at hydroponic production
on Guam. One of the larger attempts was by
an Arizona based group on a property in
Mangilao. Theyusedagravelculturemethod
with basalt gravel imported from the Philippines. Many different crops were tried, the
most successful being a Dutch hybrid cucumber. Tomatoes and leafy greens were
also tried with only limited success. The
principal problems with tomatoes were 1)
low prices, 2) pH increases and 3) nematodes. Apparently, the project was moderately successful, but when Gu~m was hit by
Typhoon Pamela, the project did not have
sufficient reserves to recover. Later, two
other attempts on a smaller scale were made
on the same site. The first follow-up attempt
wasatgrowingornamentalplantsinhanging
pots. It was destroyed by a smaller typhoon.
The second large attempt of the early
1970's was made by the Hawaiian Rock
Corporation which tried to start a hydroponics project on their property. Significant
investments were made in greenhouses and
equipment. A major problem with this operation was the selection of the appropriate
variety of tomato. Again, there seems to
have been a failure to generate sufficient
returns on the investment, and the project
was abandoned as it was not generating
enough cash. Supertyphoon Pamela may
have played a role in this decision, but we
have little information about this project as
the investors did not work closely with any of
our sources.
A smaller project of the early 1970's
was "Yigo Hydroponics." It was a one-man
operation which used coral beds and rainwater. Apparently, the operation suffered
from pH increases from the coral matrix and
also from labor shortages. The principal
production problems seemed to be due to the
pH control problems and plant nutrition. The
farm also suffered from mite infestations.
Apparently it broke even, but failed to make
adequate profits, and the farm was eventually abandoned.
After Supertyphoon Pamela in 1976, a
Japanese concern started operations near the
Yigo Church. This project was meant to be
a demonstration project to show a working,
profitable model in order to sell hydroponic
• units. The plan was to grow high value
2
melons and Japanese cucmbers for the Japa- Ando, an experienced hydroponic operator,
nese market. However, the Japanese quaran- to run their operation. He has produced the
tine barriers to importing the products were only results from a hydroponic production
not overcome, and the melons could not be trial on Guam to which the authors have
sold in Japan. Also, management problems access.
plagued this attempt. Local problems were
However, the land on which the BABA
referred to Japan for solutions, and the delays Corp. experiment is located is slated to be
and misinterpretations caused problems. The used in the construction of new condominitomatoes suffered from pH control problems ums which are anticipated to bring a greater
and mite infestations. This project was not return than the greenhouse operation. Thus,
profitable, and it was abandoned after a few this hydroponic project· will also be disconyears.
tinued. It is currently under lease to an
In the late 1970's, a local farmer started second investor who is operating it on an
a hydroponic operation near Fadian point. experimental basis pending its disassembly.
Finally, Thomas Hinkle in Santa Rita
He later moved the operation to the Talofofo
area, where he grew the tomatoes in bags of has an operation which is not "true" hydropeat and pearlite directly on the ground using ponics but is very similar. He grows some
drip irrigation. The contact with the ground herbs and greens, but mostly beari sprouts.
allowed a massive nematode infestation, and He has successfully operated his business for
the project was abandoned.
seven years, and has done so by operating
Two other smaller scale attempts were with very low over-head and low to moderate
madein.theearly 1980's. OnewasinDededo capital investment while using very simple
and the other in Yigo. We have little infor- technology.
mation about these projects. It appears that
This brief history of hydroponics on
they were of small scale and that they were Guam points out some of the pitfalls and
abandoned after relative short periods of problems that must be overcome if one is to
time.
run a profitable hydroponics operation. These
In the middle 1980's, a project was problems are:
funded by GEDA in Yigo. It used an open pit
o Lowyield:
style operation to grow the plants in beds of
o Low prices;
coral. Theprojectwasdroppedfairlyquickly.
o Lack of cash reserves and insufficient eash flow;
The project appeared to be moderately suco High start-up costs;
cessful, and our sources questioned the reao Labor shortages;
son for abandoning the project.
o Maintaining proper pH and nutrient balances in
the solution;
At about the same time, a project was
o
Pest and disease infestations;
started on the back road to Anderson; the
o Destructive high winds/typhoon risk;
project's goal was to·grow ornamentals and
o Coral gravel not a viable growing medium;
tomatoes. The project ran out of money
o Japanese quarartine barriers against imports;
before an appropriate nutrient formulation ,
o Need for Guam based hydroponics expertise.
could be established.
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
A. Current situation and markets on Guam.
In the past few years, the economy of
Guam has improved markedly. Driven by a
boom in the tourist industry, unemployment
has fallen to historic lows and per capita
income has risen rapidly. According to the
Economic Research Center, Department of
Commerce (ERC), the number of air arrivals
increased from 316,746 in 1982 to 658,883
in 1989. Concurrently, unemployment
dropped from a high of 12.2 percent in July
1982 to a low of 1.9 percent as of March 1990
(ERC, annual and quarterly reports).
In the meantime, the consumer price
index has increased from 170.5 in the fourth
quarter of1982 to 254.7 in the fourth quarter
of 1989, which is a 49.3 percent increase.
The comparable figures for the food component of the Guam CPI ate 191.1 in the fourth
quarter of 1982 and 348.8 in the fourth quarter of 1989, which is a 82.5 percent increas~
(ERC annual and quarterly reports). Thus,
the price of food has increased to a greater
extent relative to the other components of the
CPI Market Basket in the past seven years.
The price of fresh tomatoes imported
from the U.S. mainland has increased rela-
4
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
shipped by sea, the additional time in· transit
magnifies the problems inherent in the normalmarketingprocessfortomatoes. Inorder
for tomatoes to travel from their point of
origin - California, Mexico, or Florida to the
market, they are picked green and hard, and
the ripening in transit or at the market site
must be carefully controlled (Morrison,
1962). Frequently, imported tomatoes are of
unacceptable quality by the time they reach
the Guam consumer.
Locally grown tomatoes are potentially
a high volume crop. They could be used in
large quantities by both the resident population and the restaurant industry. The 1988
U.S. annual per capita consumption of fresh
market tomatoes was 17.8 pounds (Pearrow,
1990). However, high prices and poor quality limit the current of consumption of tomatoes on Guam.
Locally grown tomatoes have historically sold at a discount to the U.S. mainland
tomatoes as Figure 2 demonstrates. Thus,
there are strong indications from the market
prices that the locally grown field- tomatoes
are considered inferior to the imported torpato. We then have a situation in which the
·imported tomatoes are frequently of poor
TOMATO PRICES
(SLICING)
3.-----------------------------------------------~------.
0
z
:::>
0a_
2.5
2
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
However, it appears that the Guam
quality, and the locally grown tomatoes are
market may be much smaller primarily belikely of poorer quality.
cause
of the differences in eating habits beIf hydroponic tomatoes can be produced
with superior quality on Guam, then one tween Guam and the US mainland. In 1980,
would expect them to sell at a premium to the imports of tomatoes from th.e US mainboth imported and local field-grown toma- land were worth $606,634 (Khamoui, 1984),
toes. Exactly how much of a premium could and the US wholesale price was $0.368 per
be commanded is difficult to predict. We pound for Florida tomatoes. If we double the
anticipate that a specialty market could be price and use a 1980 population of 105,816,
developed catering to higher priced restau- the per capita imports approximated 7.8
. rants oriented primarily to the tourist market. pounds per year. Currently, with a populaCareful attention will have to be paid to tion of 133,000, the consumption on Guam
achieving a consistent supply and to the would amount to about 1,037,000 pounds
marketing strategy. A rough estimate is that per year. Thus, we have a rough guess that at
small quantities could be sold at a price of a price of $2.00 per pound the market for
$2.00 per pound delivered to these hotels and tomatoes might approximate 200,000pounds
restaurants. However, this figure is more of a per year, and at a price of $1.00, it might
guess or a consensus estimate, than it is a approximate 1,000,000poundsperyear. The
primary reason for such an elastic demand
figure verified by marketing research.
The size of the tourist-oriented market is curve is the availability of tomatoes from the
relatively small, say on the order of 5 pounds US mainland, which are a very close substiper room per month, or currently about tute for the hydroponic tomatoes.
200,000 pounds per year.
The market to restaurants serving a local B. Costs of Production
clientele for such a premium product is
unknown, but it could be substantial as could 1. Physical Plant:
be the local retail market. Fast food restauThe main objective of using a structure
rants use substantial amounts of tomatoes,
but our informal discussions with the man- to grow tomatoes is to provide an optimal
agement of two sets of franchises on Guam environment for highly productive cultiva:indicate that while they are unhappy with the tion. Design, therefore, is critical. Several
quality oftomatoes presently available, they designs and variations were considered, based
are quite price sensitive. Hydroponically on the necessity to reduce heat, protect the
produced tomatoes would have to be lower in plants from torrential rains, withstand wind
price than $2.00 per pound to penetrate. this loads common to Guam and provide the
market.
tomato plants with a consistent nutrient soluAt the upper end, the total market on tion.
Guam could be as large as 2,367,000 pounds
Most common greenhouse designs are
per year, if the price was low enough, and if engineered to retain heat. Where cooling is
all residents of Guam followed US mainland necessary evaporative methods are used. Both
eating habits. This figure is calculated by of these design parameters are inappropriate
using the US mainland consumption rate of for Guam. The major concern for Guam is to
17.8 pounds per person per year times an reduce heat and humidity build-up in the
estimated population of 133,000.
greenhouse to ranges below the stress levels
for tomatoes. The ·history of greenhouse require 5 square feet of greenhouse floor
operations on Guam, and the most recent area. Thus, there is room for 4,000 plants
literature, indicate that the popular quonset under roof. Each plant will be in a seperate
huts and shallow gabled roof designs do not bag .filled with a composite growing meventilate easily, and therefore retain too m~ch dium.
heat. Evaporative cooling depends on much
The nutrient delivery system will be a
drier air than exists in Guam, so it does not simple gravity feed, drip irrigation system.
offer an alternative. The most viable option Unlike most hydroponic systems, the drip
for our environment seems to be the "saw- irrigation does not require constant energy
input or continuous solution monitoring. By
tooth" roof design.
The "saw-tooth" configuration consists using the drip system, ·the nutrient solution
;of one half a shallow gable roof with the ridge can be mixed once a week and pumped into
1
0f the roof occurring at the outer edge of the an elevated tank, then gravity fed to the
building. When two of these structures are plants on a continuous basis.
The costs of the physical plant are shown
placed side by side with the slope of the roof
facing the prevailing winds, a low-pressure in Table 1. The total investment required for
area i"s formed at the top of the roof, and this a twenty thousand square foot greenhouse
pulls the hot, humid air out through the roof operation is $184,613.00or$9.23 per square
vents. This design combined with "bug-net" foot. The cost of site preparation, drawings,
walls and electrical air circulation fans may legal fees, permits and utility hook-up is
be the most effective way to deal with the $13,811. The cost of the greenhouses, storage buildings and assembly is $107,495. The
heat and humidity build-up.
cost
of the plumbing, electrical systems,
Another concern is the possibility of
pest and disease infestation of the plants. benches, growing medium and bags is
Some designs encourage the use of a con- $44, 107. Miscellaneous tools, a truck and
crete floor to help maintain a more sanitary mowing equipment are estimated at $15,600.
and controllable environment. The cost of These figures are rough estimates. They will
construction on Guam, however, makes the vary with the specific site and design used. .
use of concrete pads cost-prohibitive. The Also, they assume that the hydroponic operadesign that appears to be most economical tor will act as his own contractor. Contingenwould use a thick co-extruded polyethylene cies, overhead and a contractor's fees could
groundcover as the pest barrier with a crushed add as much as thirty percent to these figures.
gravel covering. The roof would also be
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 harThe 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
Table 1
Required Investments
Construction
Site preparation
legal fees, permits and ins.
ground cover
Quantity
Unit
Cost
Total
24,QOO
0.30
2,600.00
0.05
$7,200
2,600
2,031
240.00
90.00
1,650.00
240
90
1,650
320
20,000
20,000
20,000
620
12.50
3.62
1.00
0.27
15.00
4,000
72,400
20,000
5,400
9,295
2,667
4.30
8,640.00
6.00
2.00
11,467
8,640
16,000
8,000
12,000.00
1,200.00
900.00
1,500.00
12,000
1,200
900
1.500
40,620
Utilities
electric service
phone lines
septic system or sewage lines
Buildings
office and storage
greenhouse
gravel or cement
plastic and shade cloth
fencing
Equipment
raceway/irrigation system
lighting system
benches
medium and pots
2,667
4,000
Farm Equipment
trucks
sprayer
mower
tools
Total Investment
Cost per square foot
$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.
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 ·
3. Costs of Production:
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.
9
Table 2
Fixed and Variable Costs
Fixed Costs
Manager's salary and costs
Land lease
Phone and electricity
Insurance
Maintenance
Depreciation
Total fixed costs
$30,000
7,920
2,500
1,500
13,954
15,022
$70,896
Variable Costs
Hired Labor
New medium
Chemicals
Fertilizer
Pesticides
Water
Sales
Packaging
($ 2.00 per plant)
$27,600
8,000
($ 0.90 per plant)
($ 0.25 " " )
3,600
1,000
210
($ 0.10 per pound)
8,424
Total Variable Costs
$48,834
Total Costs
$119,730
Cost per Pound Sold
$1.42
... .w ..
A
I
4. Profits and cash flows
1
j
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.
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.
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
11
I
SENSITIVITY ANALYSIS
INTEREST RATE AND YIELD-PER-CYCLE
2.4
2.2
0
z 2
:::>
0 1.8
a..
a: 1.6
w
a..
1.4
1.2
f--
U)
0
0
0.8
6
7
9
8
10
12
11
14
13
Yl ELO-PER-CYCLE
--- 4 -+- 6 ---- 8
INTEREST
RATE
-El-
10
~
12 __..... 14
Figure 3. The effects of changes in interest rates and yield -per cycle upon the total production
cost per pound.
SENSITIVITY ANALYSIS
PRICE AND YIELD-PER-CYCLE
f--
u:::
a:
0
a..
CJ
z
~
a:
w
a..
0
140
120
100
80
U)
'0
60
c
crl
en
40
:::J
0
20
..c
1::.
0
-20
-40
-60
1.1
1.2
1.3
1.4
1.5
1.6
1.7
1.8
1.9
2
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.
,,
1
..
....
~'·
•
Table 3
Cash Flows
Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
Year 7
Year 8
Year 9
Year 10
Production
0
93600
93600
93600
93600
93600
93600
93600
93600
93600
93600
Sales in pounds
0
84240
84240
84240
84240
84240
84240
84240
84240
84240
84240
360000
106285
170057
233829
297601
361373
383145
446916
510688
574460
638232
0
168480
168480
168480
168480
168480
168480
168480
168480
168480
168480
Beginning cash
Income
Capital Investment
184613
Operating Expenses
Fixed less dep.
Variable
Interest
48897
20205
0
55874
48834
0
55874
48834
0
55874
48834
0
55874
48834
0
55874
48834
0
55874
48834
0
55874
48834
0
55874
48834
0
55874
48834
0
55874
48834
0
48750
48750
48750
48750
48750
48750
48750
48750
48750
48750
-253715
63772
63772
63772
63772
42772
63772
63772
63772
63772
63772
106285
170057
233829
297601
361373
383145
446916
510688
574460
638232
702004
-253715
-189943
-126171
-62 3 9 9
1373
44145
107916
171688
235460
299232
363004
Operating Profit
Cash Flow
I'
End of year cash
21000
I
I
Cum. Cash Flow
I
J
The net present value of the cash flows at 20 percent is $ 5,208
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
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
•
I
'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.
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
RISKS
period the maximum sustained winds fell
into each of the velocity ranges.
A. Typhoons and tropical storms
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 NAS.
(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
MAXIMUM WIND HISTOGRAM
ONE MINUTE WIND VELOCITY (1958-1990)
bz
w
::::>1
aw
a:
LL
0-10
11-20
21-30
31-40
41-50
51-60
61-70
71-80
80+
WIND VELOCITY (KNOTS)
Figure 5. A histogram of the maximum sustained winds observed at NAS, Agana each month from 1958-1990.
CHANCE OF GUSTS EXCEEDING A GIVEN SPEED
BASED ON GUST RATIO OF 1.75 TO 1
w
0
z
<(
I
0
f-
z
w
0
a:
w
Q_
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 times the company went bankrupt was
of the peak gusts on Guam exceeding a almost 45 percent. Once the initial level of
specified velocity in any given month. We cash reached $340,000, the number of times
estimate that there is a one percent chance of the company went bankrupt was less than 5
a storm with peak gusts above 105 knots in percent of the trials.
While the above example is primarily
any randomly chosen month. The chance of
not having a such a storm in any randomly expository in nature, it illustrates a general
chosen year is then 0.886. Figure 7 shows principal that the better financed a risky
how the probability of going without a storm venture is, the better its chances of succeedwith gusts over 105 knots falls off as the ing are.
period lengthens. The longer the period, the
the greater the chance of having at least one R Production and price risks
such storm.
While production risks cannot be quanOnce the probability of a storm was estimated, we assumed that a storm with gusts tified as to their distribution as the typhoon
over 1.05 knots would cause damage equal to risks were, they are potentially
25 percent of the initial capital ivestment, as important to the well being of the enterand it would cause the loss of one third of the prise. In the section on sensitivity analysis,
year's output. Also, it was assumed that the it was seen that a 12.8 percent decrease in
company would extract from its cash hold- output led to a 42.1 percent decrease in the
ings an amount equal to its operating profit in operating profit.
Earlier in the review of the history of
any year without a typhoon. These assumptions were made to allow examination of greenhouses, several factors affecting the
effect of the risk of a typhoon and the initial production were reported. These included
capital investment upon the viability of a thrips, nematodes, pH control problems,
nutrient control problems, cultivar choice
greenhouse enterprise.
Two thousand simulations of a ten year and salt spray damage. Some of these probcash flow history of our base case were run. lems such as the choice of cultivars and salt ·
If at any point during the ten years, the end of spray damage and the resulting low producthe year cash on hand was negative, then the tion levels will be a function of the inital
company was declared bankrupt. Forty-one choices in setting-up the hydroponic farm.
of the simulations went bankrupt. This indi- The production levels can be determined
cates that under the assumptions of the simu- before undertaking large-scale investments,
lations, the chance of going bankrupt is 2 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 theirtrans17
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.
CHANCE OF HAVING NO GUSTS EXCEEDING
105 KNOTS IN A GIVEN PERIOD
w
0
z<(
t
I
0
1-
z
w
a:
0
w
D...
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
10 YEAR HISTORY
w
0
z<(
I
0
1-
z
w
0
a:
w
D...
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.
·
----~-:--~~~---
- - - - · - · · •
·-·-------
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.
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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 AVRDC 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.
~~~--------~~-~~------~---