In deciding to participate in any economic activity, whether it be agricultural or manufacturing, an investor must ask him- or herself if it is worth investing his or her money in this specific activity. If someone wishes to invest money, there are a multitude of options, the simplest of which is banking the money and earning interest. In evaluating different options, investors must consider the opportunity cost of any chosen activity. This basically means, "What are you giving up in terms of other investments by choosing to invest in this particular activity?" If, given your capital (which includes land, management abilities and cash), you can earn better returns with some other activity you probably prefer to choose the more profitable activity. Investing your capital in an activity with the highest return means that this activity has a low opportunity cost. Investing your capital in an activity which earns less money than other activities means that the chosen activity has a high opportunity cost.
In evaluating the opportunity cost of starting an avocado orchard, the first consideration might be land use. You might think that agricultural characteristics of the land are the first thing to consider in evaluating the opportunity cost of land but often this is not the case. In California, a potentially lucrative use of land in many rural areas is housing development. Agricultural land is being converted to housing at significant rates in the Central Valley and in Southern California and one of the reasons is that the per acre return to housing will almost always outweigh the per acre return to any form of agriculture. The transition can be relatively rapid. You may not know that Orange County was known (and named) for its huge expanse of orange groves -- now there is only a tiny acreage of commercial orange groves in the county. This conversion was achieved with the cooperation of agriculturists -- many determined that it was more profitable to sell their land for development and retire from farming or move to new areas and start new farming operations.
To give you a better idea of the impact of development on avocado acreage, consider the graph below which shows avocado acreage in California between 1920 and 1995.
You can see from the graph that for the 1970s to mid-1980s, the growth in avocado acreage grew dramatically. Yet, starting in the mid-1980s that growth abruptly stopped and then plummetted. If you look at the level of nonbearing acres of avocados -- remember that nonbearing acres are those orchards which are still young and not yet bearing fruit -- you can see that the levels are very low. This could indicate that very few people have recently decided to increase their acreage or who have recently decided to replace old trees (we will discuss more about these decisions later).
Assuming that development is not an option for the potential avocado producer (for reasons that may be personal, legal or otherwise), the investor must consider the agricultural alternatives to avocado production in order to evaluate the opportunity costs. Given the soil characteristics, the slope of the ground, etc., a grower must consider what other crops aside from avocados might be grown on the land. Do other crops have a higher productivity and return on investment than avocados? Remember, avocado production is a longer term commitment than field crops and other non-vine and -tree crops because of the need to wait a number of years until the first commercial harvest. If tomatoes, strawberries or vegetables are considered, they have the benefit generating returns in the first year -- in California you can often plant more than one crop in a year on a given piece of land which means that you are getting multiple revenue streams from that piece of land.
Assuming that avocados are judged to be the preferred production commodity, the producer must consider the labor and water costs involved in avocado production. Avocados are quite demanding of both labor and water. Maintaining and harvesting avocados is labor-intensive and there is relatively little cost-efficient technology available. Therefore, producers considering operating an avocado orchard should consider the cost of labor as well as its availability during critical parts of the season. If labor cost and availability is a problem, then avocado production may have a high opportunity cost and the investor may be better off investing in other areas.
Similarly, water can be a constraining factor. Ideally, all the water a producer would need would come from rainfall occurring at critical growing times for the avocado trees. Unfortunately, much of California is a Mediterranean or desert environment, especially where avocados grow. Local rainfall, by itself, is insufficient to maintain agricultural growth and, as a result, growers depend on water delivered by canals from Northern California and the Colorado River as well as groundwater.
In California, the cost of water often depends on where it is needed. In the case of water delivered by state and federal water projects, farming operations must be near canals in order to receive water. Even more importantly, water must be available to be sold to the new producer at the time it is needed. Pricing of water from these water projects depends on the type of water rights a holder has. Holders of junior water rights must often pay higher prices than senior water rights users and are not guaranteed their contractual allotment in times of scarcity.
In the case of groundwater, the alternative to water from the water projects, the cost depends on how high the water table is. The deeper the water, the more energy is required to pump it up and the more energy required, the more expensive it is to pump the water. Other considerations include how many other farming operations (as well as townships and cities) are sharing the aquifer (the pool of groundwater), the quality of the groundwater as well as any institutional or legal controls on groundwater pumping.
In considering the cost of land, labor and water you should keep in mind how California compares with Mexico and why Mexico is such a concern of California avocado producers. We have already seen how Mexico benefits from adequate rainfall as well as relatively inexpensive land and labor. While costs in California may vary over time, there is little likelihood that the cost of land and labor will fall; in the case of water, its price can only increase. While new avocado operations are being started, the trend of the previous few decades is slowing significantly -- especially given the high costs of production in California combined with the pressure of urban development to convert agricultural land. This has forced growers to think beyond simple avocado production as a means of protecting their investment -- but this will be discussed later.
The next question to consider is the case where an avocado orchard is already existing and a grower must consider whether or not to replace older trees.