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

Solving the cost-price squeeze

by

According to Table 10 in today’s BEA report, real disposable personal income increased in July by 1.2% compared to July last year, following a 3.4% annual increase in June and 6.3% increase in May. Both growth rates (May and June) were above the 2.6% average growth in real disposable income since 2001, following 7 months (October 2007 to April 2008) of below-average growth.

Although real disposable income growth showed weakness in the last quarter of 2007 (0.6%) and the first quarter of 2008 (-0.7%), the above-average, year-to-year growth rates of 6.3% (May) and 3.4% (June) contributed to an 11.4% increase in real disposable income during the second quarter 2008 (see Table 6), one of the biggest quarterly increases in history, largely due to the Economic Stimulus Act of 2008.

Couple this increase in real disposable income with the core inflation rate holding relatively steady (see 8/15/08 post) and this means that [a sizable portion of] our end consumer in the green industry has the means with which to purchase our products and services, but do they have the desire — particularly at the prices we must charge in order to cover our current cost-price squeeze?

My friend, Lloyd Traven of Peace Tree Farm, just reiterated to me of how tough it is for growers right now given the “20% increases in pots, film, chemicals, and 30+% for fertilizers, soil, etc—and don’t forget to add energy, labor, etc. BTW, medical just went up again, and let’s not forget tuition.” The recent news of Hines Nursery’s bankruptcy (and the rumors of others pending) also reminds us that no one is immune from the effects of this cost-price squeeze.

But the key question is what to do about it? Logic would tell us there are only two options — either (1) employ the supply side strategy of continuing to shave costs out of the value chain internally or (2) opt for the demand side strategy of increasing price. Anyone who has been reading Making Cents for a while will readily know that I have been pushing for growers to embrace both strategies, but particularly option #2 (click on the differentiation tab on the right hand side of the page to view relevant posts).

On the flip side, however, never underestimate the value of a regimen of lean flow analyses on your value chain activities. Several growers at the Seeley Conference related some impressive cost savings testimonials to the rest of the group. You might want to give Gary Hudson a call if you’re interested in finding out more about lean flow. Also check out recent issues of Greenhouse Grower and GMPro for lean-related articles.

Stay tuned on more on the cost-price squeeze topic later…

Tired of doom and gloom? Part 2

by

Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse.

Abstract from “What’s a Recession, Anyway?” by UCLA Professor Edward E. Leamer, NBER Working Paper, August 2008

Home prices increased in 30 of the 50 states this past year

by

From Mark Perry: The map below is from the latest housing report from the Office of Federal Housing Enterprise Oversight, showing the “Four-Quarter Price Change by State” from 2007:Q2 to 2008:Q2.

Notice that the biggest price decreases have taken place in 4 states: CA (-15.8%), NV (-14.1%), FL (-12.4%) and AZ (-9.2%), see previous CD post (data through 2008:Q1 for that post).

Further, house prices have increased over the last year in 30 states, including increases of above 4% for two states (OK and WY), and increases at or above 3% for 12 states (OK, WY, TX, OK, SD, ND, MS, AL, NC, SC, KY, WV). Finally, more than half of the states (27) have experienced home price increases of 1% or greater, and 30/50 states have experienced price increases over the most recent year (2007:Q2 to 2008:Q2).

Farm Bill Side-by-Side Comparison

by

The Food, Conservation, and Energy Act of 2008, which governs Federal farm programs for 2008-12, was enacted into law in July 2008. ERS’ side-by-side comparison of this new Farm Act with previous legislation is now available (click here). Summarized but substantive, this comparison is a time-saving reference on farm bill provisions. Title X deals specifically with horticultural crops.

Real versus perceived value

by

Marvin Miller’s latest musings in the August 18 America in Bloom newsletter is a must read. Click here to view his comments. Pay particular attention to his “perceived” value comments.

Signaling perceived value is a key point in any successful differentiation strategy. The questions you must answer about these signals include:

  1. What mix of quality, price, service, convenience, and selection signals can influence perceived value?
  2. What signals work for your customers?
  3. Are multiple signals necessary?
  4. Does it depend on purchasing behavior, customer segment, or outlet(s) chosen, or all or the above?

Why does it matter? The greater the perceived value that higher the willingness to pay. Period.

America in Bloom is designed to increase perceived value by promoting nationwide community beautification programs through the use of flowers, plants, trees, and other environmental and lifestyle enhancements. AIB does this by providing educational programs, resources, and the challenge of a friendly competition between participating communities across the country.

The end result? Only a few things like improved quality of life, enjoyable end results, greater community involvement, recognition for volunteer efforts, inspired imaginations, beautified spaces, educational opportunities, shared ideas, and new friendships. Sounds like a good way to increase perceived value of our products and services to me.

Higher minimum wage effects

by

Teenage unemployment (16-19 years old, seasonally adjusted) for July (20.3%) was at the highest level in more than 15 years. It seems like that would be pretty newsworthy, but it received almost no media attention. Plus, the attention it did receive was mostly off-base, blaming on the country’s “economic malaise” and “economic downturn,” without a single mention of the increase in minimum wage.

The only newspaper report that linked the 20.3% teen unemployment rate to the increase in minimum wage was a story in the LA Times, which quoted David Resler, economist at Nomura Securities:

“The July jump in the federal minimum wage rate appears to have had the predicted impact on teen employment: The higher required rate enticed more teens into the job market to search for a smaller number of jobs on offer.”

Demand curves slope downward, whether it’s the demand for gasoline, the demand for cigarettes, or the demand for unskilled workers. We can argue about price sensitivity, elastic demand vs. inelastic demand, availability of substitutes, etc., but higher prices or wages result in a reduction in the quantity demanded. That is, we can argue about the slope, but the slope of the demand curve is always negative.

The bottom line: higher wages for unskilled workers equates to fewer jobs for unskilled workers which equates to higher unemployment rates for unskilled workers.

Core inflation holding relatively steady

by

According to Brian Wesbury and Bob Stein (click here), “Inflation is the leading menace to the economy.” Although I usually agree with their postulate, I don’t see inflation as much of a “menace” right now. The core CPI inflation on an annual basis was 2.5% in July, barely above the 10-year average of 2.21%, below the levels close to 3% between mid-2006 to early 2007, and way below the 4.58% average since 1970 (see graph below).

IMHO, unless and until the core CPI inflation starts to rise, inflation is not a big problem. For example, inflation was a huge problem in the 1970s and early 1980s, but it was when CORE CPI INFLATION was increasing by double-digits, not just oil, energy and food prices. By definition, inflation is a phenomenon when all prices, in general and on average, are rising, not just food and energy. With core inflation so low and stable, I don’t see how inflation can be a menace. And with oil prices plummeting and the dollar soaring, look for August inflation, both overall and core, to moderate.

Location, Location, Location

by

This past week I spent time at the Researchers Conference at the SNA (Southern Nursery Association) Trade Show in Atlanta. I talked with a number of growers and retailers and found the conversations similar to those at previously attended conferences — some folks have really struggled this year, some have held even, and others have done “quite well” having both increased their prices and experienced increased sales.

It certainly causes one to reflect on the reasons why this diversity in business experiences have occurred this year. There are several factors, as we have discussed previously within these blog pages. Some are pertinent to the individual firms themselves (e.g. a well-grounded differentiation strategy for instance) and other factors are purely external to the firms strategy (e.g. the effects of a down economy).

I pondered another possible external factor that we have often referred to a “location, location, location” as I read this week’s BusinessWeek. It has an interesting slide show and article about the “Real Estate Boom and Bust in the Same Metro Areas” (article here) which looks at the best and worst-performing zip codes in the 20 largest metro areas. EconomicPicData blog summarizes the BusinessWeek data in the chart below.

For example, in Dallas’ Preston Hollow area (75220 zip code) there has been a +33% increase in asking price over the last year, with a median list price of $310,564 and average marketing time of 125 days. In the Fort Worth area (76110 zip code) of the Dallas metro area, asking price has decreased by -19%, with a median list price of $104,538 and average 118 days on the market.

The bottom line — There is no “national real estate market,” it’s thousands and thousands of local real estate markets. As these data show, there’s not even a single “local real estate market” by metro area, it all comes down to zip code areas. Since there are about 43,000 zip codes in the U.S., that ‘s probably an approximation of the minimum number of local real estate markets, and many local markets probably vary within a zip code. So where you live and operate your business certainly affects business performance.