Are surpluses and shortages inevitable during economic swings?
As tree customers know all too well, the slowdown in production during the last recession resulted in shortages in popular varieties across the nation over the past several years. The recession was estimated to have lasted from 2007 to 2012. Growers were stuck with surpluses so in turn decreased production, sometimes dramatically.
While the shortages are becoming less common, some in the green industry are already looking ahead to the next recession and wondering how much tree inventory will be impacted. If we go into another recession in the next couple years, can growers avoid cutting back on production so much that it impacts plant availability as the economy improves and demand for plants increases? How can growers balance slowing down on production due to the expected drop in sales with keeping enough plants in the pipeline so we don’t repeat shortages?
CNGA asked for answers from two members, who share their insights in this LooseLeaf article. Many thanks to Bailey Nurseries National Director of Sales and Marketing Marc McCormack and J. Frank Schmidt & Son Co. National Sales Manager Rich Bailey.
Marc McCormack at Bailey Nurseries: I think the big difference between now and the last recession is what we learned last time about surpluses. Before the recession, when the economy was really strong, we got wrapped up and worried too much that we were running out of product and missing sales. We reacted to the last recession by adjusting our production schedules. We learned it is better not to worry about running out but focus on selling out. We want to sell down to the bare walls because that’s when the profits really kick in. We don’t want to miss sales by huge amounts, but we want to be realistic with setting numbers. On the positive side, if we do sell out of a popular variety, that can help build anticipation for the next crop and keep prices at good levels.
Rich Bailey at J. Frank Schmidt & Son Co.: This last recession dragged on, so it was a shock for the green industry due to its duration and long-lasting effects. When a recession lasts several years, nurseries can get to a point where inventory is backed up and unfortunately we have to destroy material. Many growers ended up taking a year or two off from planting trees because the business wasn’t there, and when it came back they needed trees! We learned a big lesson.
Planning for the Next Recession
MM: Forecasting is never an easy or exact science by any means. At this company, we strive each year not to cut too much if it’s a down economy, especially when we consider the time it takes to bring certain varieties to market. Each year our goal is to produce what demand is or what it will be when the plants get to market. Since trees and evergreens take much longer, we are forecasting five to seven years out. That’s why we strive not to cut too much or increase too much in one single year — because of the time and investment it takes to bring a plant to market. Since greenhouse crops typically have a much shorter production time than field crops, the impact is less in terms of timing. However, scheduling the propagation of cuttings for field and container production and our direct liner sales is trickier. Still, we are willing to take on more risk with greenhouse propagation, because even if we are not completely accurate and have to toss liners from propagation, it costs much less than if we have to toss grown, finished stock.
RB: Planning for a recession is tough. Knowing that we have to be more mindful of production, JFS has really adapted. When a recession is looming we know we can always improve efficiency, limit waste and fine-tune processes, but these are things we focus on all year long. Availability of labor limits growth and we never compromise our quality, so we’ve focused on small increases and are mindful of overproducing so as not to risk quality expectations. We expect more gradual increases in our future production numbers while maintaining the expected quality customers can rely on. Many companies would be happier to be sold out of inventory than to have more inventory than needed. If the economy is great, we’re happy about that and of course want to sell more. If the economy isn’t great, we want to be happy we didn’t produce too much. We have to find the sweet spot.
Production based on Sales History
MM: Because we self-propagate, we control the number of plants that we bring either to field or container production each year. We base that number on historic sales data from the last year and our three- and five-year sales history, as well as trying to decide what demand will be in two to three years. We have approximately 30 salespeople in markets all over the country, who are in touch with customers every day. They may see shortages or surpluses with customers now, and can help us plan for the future. Input from them helps us in terms of understanding or forecasting what the demand may be in each market nationwide. Then, we schedule a production number that we can sell out of and strive to not have surpluses. If we sell out, we won’t deviate too much up or down with production. Whether we are dealing with shortages or surpluses, we always feel it’s super important to find ways to satisfy our customers.
RB: What we produce is based on prior years’ sales and the buzz in the market. A few times a year our management group will sit down and discuss our sales/production history, plant sell-through and production difficulties to come up with production plans. If we realize that production has been higher than sales output for multiple years, we adjust, but we are not making drastic changes. We are mindful and small with our changes, because what we are planning for today affects us five years from now.
Some Influences on Customer Demand
MM: Each market across the country is unique and demand will vary. Even in a down economy, we see some markets that are not down. It’s also really important to look at each channel of distribution that we’re selling into each year. The demand for a retail cash-and-carry business can be very different than demand from landscapers and the wholesale channel. The customers’ behavior may be different from channel to channel. It’s also important to watch nationwide economic indicators, which certainly influence consumer behavior. A strong or weak market will influence how consumers spend and how much disposable income they have, or feel they have.
“We ship our trees all over the country and test trees at multiple sites. We’re always evaluating our trees for better hardiness, better disease resistance…etc. — it must be an improvement to be introduced.”
– Rich Bailey
RB: We ship our trees all over the country and test trees at multiple sites. We’re always evaluating our trees for better hardiness, better disease resistance…etc.— it must be an improvement to be introduced. It is vital to JFS that our trees are proven and we can stand behind them. We understand that our customers need to succeed. They’ve helped us grow to where we are as a company, so their belief in our introductions is even more valued. Our hope is that by marketing and getting the information to our customers, the word about our improved plants gets out to designers, landscapers and retailers so they have confidence in new trees and see better options. There are hundreds of varieties of different species and options of new and better varieties for our finished container, bare root and B&B products that are popular with growers, wholesalers and garden centers.
Other Variables in Production Planning
MM: Labor availability is a significant variable for the green industry. Because of concern about or lack of labor, we can’t swing too much in either direction, increasing or decreasing production. On one side, we may not have enough workers to handle the increase in production, and on the other, we don’t want to let go of
valuable workers even if we can’t fill their schedules. One of the most important things we do to balance our production is really understanding our costs. We do annual studies of costs by variety and size. Where margins are thin, we will be conservative with production. For those items where margins are greater, we might be a little more aggressive in our scheduling. Understanding our costs has really helped us better balance production whether the market is slowing down or speeding up. In addition, we’ve got a production staff with a depth of knowledge that allows us to make changes in our cultural practices throughout the year. They can stage prune to try to hold crops back, or do things to speed up production. Those people behind the scenes do play an important role in meeting demand.
RB: As far as what the economy does…
I think everyone would love to have that crystal ball. It’s extremely difficult to estimate how to meet demand for living, breathing products that are going to be sold five to six years from now. The biggest thing we can do is keep market demand high with education, variety and quality. We’re fortunate to have the track record of almost 75 years of new trees to the market with improved quality. Our hope is to be here for customers whether the demand is low or high, by maintaining what people expect from J. Frank Schmidt. We truly appreciate our customers; that’s really what drives our company, and we have confidence that we’ve built relationships to last through good and bad times. We are there for them, and they for us.
“One of the most important things we do to balance our production is really understanding our costs. … Where margins are thin, we will be conservative with production. For those items where margins are greater, we might be a little more aggressive in our scheduling.”
– Marc McCormack