It has been estimated that the productive life of an avocado tree is approximately 40 years and that peak productivity occurs starting around 8 years. It makes no sense to replace a tree whose productivity is high or whose productivity is still increasing. On the other hand, as a tree's productivity starts falling, the grower must start considering the possibility of replacing the tree with declining productivity with a new tree. Of course, the new tree may will initially have lower yields but over time its yields would surpass those of the older tree (since the older tree will reach the end of its productive life before the new tree).

While the factors affecting the decision of when to replace an old tree with a new tree can be quite extensive and complicated, we will focus on the factors affecting the decision of whether to replace an old tree with a new tree now. Considerations for this decision, again, revolve around the costs of production as well as expectations of costs of borrowing and of prices of avocados.
 

1. The Influence of the Costs of Production

Just like the considerations concerning whether or not to start an avocado orchard, the question of replacing old trees involves the cost of labor and water. In general, the requirements for planting and caring for a young tree are greater than that of maintaining a mature tree. New trees must be purchased, planted, given extra water and care to establish the tree and protected from various diseases and pests. Clearly, there are numerous costs undertaken years before any revenue is generated. The tradeoff is that by leaving older, low productivity trees in place, less management resources and costs are expended yet a revenue stream is still generated. The costs of replacing new trees cannot be avoided but a grower must determine when the most opportune time is for doing so.

Because cost of labor and water are so critical to early avocado tree growth, it would make sense that the best time to replace trees is when the cost of these two inputs are low relative to other costs and relative to the price of avocados. The lower the relative costs, the lower the overall cost of replacing trees and the quicker it takes for the revenue generated by the tree's production to cover the costs of tree replacement.
 

2. The Influence of Prices and Interest Rates

As alluded to in the previous paragraph, the price of avocados plays a critical role in the economics and psychology of tree replacement. If prices are high and are expected to remain high, then growers are much more likely to replace older trees in the hopes of taking advantage of the high prices with higher-yielding younger trees. If prices are low and not expected to rise, then growers are less likely to replace old trees. The reason psychology plays a role is because some research has shown that when prices are rising, growers are more likely to believe that they will continue to rise even though there is natural variability in avocado prices. Of course, this behavior is not unique to avocado growers.

Another factor to consider is the cost of borrowing or the interest rate. The higher the interest rate, the more a borrower will have to pay back to the lender, thus increasing costs of production across the board.

Finally, a principal consideration for tree replacement is the old idea of the opportunity cost of land. If land prices have increased substantially and there is much development pressure, a grower may decide that it is not worth replacing trees and that selling out to a developer is the best economic decision.

The next question to consider is the case of whether it is worth expanding an existing avocado orchard.