How Owning the Packing Facility Boosts ROI for Our Investor
Introduction
Farming is one of the oldest industries of all time. That said, how we farm has evolved significantly. Today, how we grow, prepare, pack, and ship our produce looks much different than in decades past. Packing facilities, in particular, are more advanced today than ever before. In turn, the design and operation of a packing facility can have a major impact on a farm’s profitability.
In this article, we look at the role of the packing facility in a farm’s operation. We go on to describe the many ways in which owning a highly-efficient packing facility – like we do at Bravante Farm Capital – can boost returns for farmland investors.
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What is a packing facility?
All produce requires a series of treatments between harvesting and final packaging. Packing operations can be categorized into “field” packing and “packinghouse” packing. A farmer’s use of one form of packing over the other depends on several factors, including perishability and the value of the crop. Field packing is arguably easier and more straightforward. As soon as the crop is harvested, the produce is packed directly into containers that are ready for shipment. Packinghouse operations are more complicated and typically utilize large, expensive machines to help streamline the process.
Packinghouse operations will vary depending on which crops are being harvested. Most will include some combination of washing, pre-cooling, trimming, waxing, sorting/grading, and vapor treatments. Washing is especially important to remove soils from root crops, while waxing, sorting, and grading are common when handling fruits.
In order to maximize yield, the packing facility must handle crops carefully. Any damage to fruits during the packing process can result in less valuable crops, and therefore lower returns for investors.
How are farmland packing facilities owned and operated?
Farmland packing facilities are generally owned and operated in one of two ways: they are either independently owned or they are vertically integrated into a larger farming operation.
Traditional Farmland Packing Facilities
Farmers either harvest and pick their own produce before having that produce shipped to an independent facility for final packaging and distribution, or they hire the packing facility to harvest the produce for them. Wanting to focus on actual produce cultivation and either because of lack of interest, skill or capacity, these farmers, most small-hold famers such as those we are targeting for acquisition, will outsource packing altogether.
On the flip side, these independent packing facilities will often accept produce from hundreds (even thousands) of individual growers. This inherently limits control. For example, produce has ideal harvesting windows that, if missed, can significantly reduce the farm’s profitability. An independent packing house operator has little incentive and limited capacity to harvest every farmer’s crops at the optimal time.
So, while using independent packing house can take a load off a farmer’s shoulders, it may also inadvertently limit their farm’s profitability.
Vertically Integrated Packing Houses
Alternatively, some farmland owners, like we here at Bravante Farm Capital, will invest in building our own packing facilities. This is one of the key components of a vertically integrated farm and one that can considerably boost profitability at the farm. Rather than outsourcing the packing function, we can bring packing in-house for greater oversight and control.
There are many benefits associated with owning your own packing facility. For example, a farmer with a strong citrus program will have specialized packing equipment that helps to grade and sort the fruit. The packing house will know exactly which boxes to use—a box used for apples may not be the “best” box for oranges, for instance. They will even know which citrus box manufacturer is the best for their specific needs.
Vertically integrated packing houses offer other benefits, as well. The ranch owner can carefully monitor when the citrus has reached its optimal size. Fruit can be picked at its “peak” size (i.e., its most marketable size) and then quickly packaged for distribution while the fruit is still optimally ripe.
This process may sound easy in theory, but it is actually quite difficult to navigate in practice.
Consider, for instance, that there are hundreds of acres of fruit being evaluated at any given point in time. Most farms have multiple fruit varieties, and each of those varieties need to be picked at a different time. Finding the optimal time prevents the fruit from being picked too early or too late which can degrade its value on the market.
Farmers who pick the fruit at the optimal time, and then have it packed and distributed quickly, will in turn maximize the farm’s profitability. After all, every acre of farmland can only produce so much fruit. Therefore, the quality of the fruit being produced is critically important and returns are directly correlated with how well a packing house executes. Those who own their own packing facility can monitor this process carefully and respond faster than those who use independent packing facilities.
Farmland vs. Multifamily
To better understand how a packing facility fits into a larger, vertically integrated farm operation, let us compare it to a large multifamily development. A multifamily development with 250+ apartments may be able to justify having its own on-site property management and leasing teams. This allows the owner to respond to maintenance requests or leasing inquires faster than they could otherwise. Smaller, 20-50 unit buildings may need to outsource these tasks.
Prospective investors should look at a vertically integrated farm’s packing house the same way. Just as a multifamily owner and operator can achieve efficiency by bringing certain tasks in-house, so can the farmland owner by packing on-site. It provides greater control and allows the owner to respond faster to potential issues out in the fields.
Packing House Innovations that Improve Farmland ROI
It may seem as though packing produce is relatively straightforward, but there are aspects to a packing facility that can make a business more or less profitable. Facilities that use state-of-the-art equipment, sustainable design features, and careful operational strategies will prove to be more profitable than their counterparts.
Electronic Innovations (e.g., electronic sorting of the fruit)
Technology has had an impact on nearly all industries, and farming is no exception. Twenty first century packing houses are more technologically advanced than ever before. Here are some of the electronic innovations that are making vertically integrated farms like ours here at Bravante Farm Capital more profitable.
Aweta machine
An Aweta machine is a highly valuable piece of equipment that proves to be especially helpful when packing fruit. As boxes of fruits are brought into the packing house, the Aweta machine can sort the fruit based on several factors including size, shape, and sugar content. The machine then adds a sticker to each piece of fruit to ensure they are properly sorted and then sold appropriately by value. The higher value fruit, for instance, might be exported, whereas others may be sold domestically, as “choice” fruits, or sold to be juiced. This process used to be conducted manually using wooden rollers. Automating this process is much more efficient and cost-effective. It reduces the labor associated with manual sorting and allows those employees to be utilized for higher-value tasks.
Image processing
Image processing can also be used by the equipment sorting fruit. Image processing, also referred to as “machine vision”, is another way to detect color, shape and blemishes. Image processing typically relies on RGB images. The machine picks up colors from each of the color channels (red, green and blue) and can then sort the fruit accordingly.
There is generally human oversight of these machines. For example, the farm owner can determine the thresholds for color, size and blemish percentage. Fruit with too many blemishes, for example, can be delivered to the end of the conveyor and loaded into certain bins. Higher-quality fruits will be sent down a different conveyor into bins with more protection to prevent the fruit from being damaged.
Brix Machines
Many packing facilities will also utilize high-intensity light sensors that are also known as Brix machines. These sensors essentially shoot beams of light through produce to determine its sugar content. Fruits with higher Brix degrees can be sorted accordingly and sold for a higher profit.
These light sensors are also helpful in determining whether fruits are being picked too early. If the sugar content is consistently low, that is a sign that the fruit has not reached its optimal state. If the sugar content is too low, consumers will be unhappy with that fruit and in turn, the buyers of that fruit will not fulfill future orders (or orders at premium rates).
Energy Efficient Operations
A lot of energy is needed to operate a packing facility. At Bravante Farm Capital, our packing house is designed with state-of-the-art coolers, humidity controls, and other energy-efficient equipment as a way of reducing energy consumption. Less energy consumption means lower bills, and that translates into higher profits for investors. It also helps support our commitment to protecting the environment and to sustainable farming.
Related article: Sustainable Farming at Bravante Farm Capital
For example, we have recently utilized a program offered by PG&E who came in to evaluate our facilities from top to bottom. They were able to make recommendations that would help reduce our energy consumption, such as replacing all our lights with more efficient LED lighting (which we then did). There are a lot of motors on the packing line and in the facility’s cold storage rooms. These motors have all been retrofitted with more efficient parts. We have also purchased more efficient compressors to reduce our energy consumption.
The cold storage area is another part of the packing house that should not be overlooked. Our cold storage rooms are designed with best-in-class insulation to ensure we use as little power as possible.
While we have not yet added solar to our facility, it is something we are seriously considering. We anticipate needing to expand the size of our packing facility in the not-so-distant future, and when that time comes, we will explore adding rooftop solar to the building. These panels could be used in conjunction with a solar field on underutilized farmland. Together, these solar arrays would offset a significant portion of our energy which in turn, lowers our total energy costs. Lower energy costs will result in a more profitable farming operation.
Automatic palletization machine
Automatic palletization machines are perhaps the next big innovation in farmland packing houses. Not only are these machines expensive, but they are also very large. Most packing facilities need to be custom-built (with double overhead height space) to be able to accommodate an automatic palletization machine.
Farmland operators who can afford to invest in an automatic palletization machine will find that these machines help move products faster and more efficiently. The machine’s robotic components can perform a variety of tasks, from packing to stacking and wrapping. This helps reduce waste and allows a packing house to operate 24-hours per day with less in-person labor. Palletizing robots are dependable and reliable – farmers never have to worry about them calling in sick! They can complete the highly repetitive tasks that would otherwise lead to staff burnout and high employee turnover.
In short, these machines help dramatically increase the production capacity of a packing house.
Tax Benefits Associated with Owning a Packing Facility
Packing houses may be “simple” compared to other manufacturing operations. However, the capital costs are no less insignificant. Any packing house requires a substantial capital investment – which is why so many farmers prefer to use independent packing facilities.
However, vertically integrated farms that bring packing in-house find there are tax benefits associated with owning the facility. The equipment can be depreciated over time, which results in valuable tax write-offs for otherwise profitable businesses. Currently, “bonus” depreciation allows owners to accelerate the depreciation of their capital investments. This puts more money back into investors’ pockets sooner than if they were to utilize more traditional straight-line depreciation.
Those who utilize a third-party packer will not be eligible for these same tax benefits.
Conclusion
While automation certainly helps to streamline the packing process, it is important to understand that farmers cannot solely rely on technology. Yes, this equipment can help boost returns for investors. However, experienced farmers will recognize that human involvement is still critical. Manual spot-checking of fruit, for example, is still essential.
And the treatment of packing house team members cannot be overlooked, either. More than 90% of the staff who work at Bravante Farm Capital’s packing house have been there since the company’s beginning. Packing is seasonal, and these employees come back every year without fail (those who we have lost are people who have retired, not gone elsewhere!). We treat our packing house employees with the utmost respect and value their hard work. In turn, they work even harder for the company. No technological innovation will replace the value of our people and ultimately, it is our people who are best positioned to maximize the farmland returns for our investors.
Interested in learning more about our vertically integrated farmland operation? Contact us today!
