Monday, June 4, 2012

State of the Nursery Industry June 1, 2012

  • Gradual Climb out of a deep Hole
  • Things Seemed to turn last fall
  • Early Spring, boon and bane
  • Quick Dig left some holes
  • Demand is OK, but not strong except regionally
  • Closed Nurseries and smaller pie, bigger slice
  • Conifers Maintain some demand
  • Pricing challenges in the Macro and Micro economic market
  • Economic Challenges on the horizon
  • Maybe contrarians will win this time

Gradual Climb out of a deep Hole
The last year has been a gradual climb out of a deep hole for many in the industry.  A year ago, if you had asked some engaged in wholesale nursery trade they would have spoken of a dire future.

Things Seemed to turn last fall
Last fall turned out to be better than many thought it would be.  Business showed a glimmer of hope.   Things seemed to turn.

Early Spring, boon and bane
Spring 2012 has been good but not great for many nurseries.  Those committed to big box stores are finding themselves with surplus inventory at the end of the year. The exceptionally early spring was helpful for an extended selling season but many were set back on their heels by the suddenness of bloom and bud. 

This has resulted in some fire sale mentality.

Quick Dig left some holes
The early year caused many nurseries to hustle early digging to put a great deal above ground.  Unfortunately the balance in variety is not as it should have been.  The early flush with the resultant termination of digging plants like Red Maples and Flowering Pear has caused some pressures.   There are a lot of trees above ground but too many of the wrong kinds in some cases.  For those wise enough to have dug well and wisely this will be rewarded in a good market demand cycle.

There will be pressure to summer dig many trees.  Some unwisely. 

Demand is OK, but not strong except regionally
While demand is holding up and business is good generally here are specific observations about the marketplace.

New home construction is increasing but it is so much smaller in relationship to what was the case in the roaring years of the mid 2000's.  Those times are not coming back, perhaps in our lifetime.

There are regional pockets of new construction and they are active.  An example would be western North Dakota where big oil is fueling a boom in demand not only for new homes but all forms of commercial and multifamily.

Looking at broader markets however we see much more spotty demand.  There are pockets of activity.

Closed Nurseries and smaller pie, bigger slice
One offset to much of this is while demand has not recovered anywhere near the level it was several years ago, supply has been greatly reduced.  Production at nurseries nationwide is far under what it once was.  In some states almost a third of acreage and production has disappeared from a few years ago.  This means the survivors are facing a smaller demand pie but the potential for a larger slice. It also means that fine tuning has to take place to properly capture market share.  Bread and Butter nurseries growing a few dozen key plants are sometimes blindsided when the market demand shifts away from the historical core production profile.  The threats of disease, insect destruction and disuse of varieties because of classification as invasive by authorities looms as external to market forces that influence future production and inhibit sales of existing production.

Perennials continue to be a growth component...but the low barrier to entry in production and the quick turn means that it is multiplied in volatility in comparison to trees and shrubs.

Conifers Maintain some demand
Coniferous evergreens have held value in comparison to the broader market.  Broad-leaf evergreens haven't been so fortunate.  Certainly they are strong but there are constant threats to the market by alternatives.  That is not the case with pine and spruce trees that are far more difficult to displace.  Arborvitae of all kinds continue to be weak.  Yews show upticks in demand but without breadth.  It is almost a static demand.

Pricing challenges in the Macro and Micro economic market
In general pricing returns are driven by demand.  Those things that are high demand and short demand a better price.   Those things that are still seen as surplus in the marketplace have not recovered as much.  The capacity to be nimble in pricing by staying ahead of the demand curve will reduce inventory bubbles that can be avoided with a good ear to the ground.  Nursery pricing and production is like the stock market, it requires timing, but it needs to be well analyzed for trends and reversals.   There are mega trends caused by macro economic influences like the economy and major supply changes.  There are micro economic influences like the early spring and dry weather.  There can be no generalized statement that prices are UP or DOWN.  Each category, each product group, each market has specific vagaries that must be taken into consideration as I do when I do an analysis of an inventory for valuation.

Economic Challenges on the horizon
There are critical changes ahead for the industry.  Some are economic.  IF the current "Recovery" continues or expands that will auger well for the nursery industry.  People feeling a little richer will spend a bit more money and that washes down to demand..  Gasoline prices are a harbinger of how rich people feel.  On the other hand, this is a very fragile time in the economy and any reversal would once again freeze new construction and discretionary buying.

Government purchasing of nursery stock for highway and streets is directly related to the future economy.  Austerity of necessity by governments could cause many state and municipal governments to freeze new purchases.  The stimulus spending that drove many highway projects is running it's course and will be unlikely to be extended.

Maybe contrarians will win this time
The nursery market is better today than is was a year ago, there is reason to hope it will hold and yet caution that it may not.  Yet, there is an adage in the nursery business... when everyone is not planting, you should be.  When everyone is going crazy planting, back off.  Be a contrarian. That takes faith, wisdom and capital.  Not everyone has all three.

I will offer a fall forecast in August as I discern what is happening around the marketplace.

Gene Redlin
Expert Horticultural Valuations
St Charles IL