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Forrest Stegelin Ag & Applied Economics Nursery Management September 21, 2009

Nursery Plants and Flower Production (NAICS 11142 ) State of the Industry, Including the Global Market, NAFTA, and the US Dollar. Forrest Stegelin Ag & Applied Economics Nursery Management September 21, 2009. Key Statistics. Revenue Revenue Growth Rate. Employment Imports and Exports.

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Forrest Stegelin Ag & Applied Economics Nursery Management September 21, 2009

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  1. Nursery Plants and Flower Production (NAICS 11142)State of the Industry, Including the Global Market, NAFTA, and the US Dollar Forrest Stegelin Ag & Applied Economics Nursery Management September 21, 2009

  2. Key Statistics RevenueRevenue Growth Rate

  3. EmploymentImports and Exports

  4. Inflation Adjusted (Constant) Prices [2009 Estimates] • Industry Revenue $ 18,630 million (-0.3%) • Industry Gross Product $ 9,133 million (-2.2%) • Number of Establishments 50,713 (US) (-1.2%) • Number of Enterprises 35,316 (US) (-1.6%) • Employment 232,412 fte (-0.3%) • Exports $ 425 million (+0.7%) • Imports $ 1,418 million (-6.1%) • Total Wages $ 4,883 million (-9.6%) • Domestic Demand $ 19,623 million (-0.8%) • Garden Plant Production 531 million • Ratio Table • Imports share of Domestic Demand 7.23% • Exports share of Revenue 2.28% • Average Revenue per Employee $ 0.08 million • Wages & Salaries Share of Revenue 26.21%

  5. Segmentation

  6. Segment % Value Share % Acreage Share Nursery & Tree 68.46 84.16 Production Floriculture Production 31.54 15.84 (471,000 acres in nursery and tree production + 89,000 acres in floriculture production)

  7. Major Market Segments

  8. 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.)

  9. Geographic Spread

  10. 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.

  11. 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.

  12. 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.

  13. 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.

  14. 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.

  15. 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.

  16. 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 intra-industry trade, meaning trading similar products with one another, including floriculture and nursery plant material.

  17. 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).

  18. 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.

  19. 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.

  20. 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

  21. 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.

  22. 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.

  23. 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 BloemenveilingAalsmeer 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.

  24. Historical Performance • US Consumption of floriculture and nursery crops: Year $/Household Consumption 1976 28 1981 46 1986 72 1991 100 1996 117 2001 137 2006 148

  25. 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.

  26. Cost Structure

  27. 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.

  28. 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.

  29. Outlook

  30. Revenue Revenue Growth Rate

  31. Gross Product Gross Product Growth Rate

  32. 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.

  33. Thank you! Forrest Stegelin stegelin@uga.edu 706-542-0850 312 Conner Hall Agricultural & Applied Economics

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