Content uploaded by Irene Tzouramani
Author content
All content in this area was uploaded by Irene Tzouramani on Jan 02, 2014
Content may be subject to copyright.
HORTSCIENCE, VOL. 35(2), APRIL 2000300
MARKETING & ECONOMICS
HORTSCIENCE 35(2):300–303. 2000.
Received for publication 20 Apr. 1998. Accepted
for publication 8 July 1999. We gratefully acknowl-
edge valuable comments and suggestions by three
anonymous journal reviewers and the editors. The
cost of publishing this paper was defrayed in part by
the payment of page charges. Under postal regula-
tions, this paper therefore must be hereby marked
advertisement solely to indicate this fact.
1PhD Candidate.
2Professor; to whom reprint requests should be ad-
dressed (e-mail: mattas@eng.auth.gr).;
3Senior Researcher.
4Researcher.
An Economic Analysis of Soilless
Culture in Gerbera Production
I. Grafiadellis1 and K. Mattas2
School of Agriculture, Department of Agricultural Economics, Aristotle
University of Thessaloniki, P.O. Box 225, 540 06 Thessaloniki, Greece
E. Maloupa3
Agricultural Research Center of Macedonia and Thrace, P.O. Box 312, 570 01
Thermi, Thessaloniki, Greece
I. Tzouramani4 and K. Galanopoulos4
Agricultural Economics and Social Research Institute, Kifissias 184C, 145 62
Kifissia, Greece
Additional index words. culture system, greenhouses, floriculture, Mediterranean, Greece,
Gerbera jamesonii
Abstract. The financial effectiveness of the soilless culture system (SCS) of gerbera
(Gerbera jamesonii Bol. ex Adlam.) production was compared with that of the soil culture
system in heated greenhouses in northern Greece. Evaluation was based on budgeting
procedures that assumed a project life of 9 years. The decision to accept or to reject the
investment was based on the following criteria: 1) net present value analysis (U.S. $18,414),
2) benefit/cost ratio, and 3) risk exposure ratio. The soilless culture system, particularly the
plastic bag system using perlite media, was more profitable. Application of sensitivity
analysis illustrated the significance of product price and discount rate in determining the
accrued benefits.
Over the last two decades, significant
changes have occurred in the cultivation of
high-value horticultural crops, as new produc-
tion techniques have been introduced and
evaluated. In principle, the enumeration and
description of the inherent technical and hor-
ticultural advantages of a new technique should
be accompanied by a thorough investigation
of its economic efficiency. This evaluation
procedure has evoked considerable attention,
mainly because worldwide market liberaliza-
tion has transformed the floriculture market
into a highly competitive one. Nevertheless,
few scientific analyses have been made of the
economic effectiveness of new horticultural
techniques. The introduction of the substrate
has brought radical changes in protected orna-
mental production and has given producers
the opportunity to achieve: 1) a high percent-
age of high-quality products, 2) uniform prod-
ucts, 3) total control of greenhouse produc-
tion, 4) reduction of negative effects on the
environment, and 5) significantly lower en-
ergy costs (Maloupa, 1993). Despite these
advantages, the high initial investment cost of
soilless culture and the need for extremely
tic tubes (Salem et al., 1993). The greenhouses
were covered with a thermal polyethylene
film. During winter (November to February),
the temperature at night was kept above 12 °C;
in summer, a black shading net was placed
over the greenhouses. Further, in the PSS
greenhouse the ground was covered with a
white, 20-mm-thick plastic film to improve
light reflection.
Planting occurred on 15 June in both treat-
ments. In the PSS greenhouse, perlite-filled
polyethylene bags 0.15 m in diameter and 2.9
m long were placed end-to-end in double rows
0.50 m apart. Plants (12 per bag) were then
planted in the medium at a spacing of 0.20 ×
0.25 m for a total of 6144 plants/0.1 ha. Four
cultivars of gerbera (‘Party’, ‘Fame’, ‘Regina’,
and ‘Ximena’) were used.
Each plant was irrigated by a dripper of
nominal discharge at 2 L·h–1. A control unit
regulated the delivery of nutrient solution on a
daily basis. Water was applied for 2 min 8 to 16
times per day depending upon need. The solu-
tion was collected from the bottom of the
medium and reused.
Traditional soil culture was used in the
second greenhouse. Plants were planted in
two-row beds separated by paths 0.40 m wide.
Within-row spacing was 0.25 m and between
row spacing 0.30 m, giving an approximate
density of six plants/m2 (6144 plants/0.1 ha).
A 9-year project life was assumed. During
this period, the investment would be produc-
tive without a major replacement. According
to Helfert (1991), economic life is the length
of time over which an investment yields eco-
nomic benefits. However, after the 9th year of
economic life, essential high-cost components
of the investment, such as heating system,
irrigation system, thermal polyethylene cover,
plastic bag system, substrate, plants, and plas-
tic mulch, would have to be replaced. Thus, a
9-year time span can provide an accurate picture
of the profits for the entire period of the project,
assuming no unforeseen outlays or changes.
The real discount rate was set at 10%,
reflecting the current Greek financial market
(Bank of Greece, 1995). Operating costs and
output prices were assumed to increase incre-
mentally at the same rate as inflation through-
out the entire 9 years. Costs and benefits were
estimated at 1995 prices. The currency unit
was the U.S. dollar (235 Greek drachmas = 1
U.S. dollar) (Bank of Greece, 1995).
Gross revenues and production for PSS
and TS were evaluated and compared in order
to determine the benefits provided by the adop-
tion of PSS. Three appraisal criteria were
used: 1) the net present value (NPV) (Levy and
Sarnat, 1994a), 2) the benefit/cost ratio (B/C)
(Gittinger, 1972), and 3) the risk-exposure
ratio (RE-Ratio) (Gitman, 1977). Addition-
ally, factors affecting the level of the income
benefits were investigated by performing sen-
sitivity analysis.
Economic assessment. Capital budgeting
procedures are being used in modern finance
theory to estimate yields on investments (Levy
and Sarnat, 1994b; Papadopoulos, 1986). When
evaluating alternative projects, expected costs
and revenues should be estimated, and spe-
skilled labor make producers reluctant to adopt
this procedure (Sarooshi, 1987). Hence, farm-
ers require a well-documented answer to the
question of whether the cost of adoption of
soilless cultivation in perlite exceeds the value
of the investment in the long run.
Protected cultivation is an economically
important enterprise in Greece, significantly
contributing both to the individual farmer’s
income and to the national trade balance
(Mattas et al., 1990). Horticultural and flori-
culture greenhouse production has increased
92.4% during the last 10 years (Tzouramani et
al., 1995). Various flower crops are cultivated
in greenhouses, but gerbera seems to be gain-
ing importance in the European market.
The primary objective of the present study
was to evaluate the economic feasibility of
gerbera cultivation in heated greenhouses in
northern Greece using the traditional soil cul-
ture system (TS) vs. the perlite soilless culture
system in plastic bags (PSS).
Materials and Methods
Procedure. The experiment was conducted
from June 1991 until May 1993 at the Agricul-
tural Research Center of northern Greece in
Thessaloniki, a semiarid Mediterranean re-
gion where the summer is hot and dry and the
winter is cold and rainy. Costs of heating
equipment and greenhouse construction were
based on estimates by Salem (1992) and
Tzouramani (1994).
The two systems were compared in two,
round arch, single-span type plastic green-
houses of 150 m2, with vertical side walls
(Tzouramani, 1994), which were heated by
circulation of warm water in corrugated plas-
301HORTSCIENCE, VOL. 35(2), APRIL 2000
cific selection criteria should then be em-
ployed (Horne and James, 1977). This ap-
proach, known as economic engineering, has
been employed in evaluating new agricultural
technologies (Feder et al., 1993; Food and
Agriculture Organization of the United Na-
tions, 1995; Lambregts et al., 1993).
The principle of incremental cash flows
states that a project can be evaluated by con-
sidering all the incremental cash inflows and
outflows induced by the investment (Levy and
Sarnat, 1994c). This implies that costs and
benefits “with” and “without’’ the investment
must be compared to determine which alterna-
tive solution yields a higher return.
The net present value method (Levy and
Sarnat, 1994a) can be defined algebraically by
the following equation:
NPV = S
1+r I
tt
t=1
n
0
()
∑–
[1]
where St = the expected net cash receipt at the
end of year t; I0 = the initial outlay; r = the
discount rate (the required minimum annual
rate of return of new investment); n = is ex-
pected life; and t = the project duration in
years.
Furthermore, the use of multi-year NPV is
based on the economic life of the project. Its
sign can be positive or negative depending on
whether there is a discounted net inflow or
outflow over the economic life of the project
(Helfert, 1991).
The B/C ratio is the present value of the
benefits relative to the present value of the
costs (Gittinger, 1972). The decision rule is
the following: 1) if B/C ratio >1 or the NPV >0,
the project will be accepted and 2) if B/C ratio
<1 or the NPV <0, the project will be rejected
(Pagoulatos, 1992).
Gitman (1977) developed a new ratio, the
risk exposure-ratio (RE-Ratio), which, instead
of assessing variability or dispersion, mea-
sures the degree of risk exposure present in a
given capital expenditure alternative. The RE-
Ratio can be interpreted as representing the
reduction in annual cash inflows (expressed as
percentage of the net investment) that could be
experienced annually and allow the project to
remain acceptable. This ratio actually represents
a linear transformation of a benefit/cost ratio.
The specific form of RE-Ratio is given below:
RE – Ratio = BCF
kn
–
,
11
()
∗
[2]
where B/C = benefit/cost ratio; and Fk, n = the
factor for the present value of an n-year annu-
ity discounted at k percent or:
Fkk k
kn,
....=+
()
++
()
+
()
1
1
1
1
1
1
12 1
[3]
The decision rule for RE-Ratio is to accept
all projects that exhibit positive RE-Ratios
and NPV. When alternative techniques
(projects) are assessed, projects with higher
RE-Ratios should be selected. Therefore, RE-
Ratio can be used to measure project worth,
and allows estimations of the degree of project
risk exposure to be made (Gitman, 1977).
Results and Discussion
Production and gross returns. Production
and gross returns of both the PSS and TS
systems were estimated and compared for the
experimental period of 24 months (Table 1).
No distinctions among cultivars were consid-
ered and quality was assumed to be the same
for both PSS and TS. Gross returns were
computed using actual gerbera price data ob-
tained from the local market.
Comparisons based on actual yield data
clearly demonstrate that the annual average
production of PSS exceeded the annual aver-
age production of TS by 5.1% (Table 1).
Moreover, gross returns of the PSS were greater
than those of TS by 6.6% (Table 1).
Production costs. Production costs were
estimated for the 24-month period of the ex-
periment, based on 0.1 ha. As was indicated
earlier, the use of perlite as a substrate led to a
differentiation in the operating cost between
the two systems considered ($42,132 and
$40,930 for PSS and TS, respectively) for an
area of 0.1 ha (Table 1). The irrigation systems
for the two cultivation systems differed sub-
stantially. The irrigation system was more
complicated and therefore more costly for
PSS, since the use of plastic bags required
establishing a recirculation system for the nu-
trient solution (Table 1).
The use of the horizontal plastic bag method
in PSS caused additional costs in comparison
with the TS, and harvesting expenses were
also greater in PSS because of higher produc-
tion (Table 1).
Financial analysis. As mentioned earlier,
three discounted measures (NPV, B/C Ratio,
and RE-Ratio) were estimated to assess the
economic efficiency of PSS vs. TS. Therefore,
monetary flows of the two systems were con-
sidered (Table 2) and discounted at 10%, within
a period of 9 years (Table 3).
The NPV was $18,414, and the B/C ratio
3.3 for PSS. Both criteria indicate that the
adoption of PSS increased income. In addi-
tion, the sufficiently large risk exposure-ratio
of 41.3% obtained indicates clearly that the
annual cash inflows may be reduced by 41.3%
and the project can still maintain its positive
NPV.
Sensitivity analysis. Sensitivity analysis
offers both additional insights on the value of
the investment analysis and an indication of
how various factors can influence the derived
outcomes (Pagoulatos, 1992). Furthermore,
using sensitivity analysis a firm can best esti-
mate all revenues and costs involved in a
project by calculating the project’s NPV and
then checking the sensitivity of the NPV to
possible estimation errors of the gross rev-
enues and various cost items (Levy and Sarnat,
1994). In this study two important factors, the
discount rate and the product price, were in-
vestigated by changing the range of values. A
50% decrease in the discount rate increased
NPV by 38.2%. Conversely, a 50% increase in
the discount rate reduced NPV by 26.7% (Fig.
1). Hence, one can argue that any decline in the
discount rate cannot significantly affect the
outcome. Since the discount rate reflects the
macroeconomic conditions, it cannot be influ-
enced by producers; however, it can be intu-
itively argued that as the Greek economy is
steadily improving, some spectacular changes
can be expected.
Finally, NPV was very sensitive to product
price variations. A price reduction of 50%
reduced NPV 29.2%, whereas a 50% price
increase generated a 70.8% increase in NPV.
In other words, product price is a crucial factor
that can significantly affect the size of NPV.
This clearly implies that producers can in-
crease their income by implementing advanced
production and marketing strategies that yield
higher prices, such as early production or well-
planned timing of production, purchase con-
tracts, and better packaging.
Conclusions
The use of SCS in gerbera production can
substantially improve producers’ income.
However, financial analysis revealed that the
PSS is more profitable than TS. Producers
that adopted PSS earned an estimated net
income of $18,414 over 9 years. Sensitivity
analysis revealed that income benefits can be
further improved by even a minor increase in
the product’s price. High quality and better
marketing strategies that lead to higher prod-
uct price can also enhance investment ben-
efits.
The results of this investigation support
the conclusion that advances in technology
may provide new opportunities for improving
the overall efficiency of the greenhouse enter-
prise. However, further research on the effec-
tiveness of PSS is needed to establish more
concrete recommendations.
Table 1. Average annual production, costs, and gross returns for the traditional soil culture system (TS) vs.
the soilless culture system (PSS) for gerbera on 0.1 ha over 24 months.
System TS PSS Increase with PSS (%)
Production (no. flowers) 178,729 187,955 5.2
Returns ($U.S.) 59,631 63,564 6.6
Costs ($U.S.)
Harvesting 4,626 5,649 22.1
Operating 40,930 42,132 2.9
Capital 29,035 30,255 4.2
Other 851 1,277 50.1
Total 75,442 79,313 5.1
Cost per flower 12.27 12.90 5.1
HORTSCIENCE, VOL. 35(2), APRIL 2000302
MARKETING & ECONOMICS
Table 2. Estimated costs of and revenues from ($U.S.) the perlite soilless culture system (PSS) vs. the traditional soil culture system (TS) for gerbera on 0.1 ha for
selected years.
Year 1 Year 3 Year 5 Year 7 Year 9
TS PSS TS PSS TS PSS TS PSS TS PSS
Capital costs
Greenhouse structure 12,766 12,766 0 0 0 0 0 0 0 0
Erection–glazing 1,277 1,277 0 0 0 0 0 0 0 0
PE–cover 1,064 1,064 0 0 0 0 1,064 1,064 0 0
Heating system 6,383 6,383 0 0 0 0 0 0 0 0
Irrigation system 1,163 2,383 0 0 0 0 0 0 0 0
Little house and basin 6,383 6,383 0 0 0 0 0 0 0 0
Total 29,035 30,255 0 0 0 0 1,064 1,064 0 0
Operating costs 0000
Plastic bags --- 404 --- 404 --- 404 --- 404 --- 0
Plants 7,843 7,843 7,843 7,843 7,843 7,843 7,843 7,843 0 0
Shading net 1,277 1,277 0 0 0 0 1,277 1,277 0 0
Double glazing with a plastic film 213 213 213 213 213 213 213 213 213 213
Plastic mulch --- 851 --- 0 --- 0 --- 851 --- 0
Perlite --- 1,004 --- 1,004 --- 1,004 --- 1,004 --- 0
Fuel 7,447 7,298 12,766 12,511 12,766 12,511 12,766 12,511 5,319 5,213
Fertilizers 101 76 429 558 429 558 429 558 328 481
Disinfection/improvement of soil 851 --- 851 --- 851 --- 851 --- 0 ---
Pesticides/insecticides 869 869 1,489 1,489 1,489 1,489 1,489 1,489 621 621
Electricity 25 37 43 64 43 64 43 64 17 27
Water 22 20 38 34 38 34 38 34 16 14
Harvesting cost 383 289 1,622 2,109 1,622 2,109 1,622 2,109 1,239 1,820
Insurance 124 124 213 213 213 213 213 213 89 89
Other 248 372 426 638 426 638 426 638 177 266
Total 19,403 20,677 25,933 27,080 25,933 27,080 27,210 29,207 8,018 8,743
Total costs 48,439 50,932 25,933 27,080 25,933 27,080 28,273 30,271 8,018 8,743
Salvage value 0 0 0 0 0 0 0 0 14,925 15,047
Gross revenues 16,693 12,917 64,625 73,572 64,625 73,572 64,625 73,572 47,932 60,655
Net benefits –31,745 –38,015 38,692 46,493 38,692 46,493 36,352 43,301 39,914 51,912
Table 3. Estimated cash flow ($U.S.) for the perlite soilless culture system (PSS) vs. the traditional soil culture system (TS), 0.1 ha.
Year
1 2 3 4 5 6 7 8 9 Total
Outflow 2494 653 1147 1504 1147 1181 1998 653 725 11,504
Inflow –3776 2852 8947 2852 8947 2852 8947 2852 12845 47,316
Flow -6270 2198 7799 1347 7799 1671 6948 2198 12120 35,812
Discount factorz0.909 0.826 0.751 0.683 0.621 0.564 0.513 0.467 0.424 5.759
Discounted cash outflow 2268 540 862 1028 712 667 1026 305 307 7,714
Discounted cash inflow –3433 2357 6722 1948 5555 1610 4591 1330 5447 26,128
Discounted cash flow –5700 1817 5860 920 4843 943 3566 1026 5140 18,414
zDiscount factor (D.F): The general form which was used in order to determine each year’s discount factor was the following:
qt,k k
()
=+
()
1
1t
where t denotes the year, and k the discount rate. Literature Cited
Bank of Greece. 1995. Monthly statistical bulletin.
Bank of Greece, Athens.
Feder, G. and D. Umali, 1993. The adoption of
agricultural innovations: A review. Technol.
Forecasting and Social Change 43:215–239.
Food and Agriculture Organization of the United
Nations. 1995. Guidelines for the design of
agricultural investments projects, p. 112–113.
FAO, Rome.
Gitman, L.J. 1977. Capturing risk exposure in the
evaluation of capital budgeting projects. Eng.
Economist 22:261–274.
Gittinger, J.P. 1972. Economic analysis of agricul-
tural projects. 2nd ed. Intl. Bank for Reconstruc-
tion and Dev., Baltimore.
Helfert, E.A. 1991. Analysis of capital investment
decisions, p. 211–277. In: R. Homewood and D.
Irwin (eds.). Techniques of financial analysis,
3rd ed. Irwin, Boston.
Horne, V. and C. James. 1977. Financial manage-
ment and policy. Prentice Hall, Englewood Cliffs,
N.J.
Lambregts, J.A.D., W.L. Griffin, R.D. Lacewell,
J.T. Davis, and G.M. Clary. 1993. Estimated
Fig. 1. The effects of a change in discount rate and product price on net present value (NPV) of gerbera grown
on 0.1 ha.
303HORTSCIENCE, VOL. 35(2), APRIL 2000
costs and returns for catfish farms with recircu-
lating ponds along the upper Texas coast. J. Agr.
Appl. Econ. 25(2), Dec. 1993:1–12.
Levy, H. and M. Sarnat. 1994a. The economic
evaluation of investment proposals, p. 38–44,
In: Capital investment and financial decisions.
Prentice Hall, Hertfordshire, U.K.
Levy, H. and M. Sarnat. 1994b. Capital budgeting:
An overview, p. 21–33. In: Capital investment
and financial decisions. Prentice Hall,
Hertfordshire, U.K.
Levy, H. and M. Sarnat. 1994c. Using cash flows to
evaluate investments, p. 116–155. In: Capital
investment and financial decisions. Prentice Hall,
Hertfordshire, U.K.
Maloupa, E. 1993. Hydroponic culture of floricul-
tural crops under protected cultivation in Medi-
terranean conditions. Proc. Natl. Mtg. for Hort.
Crops under Protected Cultivation. Heraclio,
Crete.
Mattas, K., M. Grafiadellis, E. Papanagiotou, and
M. Martica. 1990. Evaluating the effectiveness
of the passive solar system for heating green-
houses. Acta Hort. 263: 97–101.
Pagoulatos, A. 1992. Investment project analysis.
Training Material Intl., Lexington, Ky.
Papadopoulos, D. 1986. Financial analysis of capi-
tal investments of the enterprise (in Greek).
Paratiritis, Thessaloniki, Greece.
Salem, A. 1992. Economic evaluation of a passive
solar greenhouse heating system. MS Thesis,
Mediterranean Agron. Inst. of Chania, Greece.
Salem, A., K. Mattas, and M. Grafiadellis. 1993.
Assessing low-cost input use in off-season to-
mato production. Acta Hort. 340:117–124.
Sarooshi, R. 1987. Hydroponic growing of straw-
berries, p. 93. In: Proc. Hydroponics Wkshp.,
Salamander Bay, NSW, Australia, 16–18 Mar.
1987.
Tzouramani, I. 1994. Investment alternatives in
greenhouse enterprises. MS Thesis, Mediterra-
nean Agron. Inst. of Chania, Greece.
Tzouramani, I., K. Mattas, and M. Grafiadellis.
1995. Directing farmers’ greenhouse construc-
tion decisions. Medit 6(2):44–48.
