Abstract
Global blueberry production more than doubled during the last decade. In Mexico, the production of this fruit has grown faster than globally, positioning this country among the top five international blueberry-producing regions. This case study focuses on a prospective investor planning to grow blueberries in Mexico and export most production to the U.S., the largest producer and consumer of fresh blueberries. A high-technology producer growing blueberries under high tunnels in western Mexico is featured in this article. The case study was researched using a combination of field visits to blueberry producers, collaborative work with an industry consultant, and academic research. The article provides industry statistics on blueberries in Mexico and globally over the last decade. In addition, it describes how the authors conceptualized and developed discounted cash flow models to evaluate this potential investment. Despite the importance of blueberries from Mexico, there is a need for financial models to assess the profitability and risk of growing blueberries in that country. Students solving this case are expected to identify risks and opportunities in the industry and conduct Porter’s five forces competitive analysis. In addition, students will mainly evaluate the results of a stochastic capital budgeting model.
1. Introduction
In 2022, Mexico was one of the most relevant exporting regions of blueberries to the USA, the largest consumer of blueberries worldwide (Pienaar et al., 2022). Other significant exporters of blueberries to the U.S. included Peru, Chile, and Canada (USDA ERS, 2023). About 74% of blueberries were produced in two states of Mexico’s western region, Jalisco and Michoacan (SIAP, 2022c). Early in 2022, a group of researchers (the research team hereafter) was about to evaluate the economic feasibility and business risks of producing blueberries in western Mexico. The research team had gathered much information — summarized in this document — on the blueberry industry and prepared a financial model to evaluate the prospective investment.1
Given the exponential growth of blueberry production in Mexico during the previous decade (Figure 1), it was a common belief among the local agribusiness community that growing blueberries was a profitable enterprise. However, despite the importance of this crop in Mexico, financial information on blueberry production in that country was limited. The Trust Funds for Agricultural Development (FIRA), a development bank supporting Mexico’s agriculture, livestock, fishing, forestry, and agribusiness sectors, occasionally published blueberry cultivation budgets (FIRA, 2022). While FIRA’s published blueberry budgets were a valuable benchmark for producers and researchers, they had some limitations. For instance, for the western region, only partial budgets were available. The budgets included investment values, projected selling prices, and costs/expenses for only one productive year after establishment. This presented a limitation for evaluating an investment in a perennial fruit like blueberry, with a long-term business horizon and production and financial parameters varying over time. More importantly, for the analysis the research team needed to conduct, by 2022, FIRA budgets were prepared for a representative farmer growing blueberries in a traditional production system using a medium to moderate level of technology.
Mexican blueberry production (in 1000 metric tons) Note: 2020 information is not available. Source: SIAP (2022b).
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
In contrast, the research team was interested in evaluating an investment in a production system in high tunnels employing best production practices to ensure high-quality products for international markets. This was the type of production system — defined as a high-technology system in this document — some investors in western Mexico were interested in exploring. Therefore, to conduct the economic evaluation, the research team needed to prepare their own blueberry budgets, compile economic and business data regarding this industry, and create a financial model. As expected, the preliminary analysis based on the results of a deterministic capital budgeting model, indicated that growing blueberries in Mexico was profitable. However, there were some questions the research team needed to respond to. For instance: How risky this prospective investment might be? How competitive, and what were the existing barriers to entering this market? Was the U.S. blueberry market — the primary target for this investment — already mature/saturated or about to mature soon, or was still room to grow? These are only a few questions the research team needed to address when conducting the economic evaluation. A thorough analysis was needed to better understand the condition of the blueberry industry by early 2022.
2. The blueberry industry
Worldwide, blueberry production and trade have grown dramatically during the last decade. In 2010, total global production was estimated at 439 000 metric tons (MT), growing to about 1 million MT in 2019 (USDA FAS, 2021). According to the US Department of Agriculture (USDA) Foreign Agricultural Service, 11 countries — Mexico among them — produced over 10 000 MT of blueberry in 2019. Blueberry production growth in Mexico has mimicked the exponential worldwide production growth. Figure 1 shows the total production of blueberry in Mexico over time (SIAP, 2022b). Production of blueberries in this country occurred in five states: Jalisco (50% production share in 2021), Michoacan (24%), Sinaloa (14%), Baja California (8%) and Colima (4%) (SIAP, 2022c).
Most Mexican blueberries were exported. The Mexican Ministry of Agriculture and Rural Development estimated the value of blueberry exports at USD 399 million in 2020, representing a 230% increase relative to 2015 (SIAP, 2022a). However, while Mexican blueberry export values have grown every single year, they have been growing at decreasing rates lately.2 Regarding destination markets, at least 90% of Mexican blueberry exports recently went to the USA. For example, in 2020, US imports of fresh Mexican blueberry were estimated at 51.168 thousand MT by the USDA Economic Research Service (ERS) (USDA ERS, 2023), representing 93% of total blueberry production in Mexico that year (Figure 1). The high dependency of Mexican blueberry producers on the U.S. market may be partially explained by recent research arguing that the most prominent U.S. berry firms configured the global value chain of berries a decade ago in a way to strategically source berries from Mexico and other Latin-American countries given these countries’ local advantages (González-Ramírez et al., 2023).3
The U.S. is the largest producer (FAO, 2023) and largest consumer (Pienaar et al., 2022) of blueberries worldwide. Pienaar et al. (2022) estimated that the U.S. market consumed 36% of global blueberry production, followed by the EU (22%), China (18%) and the UK (6%) as the leading consumer regions. In the USA, increasing consumer demand has driven domestic blueberry production and imports. In particular, the consumption of fresh blueberries has experienced continuous growth while frozen blueberry consumption has been stable. Figure 2 plots US blueberry per capita national availability data — a proxy for consumption (Morgan 2022). In 2019, fresh blueberry consumption in the USA was 2.33 pounds per person (1.056 kg), remaining at a similar level (2.34 pounds per person, 1.062 kg) in 2020, and increasing to 2.54 pounds (1.152 kg) in 2021 (USDA ERS, 2022).
Blueberry consumption (pounds per capita) in the USA. Source: assembled by authors with USDA ERS’s Fruit and Tree Nuts Yearbook Tables; tables g5 and g38 (USDA ERS, 2022).
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
A recent economic impact analysis report sponsored by the US Highbush Blueberry Council showed that generic advertising paid by US blueberry growers has partially driven the growing demand for this fruit in recent years (Kaiser, 2020). In contrast, the consumption of fresh blueberries in Mexico was estimated at 60 gram per person in 2020 (SIAP, 2022d) and has remained at shallow levels in the last decade (García-Hernández, 2019). The strong demand for fresh blueberries in the US has been met with supplies from domestic and imported fruits. Figure 3 shows the fresh blueberry production in the USA, imports, exports, and domestic use during the last decade. In 2020, for instance, the USA consumed 773.4 million pounds of fresh blueberries, with 482.8 million pounds imported and 290.6 million pounds of net production (e.g. 350.5–59.9 million). Imports in that year represented 62% of total US consumption. Imports surpassed the amount of domestic production in 2016, and imports have been higher than production since that year.
Fresh blueberry production, imports, exports, and total domestic use in the USA. Source: assembled by authors with USDA ERS’s Fruit and Tree Nuts Yearbook Tables (USDA ERS, 2022). Domestic use is calculated as production plus imports minus exports.
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
By 2022, most blueberry imports to the USA came from Peru, Chile, Mexico, Canada and Argentina (USDA ERS, 2023). From 2019 to 2021, U.S. blueberry imports from Peru totalized 39% on average during the three years, followed by imports from Chile (25%), Mexico (23%), Canada (10%), and Argentina (2%), with other countries having around 1% share in US imports. By 2016, Chile was the leading country exporting blueberries to the USA (Park and Cook, 2018). However, in 2019 Peru surpassed Chile and became the largest supplier to the USA. Mexico also reached Chile’s US export volumes in 2021. While US imports from Chile have been declining recently, Mexico’s imports into the USA have experienced steady growth, and Peru has grown explosively lately. Peru had the most dramatic expansion, rising from less than 50 tons to nearly 125 000 to become the third largest producer behind the United States and Canada.4 Mexico was the fifth largest producer, following Spain. Furthermore, by 2021 Peru was the world’s leading exporter by value.5
As blueberry producers, Peru, Chile and Mexico have a comparative advantage relative to other producing regions. Due to favorable climate conditions for blueberry production, these countries can produce and ship blueberries to the USA, mainly during the blueberry off-season in this country. Blueberry production in the U.S. is seasonal, with production and commercialization occurring for around five months. Over 90% of domestic blueberries hit the US market during the twenty weeks from late April to early September (Prusa 2020). Thus, the off-season in the U.S. included around seven months, during which more than 80% of imports occurred. Indeed, Kramer et al., (2020) documented that imports from Chile, Mexico, Peru and Argentina reached the US market mainly during the off-season.
This lack of overlap between US domestic production and imports favored importing countries who could obtain high prices because they were not competing with US domestic producers. In addition to the off-season advantage Latin American exporters had to enter the US market, Mexican blueberry growers had additional benefits related to transportation efficiencies and costs. For example, González-Ramírez et al. (2023) estimated that it takes between 16 to 36 hours to transport berries from Mexico to the U.S., compared to 8 to 15 days to ship them by sea from Chile to the U.S. Similarly, labor cost was estimated at USD 240 per week in Mexico compared to USD 335 in Chile. Still, by 2022, Mexican growers were concerned about the aggressive growth of Peruvian blueberry exports to the USA. Furthermore, starting cultivating blueberries in Mexico for the U.S. market was challenging regarding the high investments needed to establish a blueberry high-technology plantation, relatively high opportunity cost of capital, and climate-related risks. In any case, while US-imported blueberries do not compete directly with domestic production, the increasing supply of domestic and imported blueberries has negatively affected selling price growth.
3. The blueberry financial model
3.1 Visiting blueberry producers and contacting an industry consultant
A Mexican university sponsored a research project that included the study of several aspects of blueberries. Part of the funded project was an economic evaluation of growing blueberries in western Mexico. To achieve this goal, the research team in charge of the economic assessment contacted the Mexican National Berries Exporters Association (Aneberries). Aneberries was established in 2010 with 15 exporters of berries. This association aims to represent exporters of fresh berries from Mexico to facilitate exports, ensure food safety, and promote and defend the trade and opening of new markets.6 By 2022, Aneberries had 24 berry exporters as affiliates representing many independent producers, and exports by Aneberries members accounted for about 85% of the berries exported from Mexico in recent years (Espinosa-Gasca, 2021).
Aneberries provided the research team with contact information of a few mid to large-scale blueberry producers that may contribute to their study. The producers were contacted by phone, explained the purpose of the study, and asked whether they would receive the research team in their blueberry farms for a field trip visit. Late in 2019 and early in 2020, research team members visited a few blueberry farms in Jalisco and Michoacan.7 By then, Jalisco and Michoacan were Mexico’s first and second-largest blueberry-producing regions in terms of volume (SIAP 2022c). The field visits’ primary purpose was for the research team to become familiar with blueberry production in a high-technology system, as defined in the next section. Therefore, the unstructured discussions during the field visits revolved mainly around blueberry production practices, expected yields, and what items a prospective blueberry producer should consider when forecasting costs and expenses. Given the sensitive nature of financial information, the blueberry farmers were not asked about their financial data.
In addition to the field visits, after those visits were completed, the research team contacted a blueberry industry consultant who worked with Mexican and Chilean enterprises along the blueberry supply chain. With experience developing blueberry investment prospects in the region, the consultant joined the research team. Based on knowledge from the field visits and the consultant, the research team defined the prospective blueberry producer to analyze and the assumptions for the financial model.
3.2 The prospective blueberry producer
Blueberries can be grown in an open-field production system (also referred to as a traditional production system) or in alternative production systems. According to Fang et al. (2020), alternative blueberry production systems include (a) production in protected environments such as high tunnels, greenhouses, or plant factories, (b) high-density plantings, (c) evergreen production and (d) container-based production; with these production systems used in combination or independently. The prospective blueberry producer in this case study combines high-density planting, container-based production, and high-tunnel production systems, defined as a ‘high-technology’ production system in this document.
The prospective producer would plant Biloxi southern highbush blueberry, a variety commonly grown in this region, in unheated high tunnels built with roll-up sidewalls and including micro-sprinklers to increase air humidity inside the tunnel when needed. The high tunnels would have 69 planting beds of approximately 65 m each. The planting density would be 9000 plants per hectare, a reasonable density for high-technology blueberry cultivations in protected environments (Fang et al., 2020; Gaskell, 2009; Strik and Buller, 2002). The plants would be grown in containers with substrates to control nutrients and conditions such as low pH and high organic matter content needed in high-density blueberry plantations (Fang et al., 2020).
An estimated 85% of total production would be exported to the USA, with the remainder sold in Mexico.8 The entire plantation area would be 50 hectares. Other specific assumptions are discussed in this document. This 50-hectare blueberry farm size is defined as middle-scale in this study and considered appropriate to achieve some economies of scale.9 Most of the inputs needed by blueberry producers are standard products and services used in other agricultural activities, including fertilizers, pesticides, and agricultural-related labor, among others. For those inputs, the bargaining power of suppliers in Mexico is low. However, the blueberry varietal plants are a relatively specialized input. Thus, blueberry plant suppliers in Mexico were not abundant. In 2022 some suppliers included Marpa Mexico, Fall Creek Mexico and Planamerica Mexico, among others.
3.3 The discounted cash flow deterministic financial model and uncertainties
The research team prepared a financial (i.e. capital budgeting) model. The model projected annual free cash flows (i.e. projected operating cash flows minus capital investments) for a 15-year anticipated investment horizon and calculated profitability metrics, including the net present value (NPV), internal rate of return (IRR), and discounted payback period (DPB). In addition to a deterministic Excel®-based model, a stochastic version was prepared using the software @Risk® (Palisade, 2021).10,11
The details of a deterministic financial model and the main results are provided in Table 1. Table 1 shows selected years.12 A breakdown of forecast costs and expenses is shown in Table 2 for selected years.13 Most importantly for the purpose of this case study, the notes in Table 2 indicate the items a blueberry plantation budget may include. As expected, the research team noted that growing blueberries in western Mexico was profitable, given the calculated financial metrics. For instance, the anticipated NPV value was positive, and the IRR was above the expected opportunity cost of capital at 14% (a discussion on this cost is provided below). In addition, such an investment might take a long time to ‘fully recover,’ according to the projected ten-year DPB.
Projected free cash flows of selected years for a prospective blueberry investment in western Mexico (total values relate to 50 hectares unless otherwise noted)
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
Breakdown of costs and expenses (excluding depreciation) for selected years (×1000 USD)
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
However, the research team realized that it would be hard to convince any prospective capital provider — an investment group or bank — to invest in or finance a 50 hectares / 6-million-dollar blueberry project based only on the financial figures in Table 1, no matter how accurate those projections were (USD 6 million is the estimated total investment value needed to start this enterprise. Details of this investment are discussed in the section ‘capital expenditures’ and in the notes to Table 1). Instead, prospective investors, producers, and capital financers would expect to be provided with a range of possible profits and losses instead of just point estimates like the NPV value in Table 1. Such probable profit ranges can be estimated with a ‘what-if’ analysis framework incorporating into the model the potential sources of uncertainty and risk the analyst foresaw. Simulation analysis is a valuable technique to achieve this goal.14 The research team identified some sources of uncertainties on the prospective blueberry plantation, which are discussed next.
Production yields
Like other perennial fruit plants, blueberries start producing a relatively low quantity of fruits when the plants are young. Yields typically increase as the plant develops, reaching a plateau, then gradually decreasing as the plants age and are eventually replaced with new plantations. For example, for the deterministic financial model (Table 1), the average expected yield during the first productive year was 0.8 kg per plant. Given current production technologies and cultural practices, blueberries planted in Mexico can be harvested after nine months of planting time.15 Yields were projected to increase in the following years, reaching a plateau of around 3.0 kg per plant in years 4–9, when the plants are mature. Beginning year ten, yields were projected to decline gradually until reaching 2.14 kg per plant on average in year 15 (Table 3).
Ranges of projected values for yields and selling prices over the business horizon
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
According to the interviews with blueberry producers and the consultant, 15 years was the most common business horizon to consider for these types of plantations. Producers mentioned that while blueberries can continue producing for many more years, it is rare to find economically successful blueberry cultivations with plants older than 15 years. In some cases, producers replace old plants of about ten years old (i.e. they replant), mainly if new varieties with higher yields are commercially available and the marginal gains offset replanting costs.
The research team considered the yield projections discussed as the “most likely” values for the financial model shown in Table 1. However, the team knew actual yields would likely differ from those projections. This is because plant yields depend on many factors out of producers’ control, including climate conditions, plant response to agricultural practices, sunlight intensity, temperatures, plant-specific responses to fertilization and nutrients, and incidence of plagues, among others. Therefore, based on responses from interviewed producers and the consultant’s judgment, the research team also projected minimum and maximum expected yield values. Table 3 provides those projections, and Figure 4 illustrates the trend of projected blueberry yields over the 15 years business horizon. These most likely, minimum, and maximum projected yield values were used to simulate yields assuming a triangular distribution each year (Rees 2015).
Cost and operating expenses
Operating costs and expenses are correlated with production yields. As yields increase during the first years of the blueberry plants’ productive life, harvesting costs — e.g. additional labor — are expected to be higher (refer to budgeting assumptions in Table 2). Conversely, when yields decrease due to the aging of plants, harvesting costs will also tend to decrease. This is partly why the trajectory of forecasted costs and expenses resembles that of projected yields (Figure 4). However, the trajectories of cost and expenses and yields are not perfectly correlated (i.e. cost and expense curves are flatter than yield curves) because some economies of scale are reaped by operating this blueberry plantation.
Trends of projected variables for the blueberry financial model over the business horizon (minimum, maximum, and most likely projected values).
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
In addition, as time passes and blueberry plants mature, the intensity and cost of cultural activities like pruning and fertilization increase, partially explaining the increasing costs during the project’s first years. Therefore, costs and expenses were projected to increase as the plantation matures and slightly decline when the plantation is ten years old (Table 1).
Like in many other crops, in blueberry plantations, costs and expenses are less volatile than selling prices. Still, costs and expenses are subject to some variation other than due to inflation and exchange rates (see footnote 13). For example, fertilizer prices are sensitive to freight costs (e.g. energy prices) and worldwide supply quantities. Therefore, the research team incorporated a relatively low projected costs and expenses variation of ±5% around the most likely value. Given the projected minimum and maximum values, costs and expenses were simulated following a uniform distribution. In addition, a low correlation of 0.20 between costs and yields was added to the simulation algorithm in @Risk®.
Freezing and other abrupt changes in climate conditions
Blueberry yields and fruit quality are sensitive to abrupt temperature changes (Fang et al., 2020). In particular, the research team considered freezing temperatures and volatile selling prices among a blueberry enterprise’s most critical risk factors. According to the discussions with blueberry farmers in Jalisco and Michoacan, Mexico, it was concluded that freezing conditions are likely to occur every three years and that when they occur, 15% of the projected production is usually lost. This possibility was incorporated in the stochastic model according to a Bernoulli distribution, assuming freezing occurs 1/3 of the time (i.e. every three years).
Capital expenditures
The investment needed to establish the blueberry plantation was referred to as capital expenditures or CAPEX. This included the required infrastructure, such as the construction of the high tunnels, the purchase and installation of the equipment to produce blueberries (e.g. sprinklers), and the cost of buying and planting the blueberries. This cost for a high-technology blueberry plantation in Mexico was estimated at USD 120 000 per hectare, for 6 million dollars total, according to Table 1. About one-third of this investment (e.g. USD 40k) was estimated to build the high tunnel infrastructure. The cost of the blueberry Biloxi plants also represented a high percentage (33%) of CAPEX, plus the cost of the soil substrate in bags representing another 18% of CAPEX.
Like with most prospective investments, the actual investment value in a blueberry enterprise was expected to differ from the projected value. Specialists in capital budgeting evaluation have concluded that CAPEX estimates are usually ±30% accurate relative to actual values in the chemical industry (Peters et al., 2003). The research team believed this variation was lower in the blueberry industry because building the infrastructure for a blueberry was not as complex (hence, more accessible to forecast) than building a chemical facility. Using the advanced sensitivity analysis tool of @Risk®, the research team evaluated a ±10% variation of CAPEX around the baseline, deterministic USD 6 million value.
The opportunity cost of capital
The opportunity cost of capital — the rate at which projected free cash flows are discounted when calculating NPV — is challenging to estimate accurately. The opportunity cost of debt and equity capital is needed to calculate the opportunity cost of capital. To estimate the firm’s cost of equity, financial managers commonly use the Capital Asset Pricing Model (CAPM) by Sharpe (1964) (Graham and Harvey, 2001). In addition, companies generally use the firm’s equity and debt capital cost to estimate a weighted average cost of capital (WACC), which is used as the firm’s opportunity cost of capital and discount rate in capital budgeting models such as those developed in this document. In other words, the WACC is the rate to discount the projected free cash flows and calculate the NPV and other financial metrics.
The CAPM is an intuitive and straightforward model that estimates the expected return investors should receive given the risk they undertake. However, the model needs some inputs that are difficult to estimate in practice. For example, estimating the firm’s systematic risk or beta requires that the firm trades on a stock exchange market. Yet, by 2022 no publicly traded Mexican firms specialized in growing blueberries. Another CAPM input, the expected market premium, is an unobservable input, usually proxied with historical returns, providing inaccurate estimates.
By the time the deterministic financial model was prepared, the research team had decided to use a 14% opportunity cost of capital, according to their experience valuing other projects in the country. However, this rate was used as a reference only, considering that the actual opportunity cost of capital likely differs from this benchmark and varies over time. Furthermore, given that the value of an investment is typically highly sensitive to the opportunity cost of capital (i.e. NPV is highly elastic to the rate at which cash flows are discounted), the research team decided to conduct a sensitivity analysis on this variable. Like with CAPEX, the advanced sensitivity analysis tool of @Risk® was used to evaluate the variation of the opportunity cost of capital around the 14% baseline.
Selling prices
With increasing demand, Mexican blueberry selling prices experienced exponential growth in the last decade. However, the research team believed that some forces may drive blueberry export price declines in the future. For instance, competition to reach the US market from farmers within Mexico and blueberry exporters from other countries, particularly Chile and Peru, was high. The research team also considered the possibility of the US blueberry demand entering a mature stage where the gap between supply and demand starts to shrink, pushing prices down. Some signals were pointing in this direction. Some industry analysts argue that the worldwide blueberry supply may be growing more rapidly than demand (Park and Cook, 2018). Furthermore, according to consumer surveys in the USA, fresh blueberries were losing growth traction compared to other ‘super foods’ like quinoa, chai seeds, kale and strawberries (Nielsen, 2017). The latter, strawberries, were considered the direct substitutes for blueberries, given their nutritional properties (Kaiser, 2020).
Despite those reasons, Mexican blueberry import prices in the USA may not decline in the future due to industry initiatives to push demand up (e.g. the blueberry advertising investments by the US Highbush Blueberry Council discussed above) and other forces such as further recognition of the health benefits of blueberries by consumers. To evaluate this prospective project, the research team adopted a conservative approach. All this explains the conservative export selling price projections, evidenced by the downward-sloping trajectory of the most likely, minimum, and maximum projected prices in Table 3 and Figure 4. 2022 blueberry selling price — 2022 is year 1 in the capital budgeting model — was estimated at USD 4.5 per kg, below the reference price provided by FIRA, at USD 4.7 per kg (FIRA, 2022) and the USD 4.8 per kg median value of historical prices (e.g. notes to Table 3).16 Like the other variables discussed, most likely projected values were used for the deterministic model. Most likely, minimum, and maximum values were the parameters to simulate export selling prices each year, assuming a triangular distribution function (the rationale behind forecast prices is further explained in Table 3).
Regarding domestic price projections, in 2022, blueberries in Mexico were projected to be sold at about one-fourth of the prices in the export market, according to price levels in recent years. The research team considered that since only 15% (14% net, considering wasted production) of the quantity produced by the prospective plantation would be sold within Mexico, the value of the project was less dependent on domestic revenue. Therefore, the team considered it appropriate and convenient to keep the projected price flat over the 15-year business horizon. Variation from the most likely projected prices was also expected, according to Figure 4, assuming a uniform distribution, with an equal likelihood of domestic prices varying above and below the most likely price.
The research team knew that projecting selling prices was probably the most challenging task when preparing capital budgeting models. This is particularly true in the agribusiness sector, where prices are subject to high variability due to seasonality across producing regions, climate variability and yields, among other factors. Figure 5, for instance, illustrates how volatile the prices of fresh blueberry US imports from Mexico were during the last three seasons. Thus, estimating one price only per year, as is conventionally done in capital budgeting models, is a limitation in these types of models.
Quantity and prices of US fresh blueberry imports from Mexico during three seasons. The left axis shows prices (USD/kg) and the right axis shows quantity (thousands lbs.). Source: U.S. Highbush Blueberry Council (2023).
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
3.4 The stochastic financial model results
After considering the sources of uncertainty, the determinist model was made stochastic. Table 4 gives selected descriptive statistics of NPV, IRR and DPB of 10 000 simulations with @Risk®. Figures 6 and 7 plot the distribution of simulated IRRs and NPVs for the prospective blueberry investment. Figure 6 shows a 39.6% probability that the project’s internal rate of return will fall between 13% and 15% (±1 percentual point variation around the 14% discount rate in the deterministic financial model). Figure 7 suggests there is an 84.2% probability of this being a positive NPV project.
Selected descriptive statistics of stochastic simulations for a prospective blueberry production investment in high tunnels in western Mexico
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
Distribution of simulated IRRs for a prospective blueberry production investment in high tunnels in western Mexico. A total of 10 000 simulations were conducted with @Risk®. Assumptions of the simulations are summarized in Table 4.
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
Distribution of simulated NPVs (at 14% WACC) for a prospective blueberry production investment in high tunnels in western Mexico. A total of 10 000 simulations were conducted with @Risk®. Assumptions of the simulations are summarized in Table 4.
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
Furthermore, given that CAPEX represented a relatively high investment value, subject to variation, the research team simulated four potential deviations (e.g. scenarios) around the USD 6 million baseline investment. Finally, as discussed, the opportunity cost of capital (WACC) was challenging to estimate in practice given that some of its components are unobservable. Therefore, financial metrics were simulated for alternative WACC values ranging around the baseline. Results are provided in Table 5. Figure 8 is a sensitivity chart plotting the mean value of simulated NPVs from Table 5.
Selected descriptive statistics of stochastic simulations for a prospective blueberry production investment in high tunnels in western Mexico across alternative scenarios
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
The mean of NPVs vs. percentage changes of inputs CAPEX and WACC (simulated values from Table 5).
Citation: International Food and Agribusiness Management Review 27, 2 (2024) ; 10.22434/ifamr2023.0052
4. Final Remarks
Research team members have individually analyzed the financial models’ results. Each member has also studied the macro-environment surrounding the blueberry industry in Mexico and globally. The team was about to meet to discuss this information and prepare a report on the economic feasibility of producing blueberries in western Mexico. The report would include aspects of anticipated profitability and financial risks and an industry analysis following a systematic framework such as Porter’s five forces or an alternative framework. This report would be provided to the project’s sponsors and made available to Aneberries members, including those blueberry producers visited by the research team. As a research team member, be prepared to contribute to the imminent meeting.
Acknowledgements
Carlos O. Trejo-Pech and Alejandro Rodríguez-Magaña contributed equally to this work and share the first authorship in this article. Rodríguez-Magaña and Briseño-Ramírez acknowledge that Fondo de Investigación, Universidad Panamericana at Guadalajara, Mexico, partially funded this work. Carlos O. Trejo-Pech acknowledges that this work was partially supported by the USDA National Institute of Food and Agriculture, Hatch Multi-State project 1020537.
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Corresponding author
Like Trejo-Pech and White (2020), this case study examines financial statement parameters needed to prepare a capital budgeting model. In addition, this case discusses how a research team designed the model to evaluate the economic feasibility of a blueberry plantation in Mexico. Furthermore, rather than focusing on a deterministic model, as Trejo-Pech and White (2020) did, the main interest in this case study is a stochastic model.
Mexican blueberry total exports, in USD million, were estimated at 35 in 2012, 42 in 2013 (20% annual growth), 85 in 2014 (102% growth), 121 in 2015 (42% growth), 188 in 2016 (55% growth), 231 in 2017 (23% growth), 306 in 2018 (22% growth), 341 in 2019 (11% growth) and 399 in 2020 (17% growth) (SIAP 2022a).
The high dependency of Mexican blueberry exports on the US market was not exclusive to blueberries but to all berries produced in Mexico. The Mexican Ministry of Agriculture and Rural Development estimated that, in 2016, 94% of Mexican berry exports went to the USA, 1% to Canada, 1% to the Netherlands, and 4% to other countries (Ministry of Agriculture and Rural Development (Mexico), 2017).
See https://www.atlasbig.com/en-us/countries-blueberry-production (accessed 28 March 2023).
See https://www.tridge.com/intelligences/billberry/export (accessed 28 March 2023).
See https://www.aneberries.mx/?lang=en (accessed 16 February 2022).
Six blueberry farms from Jalisco and six from Michoacan were visited. To maintain the confidentiality of the visited producers, no personal or identifiable information was recorded.
Given that a mid-sized blueberry producer, like the one featured in this case, does not have the logistic capabilities of blueberry exporting companies, the blueberry producer would sell their export fruits to Mexican exporters who would aggregate larger volumes to be shipped to the USA.
Statistics on what constitutes a competitive plantation size to start a blueberry plantation in Mexico selling to the US market are unavailable. However, anecdotal evidence from the discussions with farmers and experience by industry consultants indicate that a 50-hectare plantation constitutes a middle-scale for such a project.
Stochastic capital budgeting case studies are scarce. A few such cases include Curry and Meyer (2015) and Trejo-Pech et al. (2018).
@Risk® is an add-in software package for Microsoft Excel® that performs risk analysis. The analysis in @Risk® is conducted with the Monte Carlo technique, which simulates distributions of selected outputs (e.g. NPV and IRR) given expected probability distributions of inputs chosen (e.g. yields and prices). This software can be used with any Excel model, such as the capital budgeting discussed in this case study, where uncertainty is expected. For more information on @Risk®, see https://palisade.lumivero.com/ (accessed 16 August 2023).
Projections for the complete 15 years can be obtained by contacting the author.
Table 2 shows more than one year (but not all years) to highlight that some forecast expenditures vary from year to year while others do not. As mentioned in Table 1, forecasts were prepared in Mx and converted into USD. Thus, keeping values equal from year to year assumes that inflation and exchange rate variation effects cancel each other. Table 2 shows budgets for the first year, when yields and costs are at a minimum, for the eighth year when yields and costs reach a plateau, and for the last year.
Other techniques that can be employed to conduct ‘what-if’ analysis are sensitivity and scenario analysis. The advantage of simulation analysis, also known as stochastic simulation and Monte Carlo simulation, over sensitivity and scenarios is that simulation (i) incorporates the analysis of many ‘scenarios’ (e.g. hundreds or thousands simulated), and (ii) considers elements of statistics by forecasting selected variables according to assumed distribution functions.
To take advantage of the best-marketing window in the U.S. market (discussed above), blueberries in Mexico were typically planted early in the spring to harvest early in the winter, usually from January to March of the following year.
The FIRA estimated selling price was MXP 100, converted to USD at the 21 MXP per USD exchange rate during the last part of 2021.
