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

Economic Outlook for 2008

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Robert Barr, an economist in Washigton, D.C. says we’re in for more rough sledding well into 2008. Even the chairman of the Federal Reserve has announced that he expects the economy to “slow noticeably.” Still, it doesn’t appear that we’ll skid into a recession in the coming six to nine months as the economy continues to go through some critical realignments, but the mood will likely hang heavy until at least next summer. Let’s take a look at what the economy is having to battle.

  • High oil prices. With prices nearing $100 a barrel as of mid-November 2007, consumers are seeing higher prices at the pump, and $4 per gallon during 2008 isn’t out of the question. For consumers, the higher price acts like a tax hike, leaving less to spend elsewhere.

  • Housing market problems. Home values are in retreat after many years of forceful increases. The most adversely affected may be those homebuyers of the past couple of years who really couldn’t afford the loan’s terms and were counting on higher home prices to help them refinance when it came time for the monthly payments to readjust. Oops. Foreclosures are up dramatically, especially on exotic loans to borrowers without strong credit records. Still, the problem is relatively contained – if you don’t need to sell or refinance your home over the next year, any declines are only on paper (and, for the most part, follow years of strong gains).

  • Credit market recalibration. The credit markets are now trying to determine just what the right price is for a given pool of underperforming mortgage loans. With appraisals in question and foreclosures on the way up, these loans are far riskier than Wall Street had previously reckoned. The uncertainty has endangered many home lenders and mortgage investors in general. Wall Street is working through a credit realignment that will take several more quarters to resolve.

  • Low dollar. The dollar has weakened significantly, which is driving up the cost of imports. This is good news, generally, for American domestic manufacturers and the domestic tourist industry (American tours are cheaper for overseas visitors). Floral buyers who purchase foreign-grown flowers will likely find little relief from the low dollar this year.

  • Falling stock market. Equity values are struggling, having given up a lot of ground in November 2007. Consumers feeling less wealthy because of shrinking investment portfolio values and declining property prices can’t be expected to keep spending at the rates seen during the last several years.

So, why not a recession in 2008? Because the economy remains fundamentally strong. Productivity growth toward the end of 2007 was strong, and employment growth remains decent. The Fed loosened monetary policy in the fall of 2007 and is expected to make more significant easing moves during the first half of 2008. This will make the high-profile economic realignments easier to manage.

How can they sell it at that price?

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Let’s face it. Business in the Green Industry is competitive and sometimes cut-throat. In recent years, I have had many growers ask me the question: What do I do when another grower is selling product in my market at a price that is below my break-even cost? While there is no perfect answer to this question, I have included several tried and true suggestions below.

  • Sharpen your sales skills. For example, educate buyers regarding your unique selling proposition in terms of your quality, value, service, convenience, and selection relative to the competitor(s). Also emphasize the historic “win-win” relationship you have shared with the buyer – assuming you have one of course. Some examples might include: a) that you have been there when they needed you, b) that you did not gouge them with extraordinary price increases when availability of a certain product in the market was low, c) that the low prices obtained from the undercutting grower are simply not possible at the quality level you typically provide.

  • Go and buy as much of the competitor’s product you can and use it as part of your own inventory – assuming it is of comparable quality or could be within a short period of time.
    Match the price in the short run. A marginal pricing strategy (where selling price is greater than your variable costs but less than total costs) can be used in the short run, but remember that it is not sustainable in the long run. With this strategy, you are attempting to “wait out” the competition until theoretically they go out of business or can no longer afford to compete in your market. This is considered to be more reactive in nature, whereas the first two options are more proactive. You must emphasize to the buyer that this is a one-time phenomena; that you are only doing this because you value their business.

  • Consider the nature of the product they are selling in your market. If the product they are selling in competition to yours has become “commodicized” – that it has become a commodity item that many are starting to grow and carry – then you have the option to quit growing it, or grow a different size, form, cultivar, or variety. In other words, tweak the commodity so that it becomes a differentiated product.

  • Examine your production system and the associated costs of production for that product. It may be that you are using a system that increases your relative costs of production. To do this, you may have to visit other growers, attend educational conferences and workshops, or participate in field tours.