Sod Production: From an Economic Standpoint

Clifford (Treis) Scotten

Introduction
A vital aspect in any business venture is profitability potential. Sod production is no exception. With a growing suburban population, demand for sod remains strong. Within this report, sod production will be analyzed from a financial standpoint. First, background information will be given and a history of sod production will be addressed. Next, strategies for choosing a production site and establishing reliable markets will be discussed. Finally, start up costs will be identified as well as the machinery needed for the daily operations of a sod farm. The overall focus of this report is to provide a broad insight in the economic feasibility for a potential sod producer in Missouri.

Background Information
In order to fully understand sod production in Missouri, we must first understand the history of sod and economic conditions of Missouri. According to the Missouri Turfgrass Economic Impact Survey, there are more than 3,000 acres used for sod production in Missouri with annual sales of $12 million dollars per year.1 Thus, total annual sales are around $4,000 per acre. As a result that figure is much higher on a per acre basis than when compared to traditional crops like corn or soybeans.

However, unlike traditional grain crop operations, sod farms require numerous full time employees. For example, for a 250 acre sod farm it is estimated that five full time employees, along with two seasonal employees, would be needed for the farms operations.2 Similarly, according to Dr. Forest Stegelin of the University of Kentucky, production costs for sod are much more expensive than grain crops. In 1989, Dr. Stegelin estimated the cost of growing 100 acres of sod to be $1,888 per acre or $.42 per square yard (in today's terms that is equivalent to $.63 per square yard).3 Although price is quite variable depending upon the operation, a sod producer can expect to sell a piece of sod for $.85 per square yard. Thus, producing a profit of $.22 per square yard or about $990 per acre.4

Albeit, $990 returns over costs sounds extremely profitable, the truth is that there are numerous factors that can vary this figure. Some variable factors that impact production costs include: drought, flood, supply and demand (market decline), repairs, available labor, poor turf establishment, taxes, fertilizer, etc. Thus, when considering diversification from grain crops and moving in to sod production, profit potential might not be as high as the producer originally anticipated.

Another interesting aspect to consider when starting a sod farm is economies of scale. Economies of scale are defined as the decrease in unit cost of a product or service resulting from large-scale operations, as in mass production.5 In our case we are talking about spreading out costs over a larger number of acres. For example, a 250 acre sod farm would have a lower per acre cost than a 60 acre sod operation (ceteris paribus). Through capitalization of economies of scale, producers can greatly benefit from wider operating margins. Thus, providing greater profitability potential.

Finding a Production Site
One of the greatest obstacles in the planning phase of building a sod operation is finding a production site. There are numerous factors to consider when considering a building site. Ideally, a producer wants to be located close to his target market. Typically, a rule of thumb of 100 miles or closer is used when selecting a site for sod production.6 Also important in site selection is the accessibility to major roads and highways. By setting a site that is near the target market and is easily accessible to highways, the producer is improving economic efficiency by reducing transportation costs. Because sod is a perishable product, quick delivery is another bonus of being located close to your target market.

Another aspect vital to the success of a sod farm is the overall capability of the site. This includes available water (and quality) and soil type. If a natural body of water (such as a lake) is not available or does not provide adequate water, additional methods would be necessary to ensure available water. Wells and lagoons are additional water sources that may be installed or already available on your site. Ensuring sufficient water supply is essential from an economic and production standpoint. By choosing a site with a quality water supply, you are protecting against unforeseen obstacles such as drought.

As mentioned previously, soil type is another essential issue that needs to be discussed when planning a site for sod production. Not only does the site need provide good nutrient balance, it also needs to have good soil and surface drainage.7 Adequate drainage reduces the potential for disease and weed infestation. By avoiding disease and weed problems, as a producer you are also avoiding additional input costs such as fungicides and herbicides. By limiting input costs, ultimately profit potential is being increased.

Additionally, land value needs to be considered when selecting a site for sod production. For example, a producer might find the perfect spot for a 100 acre sod farm. However, the land on this specific site costs $20,000 per acre due to high development demand for this particular tract. Obviously, a sod farm on this land would not be economically feasible due to high land costs. Similarly, farmland prices vary considerably throughout the region. Examples of this can be seen in farmland values based on Southern Missouri ($1,500 per acre estimate) compared to Northern Missouri ($2,500 per acre estimate) land values. Northern Missouri farmland typically produces higher yields, thus, demands a higher price per acre.

An increasingly more common practice for sod production is cash renting farmland. By cash renting farmland, the producer does not have a large financial outlay tied to the land. This frees up available credit where it can now be used on equipment, buildings, and other necessary means of sod production.

Establishing Markets
Another very important aspect to consider when planning a sod farm is who exactly is going to be buying your product? Marketing sod is different than marketing traditional agronomic crops because there is no guaranteed market for your product. Producing a quality sod at a relatively low cost does not always ensure profit. The relationship between economic success and consumer demand for sod are positively correlated. Thus, when demand goes up the chance for economic profits go up. However, when demand goes down, so do your profitability chances.

Landscapers and building contractors make up the largest portion of sod consumers by accounting for 50% of total sod sales. Likewise, homeowners represent the second largest purchasing group for sod, making up 15% of total sales.8 Additionally, some sod producers contract a portion of their crop in order to reduce the risks associated with producing sod. By networking and finding markets for your product, ultimately you are maximizing profit potential by securing a market share in your region.

Start Up Costs / Machinery
The biggest consideration to take into account when developing a sod enterprise is the amount of capital required to start up the operation. To best describe the financial outlay a sod production enterprise entails, the following tables summarize estimated expenses associated with a start up sod farm. The information used in this scenario was gathered by John Jenson, the interim director of the Alabama Agricultural Experiment Station at Auburn University, in October 2003. Although the following expenses and cash flows are from a sod farm in Alabama, the following scenario provides realistic analysis of what a start up sod operation in Missouri might encounter.

Capital Investment for 100 Acre Sod Farm (In 2001) 9
Resource Cost
Buildings and Office Equipment $ 21,000.00
Equipment (harvesting) $116,900.00
Maintenance and Establishment $201,764.00
Maintenance and Establishment: Irrigation $ 85,000.00
Maintenance and Establishment: Delivery $ 87,500.00
Total Investment $512,164.00

Per Acre Fixed Costs for 100 Acre Sod Farm (In 2001) 10
Resource Cost
Land Rent $ 100.00
Insurance $ 41.00
Depreciation $ 670.00
Interest on Fixed Capital (@ 10%) $ 256.00
Operator Labor Management $ 400.00
Miscellaneous $ 100.00
Fixed Costs Per Acre $1,567.00

Per Acre Variable Costs for 100 Acre Sod Farm (In 2001) 11
Resource Cost
herbicides $ 50.00
Insecticides and Fungicides $ 25.00
Fertilizer and Lime $ 135.00
Fuel and Lubrication $ 140.00
Pallets $ 360.00
Irrigation $ 39.00
Repairs $ 342.00
Hired Labor $ 480.00
Interest on Variable Capital (@ 9%) $ 147.00
Other Variable Costs $ 250.00
Total Variable Costs Per Acre $1,968.00

Estimated Per Acre Returns to Management for 100 Acre Sod Farm (2001) 12
Item Year 1 Year 5
Gross Receipts $ 735.00 $ 6,224.00
Variable Costs $ 1,968.00 $ 3,567.00
Income Above Variable Costs $ (1,233.00) $ 2,657.00
Fixed Costs $ 1,567.00 $ 1,567.00
Returns to Management $ (2,800.00) $ 1,090.00

Typical Inventory for a 100-250 Acre Sod Farm 13
Chisel and Moltboard Plows Tractors with Turf Tires
Disk, 12 ft. (1-2) 40-45 Hp
Rotovator, 8-10 ft. (1-2) 60-85 Hp
Boom Sprayer, 300-400 gallon (2-3) 120-130 Hp
Roller, 5-8 ft.  
Fertilizer Spreaders, 1000 pound Trucks:
Reel Mowers, 5 to 9 gang (2) 20-22 ft.
Sweeper, 5 ft. (1) 1-1.5 ton utility
Cultipacker, 10-12 ft. (1-2) pickup
Rotary Mower, 10-16 ft. (x) Flatbeds for shipping (40 ft.)
Flail Mower, 16 ft.  
Forklifts and Pallets (field and truck mount)
(1-2) Irrigation with pumps, center pivot, traveling gun, or cable tow
(2) Sod Harvesters, 16 to 18 inch, tractor mounted and hand operated
Building: Shop, office, storage, (telephones, computer, fax)

Other Considerations
When considering starting a sod operation, often there are issues that get overlooked. One of these issues is the intense management required to run a sod enterprise. A manager of a sod operation should have a good knowledge base on turf diseases, weed control, irrigation schedule and rates, as well as good business sense. If one of these aspects gets overlooked, it could lead to potential financial losses.

Another consideration that should be taken into account is establishment time for both the turf and the operation. Like any other agronomic crop, turf takes time to establish itself. Thus, it is not profitable immediately after it is planted. Likewise, the sod operation is not immediately profitable as a business. It takes time, effort, and resources to establish a successful marketing scheme. Establishing a successful marketing scheme will eventually lead to the development of a client base and repeat customers.

Conclusion
A sod operation requires intense management and capital outlays. It is not a business venture that "you just fall into". A sod operation requires good turf, capital, and labor management as well as a good business sense. There are numerous risks associated with sod production. However, by minimizing input costs and producing a quality product, a well managed sod operation in the right economic environment has the financial efficiency to stand on its own.


1 Missouri Turfgrass Economic Impact Survey, Missouri Valley Turfgrass Association, 1998
2 LSU Ag Center Research and Extension, Sod Production in Louisiana,
http://agebb.missouri.edu/mac/library/linkview.asp?linknum=5664&subject=284
3 The Business of Sod Production, Dr. A.J. Powell Jr., University of Kentucky, Department of Agronomy
4 Ibid.
5 Answers.com, 2006, http://www.answers.com/topic/economies-of-scale
6 University of Florida, Sod Production in Florida, 2006
7 Crop Profile for Commercial Sod Production in Louisiana, 2004,
http://www.ipmcenters.org/cropprofiles/docs/LAsod.html
8 University of Tennessee Extension, Commercial Tall Fescue-Kentucky Bluegrass Sod Production in
Tennessee, http://www.utextension.utk.edu/publications/pbfiles/PB1649.pdf
9 Turfgrass-Sod Production in Alabama: Economics and Marketing, Bulletin 653, October 2003,
Alabama Agricultural Experiment Station, John Jensen, Interim Director, Auburn University, Auburn,
Alabama http://www.ag.auburn.edu/aaes/communications/bulletins/653turfgrass.pdf
10 Turfgrass-Sod Production in Alabama: Economics and Marketing, Bulletin 653, October 2003,
Alabama Agricultural Experiment Station, John Jensen, Interim Director, Auburn University, Auburn,
Alabama http://www.ag.auburn.edu/aaes/communications/bulletins/653turfgrass.pdf
11 Ibid.
12 Ibid.
13 LSU Ag Center Research and Extension, Sod Production in Louisiana,
http://agebb.missouri.edu/mac/library/linkview.asp?linknum=5664&subject=284