Forrest Stegelin
Ag & Applied
Economics
Nursery Management
September 21, 2009
Key Statistics
Revenue
Revenue Growth Rate
Employment
Imports and Exports
 Inflation Adjusted (Constant) Prices [2009 Estimates]
 Industry Revenue
 Industry Gross Product
 Number of Establishments
 Number of Enterprises
 Employment
 Exports
 Imports
 Total Wages
 Domestic Demand
 Garden Plant Production
$ 18,630 million (-0.3%)
$ 9,133 million (-2.2%)
50,713 (US) (-1.2%)
35,316 (US) (-1.6%)
232,412 fte (-0.3%)
$ 425 million (+0.7%)
$ 1,418 million (-6.1%)
$ 4,883 million (-9.6%)
$ 19,623 million (-0.8%)
531 million
 Ratio Table
 Imports share of Domestic Demand
 Exports share of Revenue
 Average Revenue per Employee
 Wages & Salaries Share of Revenue
7.23%
2.28%
$ 0.08 million
26.21%
Segmentation
Product/Services
Share
Deciduous Trees and Shrubs
22.70%
Evergreen Trees and Shrubs
20.60%
Bedding and garden plants
16.20%
Propagative materials
11.30%
Ornamental Grasses Plants and
Vines
7.00%
Potted flowering plants
5.00%
Potted foliage plants
4.40%
Fruit and Nut Trees
4.10%
Christmas trees
3.10%
Palms
3.00%
Cut flowers
2.60%
Segment
Nursery & Tree
Production
% Value Share
68.46
Floriculture Production 31.54
% Acreage Share
84.16
15.84
(471,000 acres in nursery and tree production + 89,000
acres in floriculture production)
Major Market Segments
Market Segment
Share
Domestic sales – retailers
61.70%
Domestic sales - intra industry
sales
34.00%
Export
2.30%
Domestic sales - other
2.00%
 Market for floriculture and nursery crops classified into 3
main segments: retailers, other growers, and export
customers.
 Retail market has 2 distinct sub-segments:
the traditional florist and/or garden center market
characterized by high quality products and more service;
and the mass market that that is focused on higher
volumes, smaller products and lower prices.
 As an agricultural industry, has a low level of ownership
concentration; industry consists of number of
companies, including national, regional and local
nursery businesses dominated by small, family-run
operations. A bi-modal skew in operations has occurred,
resulting in commensurate labor issues (family labor,
temporary hired workers, immigrant labor, wage scales,
benefit and incentive packages, etc.)
Geographic Spread
Region
Percentage
Southeast
28.9
West
26.0
Great Lakes
14.7
Mid-Atlantic
11.4
Southwest
7.8
Plains
3.9
New England
3.8
Rocky Mountains
3.5
 Floriculture and nursery production occurs in all 50
states, with California being the top producing state
(22.5% of total value of production), followed by Florida
(10.4%), “Texas (8.9%), Oregon (6.1%) and North Carolina
(6.2%); together these 5 states account for about 54.1% of
total value of production due to favorable climatic
conditions for floriculture and nursery production.
 Michigan and Ohio are also popular states for production
given their proximity to major metro markets.
 The Far West is particularly dominant within the cut
flower segment, with California accounting for almost
75% of cut flower production in the US.
Market & Demand Characteristics
 Demand is derived from a range of factors, including per
capita expenditure on flowers and domestic plants,
activity in downstream nursery retailing, seasonality, and
exchange rates.
 Since US retailers source the majority of their produce
from local growers, any growth in retail sales usually
translates into greater demand for domestically grown
crops; however, intensifying competition from imports
has clouded that scenario.
 US flower and plant consumption is the single most
important demand determinant, therefore creating
immense potential for growth of the industry. US
consumption lags severely the consumption in Asia,
Europe and South America.
 Demand is seasonal – Valentines Day, Mothers Day,
Christmas. Successful producers must adjust growing
cycles to account for these peaks in demand (i.e., rose
production maximized in late January and early
February to take advantage of Valentines sales).
 Exchange rate movements directly impact on demand
for US floriculture and nursery crops in foreign
markets. Overseas customers are highly sensitive to
price increases.
 Any appreciation in the value of the US dollar will
erode the international price competitiveness of
American-grown floriculture and nursery crops. The
weaker US dollar stimulated exports from this
industry from 2005 – 2008.
 For instance, exchange rate info for 09/17/09 shows:
 1 USD = 0.939 CAD and 1.471 EUR and 1.652 GBP, or
 1 CAD = 1.065 USD and 1.567 EUR and 1.760 GBP, or
 1 EUR = 0.679 USD and 0.638 CAD and 1.123 GBP
 Appreciation v. depreciation of US dollar
 A stronger US dollar (appreciation) makes US products
more expensive in the purchaser’s money (comparing USD
to other currency), so not so willing to buy exports from US
– too expensive.
 A weaker US dollar (depreciation) is just the reverse, so, as
we saw from 2006 – mid-2008, it was cheaper for Europeans
to buy our nursery (bare root) materials, bulbs, other
floriculture, etc. than it was to grow it themselves when
looking at their own currency costs, considering the
currency exchange rates at the time.
Domestic and International Markets
 Markets Exports
 Exports in this industry are low and decreasing
 Markets Imports
 Imports in this industry are moderate – medium, and increasing
 Domestic and International Markets Analysis
 Nursery and flower imports to US have declined at an average
annual rate of 4.2% over the 5 years prior to 2009, and imports
account for 7.2% of total nursery products and flowers domestic
demand.
 Around 46.7% of imports arrive in US under the Andean Trade
Preference Act, which provides duty free access to US market for
certain goods (including floriculture products) from Bolivia,
Columbia, Ecuador and Peru.
 Advances in transportation and storage have been a catalyst for
progressive rise in imports – international air freight, as example.
Floriculture and nursery products: Sources of Imports and exports ,2008
Thousand Dollars
Country
Value of Imports
Percent Total
Colombia
513951
34.60%
Canada
267989
18.00%
Netherlands
250631
16.90%
Ecuador
134328
9.00%
Others
318266
21.40%
Source: U.S. International Trade Commission
Thousand Dollars
Percent Total
Country
Canada
Value of Exports Value of Exports
205107
49.30%
Netherlands
50965
12.30%
Mexico
34684
8.30%
Belgium
26176
6.30%
Other
98770
23.80%
Source: U.S. International Trade Commission
What is NAFTA, the North American Free Trade
Agreement, and why is it relevant to this industry?
 NAFTA is a comprehensive economic and trade agreement that
establishes a free-trade area (tariff elimination) encompassing
Canada, Mexico, and US, and is structured as 3 separate
bilateral agreements: Canada/US (CUSTA) which was
subsumed by NAFTA; Mexico/US and Canada/Mexico embodied in NAFTA.
 Not an isolated event, as had to comply with GATT and WTO
provisions for TRQ’s (tariff-rate quotas) in URAA (Uruguay
Round Agreement on Agriculture) – “green box” (not “yellow”
or “red”) compliance.
 NAFTA covers more than tariffs and quotas – also establishes
key principles regarding treatment of foreign investors and
prohibits imposition of certain performance requirements.
 NAFTA clearly recognizes right of each country “to adopt,
maintain, or apply any sanitary or phytosanitary (SPS) measure
necessary for the protection of human, animal or plant life or
health in its territory.”
 Virtually all of the major barriers to trade and investment have
been removed so the advancement of integration has occurred
in many agricultural sectors: grains/oilseeds, livestock/animal
products, fruits/vegetables, processed foods, sugar/sweeteners,
cotton/textiles/apparel.
 Thanks to NAFTA, implemented in 1994, almost all agricultural
trade within North America is free of trade and quota barriers.
Canada and Mexico supply 30% of the agricultural imports to
the US; Canada/Mexico buy about 30% of US ag exports.
 Much of Canada-US agricultural trade consists of intraindustry trade, meaning trading similar products with one
another, including floriculture and nursery plant material.
 Over 85% of US ag imports from Mexico consist of beer,
fruits and vegetables, tequila, cocoa, and plant material.
[Mexico and Canada are major suppliers of fresh
tomatoes to US with exports of $1 billion and $240
million, respectively.] About 75% of US ag exports to
Mexico are in grains, oilseeds, meat (including chicken
leg quarters), and related products.
 US ag exports to Canada/Mexico up 217% since NAFTA (up
89% to rest of world) and imports to US up 286% (up 163%
from rest of world).
 About 250,000 US jobs supported by exports to
Canada/Mexico (2006), and Canadian and Mexican
majority-owned affiliates of US multi-national food
companies had sales of $16 billion and $7 billion,
respectively (2005).
 US environmental horticultural products exports to
Mexico rose in value (USD) 911% between pre-NAFTA (’91’93) and complete implementation of NAFTA (‘06-’08); the
import data is less impressive.
 US ag exports of nursery and greenhouse products to
Canada only rose 77% during same time frame. US ag
imports from Canada of nursery stock, bulbs, etc. rose
224% between pre- and post-NAFTA.
Basis of Competition
 US floriculture and nursery business is highly competitive, and
increasing, as growers compete on the basis of product mix,
price, service quality, and product availability. Plants are largely
homogeneous in nature compared to manufactured goods. Price
rations supply.
 US floriculture and nursery business is in the decline stage of the
product and business life cycle. Reasons for this decline:
industry value-added growth below that of general economy
(0.3% versus 1.4% per annum); limited product developments
over the current and recent past; strong price competition at
retail level put pressure on growers’ margins (consolidation of
grower segment → significant gains in scale and reduced average
costs → exit of less efficient producers); and strong import
competition (as result of weakening dollar) has resulted in
imports displacing domestic production.
Key Competitors
 No major players (large market share) in industry.
 Industry characterized by privately-owned firms, so not
many instances of vertical integration in the industry.
Forward integration mostly restricted to medium and
large-sized operations.
 Some current industry players and their estimated market
share include:
 Bernecker’s Nursery, Inc. (3%) – FL-based grower & distributor of
tropical foliage
 Bailey Nurseries Inc. (1.0%) – MN-based wholesale grower of wide
range of ornamental plants (hydrangea) with operations in
Washington & Oregon
 Griffin Land & Nurseries, Inc. (>0.5%) – NY publicly listed
company owned by John Ernst & Cullman Family; subsidiary is
wholly owned Imperial Nurseries (containerized plants) - FL, CN
Industry Performance
 Nursery and floriculture production is wilting; revenues
declined over past 5 years at annualized rate of 0.3% strong retail price competition and import competition.
 Producers can take some comfort from marginally weaker
import competition in 2009 due to strong depreciation of
US dollar and weakened growth in domestic demand.
 Competition levels in industry have increased due to
better transportation; rising concentration in the
marketing sector has resulted in increased price
pressures on growers – results in increasing marketing
and retailing margins relative to grower returns.
 In 2009, industry revenue expected to be affected by a
decline in import competition, largely due to the
depreciation of US dollar. Domestic demand growth also
expected to be weak (weakened housing and commercial
markets, eroding consumer confidence or sentiment,
unemployment, per capita disposable income and
competition of discretionary dollar).
 Profitability in sector is relatively high, just under 17% on
average, even with increases in production costs (energy,
fertilizer, labor).
 Industry has been characterized by shortage of labor, yet
industry wages are low reflecting a high proportion of
part time and low skilled workers.
 Increasing concentration (fewer but larger firms) due to
mechanization and marketing mix specialization; small
growers have lower production volumes, higher per unit
costs and lower net incomes.
 Industry trade deficit has declined over past 5 years; with
vigorous import competition existing, the low value of the
US dollar boosted export growth – tide has reversed in
2009.
 International market for cut flowers will be affected by the
merger of 2 major players in cut flower international trade
– FloraHolland and Bloemenveiling Aalsmeer have 1/7 of
international cut flower trade. Dole Fresh Flowers was one
of largest exporters of cut flowers from South America
(mainly Columbia) to US, but has exited the cut flower
business in 2009 by selling its cut flower division.
Historical Performance
 US Consumption of floriculture and nursery crops:
Year
1976
1981
1986
1991
1996
2001
2006
$/Household Consumption
28
46
72
100
117
137
148
Industry Conditions
 Barriers to Entry:
 Barriers to entry are steady and typical for agriculture
 Level of capital investment is primary deterrent for floriculture
and containerized production.
 Time lag between commencement of production and selling of a
crop may be a barrier to entry.
 Cash flow and profitability can be highly volatile; exogenous
factors of world supply and demand forces, and plant disease.
 Taxation:
 No specific taxation issues above and beyond tax and financial
management of agricultural businesses, including farming.
 Industry Assistance:
 Nursery and floriculture crops are excluded from federal price
support programs, although packages to minimize risk, encourage
innovation, regulate flow of competing imports and support
exports exist – MAP, EQIP, crop insurance; ANLA, GGIA, etc.
Cost Structure
Item
Cost %
Purchases
33.10%
Wages
28.90%
Rent
5.90%
Utilities
4.70%
Depreciation
4.10%
Repairs and Maintenance
3.60%
Interest
2.70%
Other
0.00%
Profit
17.00%
Key Sensitivities and Success Factors
 Key sensitivities:
 Downstream demand from retail businesses and customers
 Exchange rate levels affect the price competitiveness of nursery
and floriculture producers; an appreciation of US dollar erodes
the domestic industry’s price competitiveness as imports
become more affordable to US consumers and a higher US
dollar constrains exports.
 Increased spending by households stimulates demand.
 Increased activity in gardening stimulates demand.
 Weather events and deviations from mean average
temperatures affect production.
 Key success factors:
 Economies of scale generate cost savings, resulting in lower per
unit growing and marketing costs → higher net returns.
 Production of premium nursery plants and floriculture finds buyers in
premium markets where prices are highest.
 Favorable weather conditions lift crop yields.
 Effective financial management reduces the likelihood of bankruptcy.
 The ability to alter the marketing mix to maximize returns is important
for a firm’s viability.
 The ability to identify and market to offshore customers reduces a
nursery’s dependence on the local market.
 Having the appropriate facilities and providing the proper growing
conditions is paramount for quality and performance.
 Water access issues can impact on the quality of plant material.
Outlook
GROSS PRODUCT GROWTH
REVENUE GROWTH
Growth %
Growth %
2010
18,890.80
1.4
2010
9,232.30
1.1
2011
19,155.00
1.4
2011
9,244.20
0.1
2012
19,423.30
1.4
2012
9,317.00
0.8
2013
19,695.50
1.4
2013
9,451.10
1.4
2014
19,971.40
1.4
2014
9,587.20
1.4
2015
20,250.70
1.4
2015
9,725.30
1.4
Revenue
Revenue Growth Rate
Gross Product
Gross Product Growth Rate
Recession Update
 Immediate impact of recession will be minimal – some small
negative impact of lower discretionary spending.
 Downturn in housing market will reduce demand for
nursery products from landscapers finishing new homes;
retailers and wholesalers are expected to exert additional
price pressures on producers in order to maintain their
margins as discretionary demand weakens.
 Import competition will be reduced as US dollar depreciates;
prices of many of inputs have experienced sharp declines.
 Can industry weather the storm? What is forecast for
industry performance?
 Industry expected to be minimally affected.
 Forecasts for industry revised down marginally in anticipation of
weakened downstream demand.
Thank you!
Forrest Stegelin
stegelin@uga.edu
706-542-0850
312 Conner Hall
Agricultural & Applied Economics