Ellison Chair in International Floriculture
Ellison Chair in International FloricultureTeaching, Research, Extension and Service

Where O Where Has Our Data Gone?

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An excerpt from the last USDA Floriculture and Nursery Crops Outlook report published by USDA-ERS:

After this issue of Floriculture and Nursery Crops Outlook, ERS will no longer maintain an active market analysis program in this area and will suspend publication of Floriculture and Nursery Crops Outlook and Yearbook. This action is being taken due to a reduction in data coverage that limits the scope of ERS analysis, resource limitations, and changes in staff assignments. This comes in the wake of USDA-NASS cutting the Floriculture Crops reporting states from 36 states down to only 15 and only conducting the Nursery Crops survey every third year. All of this comes about of course because of budget cuts. I know the folks at both agencies and they work hard to supply our industry with this data. But it doesn’t negate the fact that this is going to be a major problem for the green industry! Without these data, we have less opportunity to demonstrate our economic importance to the U.S. economy, less capability to evaluate the effects of legislation regarding immigration and other policy issues, less means of combating poorly designed municipal policies regarding water and other resource usage, less potential to influence the dramatic changes that are needed in the crop insurance program, and less ability to make informed managerial decisions about running our green industry businesses. Now is the time for voices to be heard…catch my drift?

How to combat falling consumer confidence

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The University of Michigan’s consumer sentiment index tumbled to 69.6 in its preliminary February reading from 78.4 last month, marking its lowest point since February 1992 when the economy was emerging from a recession. The component of the index that gauges consumers’ expectations — a possible sign of their willingness to spend — dropped to to 59.4 from 68.1. Time will tell whether the infusion of stimulus rebate checks will counter this trend. Regardless, now is the time for the industry to promote the value that landscaping provides in increasing perceived real estate values. A recent study by the S-1021 Multi-state research committee provided key findings regarding the effects that landscape design sophistication, plant size, and diversity of plant material has on consumer perceptions of home value.

Design sophistication accounted for 42% of the value added to the home, so clearly doing more than foundation plantings yields a greater return.

Plant size accounted for 36% of the value added to the home, so larger plantings translate into greater value.

Diverse plant material accounted for 22% of value of the value added to the home, so it appears that having many large numbers of different plants was not as important.

Adding one or two island beds (increasing design sophistication) can alone add 2% to the perceived value of the home.

Although a small investment (less than $250), colorful annuals and perennials added nearly $1000 to home value; returning 400% on the investment.

Moving from the least valued landscape to the most valued landscape, perceived home value increased, on average, 8.6% across all states included in the study.

A landscape is a good investment, yielding a greater than $1 return in home value for every $1 invested in the landscape.

Landscapes are one of the only home improvements that increases in value (and size) over time. Other renovations (e.g. bathroom, kitchen) typically yield less of a return than the amount invested.

Clearly, installing more than foundation plantings yields a greater return for consumers. Curvilinear beds are effective design elements in adding value to the home.

Obviously, this is vital information for landscape firms and retail garden centers to include in their marketing and sales literature. To view more details of this study, click here.

Weak dollar affects flower imports

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A recent article in the Houston Chronicle recently highlighted the plight of the Columbian flower industry in the wake of the devaluation of the dollar in the U.S. Since 6 of every 10 flowers sold in the U.S. hails from Columbia, Columbian flower profitability is extremely sensitive to demand impacts caused by the economic slowdown stateside. As a result, the income (in pesos) of Columbian growers has plummeted in spite of their worldwide exports increasing to $1 billion last year. About a dozen large Columbian flower farms have closed in the past 3 years, eliminating about 15,000 jobs. For the complete story, click here.

H-2A "patch" proposed

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The H-2A program is the temporary agricultural worker program for growers and producers in most agricultural industries. In a joint media briefing by Secretary of Homeland Security Michael Chertoff, Secretary of Labor Elaine Chao, and Deputy Secretary of Agriculture Chuck Conner, two separate sets of regulations have been proposed for public comment: the Department of Labor’s proposals to “modernize” the program and Homeland Security proposals on the hiring process itself.

The current H-2A program is unpopular with employers — only about two percent of agricultural workers come in under the H-2A program. Growers typically do not fully utilize the program because it is expensive, litigious and [quite frankly] bureaucratic. In the face of increased enforcement and a decreasing labor force, the inability to secure sufficient workers means that crops are rotting in the field in many industries and there is a less stable supply of workers available for growers in the Green Industry. One of the many problems with the current system is that the Department of Labor consistently fails to meet its own deadlines required by law, therefore farmers cannot depend on the program’s promise to provide the correct number of workers at the correct time.

The new regulations being proposed would provide some relief, but in other areas raise serious concerns. On one hand the new rules include changing the process employers must go through to apply for workers, making it less burdensome. However, the proposal also would allow the Labor Department to start random audits of H-2A employers, and increase the fines from $1,000 to $15,000 for employers who have displaced American workers by hiring foreign ones. Other fines would increase for violating regulations from $1,000 to $5,000. In addition, under the proposed changes, wages would be based on “skill levels” and the wage formulas are changed.

Obviously, the proposal is long, complex and needs careful review, but it probably represents a good first step. However, since H-2A reform alone cannot address the breadth and depth of the agricultural labor crisis, there is still a desperate need for overarching immigration reform that will will provide the industry with a workable guestworker program. If Congress fails to act, employers will undoubtedly face a plethora of state and local laws, increased enforcement, and a new “No-Match” rule, which is expected shortly.

Floriculture industry statistics available

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The latest statistics regarding floriculture industry trends, sales and production levels are now available in “The Changing Floriculture Industry: Fourth Edition” Inside, you’ll find more than sixty pages filled with maps, charts and tables. It has twice the data of the previous edition and includes a new chapter entitled “The Floral Consumer” drawing on five years of industry-sponsored consumer research. The report is produced by SAF’S Business & Economic Trends Committee and focuses on floriculture production, importing, retailing and wholesaling. To order this report or to find our more information, click here.

Which crystal ball to believe?

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Needless to say, I have been receiving a lot of questions at various meetings on the economic forecast for this year and the prognosis for the Green Industry. I always receive curious looks when I start off saying “It depends on who you’re listening to!” Perhaps the following may help to explain. The Federal Reserve Bank of Philadelphia just released its latest survey of professional forecasters and panelists were divided on when the effects of a government fiscal stimulus package would be apparent and how large the effects would be. Thirteen economists reported an effect beginning in the second quarter and 19 think the effect will begin in the third quarter. Two estimated that the effect won’t begin until the fourth quarter, and the remainder didn’t provide answers. The majority, however, expect the stimulus package to have a welcome but moderate effect on the economy. Almost a quarter said tax rebates would have a significant effect on consumer spending, while just 7% expected investment tax credits to have a major impact on business spending. Some 22% said tax rebates would have an insignificant or no effect, while 38% said investment tax credits would have an insignificant or no effect. Overall, economists in the Philadelphia Fed survey raised expectations for GDP contraction this year, but on average still expect the economy to grow, albeit at a sluggish pace. See what I mean!

An Economic Justification to Raising Your Prices

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In the January issue of GrowerTalks, Chris Beytes provided us with some excellent case studies of firms that have recently raised their prices (great job Chris!). I think it merits repeating that the only way in which this makes sense economically is if the company successfully differentiates itself in the mind of the customer in terms of the types of products or services offered and the segment(s) of customers that are being targeted. It is a well-proven fact that customers use five different attributes in making a decision about what products/services to buy and from whom to buy them from – quality, value, service, convenience, and selection.

We economists characterize demand by a concept called the price elasticity of demand which measures the nature and degree of the relationship between changes in the quantity demanded of a good/service and changes in its price. An important relationship to understand is the one between elasticity and total revenue. The demand for a good/service is considered relatively inelastic when the quantity demanded does not change much with the price change. So when the price is raised, the total revenue of the firm increases, and vice versa. What this effectively means is that green industry firms can actually raise their price, and though they might sell fewer units of the product they are selling or the service they are offering, total revenue for the firm still goes up. So, the obvious question is this…how does one go about making their local demand more inelastic? The answer…by making the firm unique and different somehow in terms of quality, value, service, convenience, and selection! That’s why your marketing efforts are so important. They are the key to successful differentiation.

In summary, if your company is successful in differentiating itself from competitors, you are essentially making your firm-level demand more inelastic within your respective trade area and you can subsequently raise your prices and [even though you may sell fewer units] total firm revenue will still increase.

Now I can already hear the objections: “If I raise my price, my customers are going to defect and buy from my competitors.” Let me provide my own testimonial regarding this common objection to raising price. Over the last few years, all (100%) of the green industry firms that I have convinced [after much prompting and counseling] to actually try this have experienced an increase in total firm revenue. Not many, not most…ALL. Interestingly, some even found that per-unit sales actually increased when they increased their prices, which tells me they were pricing their products way too low to begin with. Low prices tend to result in a low quality perception in the mind of the customer and when you raise your prices, sometimes you can influence the price-quality connotation positively.

To bring this to a close, lean manufacturing and shaving costs out the value chain is important as the industry matures, but if we [as an industry] are to make any meaningful increase in our margins and increase profitability, it has to come from the demand side of the equation, whcih means we must obtain higher prices for the products and services we offer!

Amazing! Congressional stimulus package set

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Acting just three weeks after President Bush first proposed a $150 billion economic stimulus plan, the Senate added rebates for 20 million seniors and 250,000 disabled veterans to a package passed by the House last week. The new measure, adopted by the House Thursday night, is estimated to cost $168 billion over two years.

The measure goes to Bush for his signature, which White House deputy press secretary Tony Fratto said will come next week. Treasury Secretary Henry Paulson said the Internal Revenue Service will get to work immediately, but it will take two to four months for the rebate checks to arrive.

Most single taxpayers will get $600 and couples $1,200, plus $300 for each child under 17. Anyone with at least $3,000 in earned income last year will get $300, as will seniors on Social Security, even if they paid no income taxes. The rebates phase out beginning at $75,000 in adjusted gross income for individuals, $150,000 for couples.

The big question now is how the Federal Reserve will react. Adjusting monetary policy in the wake of fiscal policy interventions is always a tricky thing. Regardless, I still maintain that when folks actually receive rebate checks will influence how much is actually spent on lawn and garden products and services. More on this in a future post.

Back to the drawing board…for now.

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Senate Republicans blocked a move by Democrats on Wednesday (1/06/08) to add more than $40 billion in checks for the elderly, disabled veterans and the unemployed to a bill to stimulate the economy. The 58-41 vote fell just short of the 60 required to break a GOP filibuster and bring the Senate version of the stimulus bill closer to a final vote. The Senate measure was backed by Democrats and a handful of Republicans but was strongly opposed by GOP leaders and President Bush, who objected to the costly add-ons. The vote left the $205 billion Senate stimulus bill in limbo and capped days of partisan infighting and procedural jockeying over the measure. One news article reporting on the vote says “The dispute has slowed down the stimulus measure, but there’s no indication that it will delay rebate checks, which are expected to begin arriving in May.” Yeah, right.

One step closer to recession???

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Recession worries surged, slamming financial markets, amid signs that service businesses may be stumbling. A key barometer of the strength of the service sector dropped to its lowest level since October 2001 and suggested those businesses are now contracting. ISM’s Non-Manufacturing Business Activity Index registered 41.9% in January, indicating a significant contraction in business activity in January from the seasonally adjusted 54.4% registered in December. This is the first contraction in the non-manufacturing sector since March 2003, when the index registered 46.3%, and the lowest Business Activity Index since registering 40% in October 2001 (one month after 9/11). The next piece of major economic data comes in a week with the retail sales report for January. Reports from retailers already offer cause for concern. Capital Economics today offers another sign of caution, and it goes back to the surprise drop in the ISM’s nonmanufacturing index that shook markets yesterday. The firm tracks the ISM’s service-sector index against real consumer spending and finds they are correlated, meaning that next weeks retail sales report should prove interesting! Even so, most pundits still only put the chance of the U.S. entering recession at 42%. All for now…time to polish the crystal ball.