Survival of the quickest

Cultivate’s State of the Industry address begs frogs to beware of boiling water

AmericanHort is a leader in its field because it has the capacity to employ top-notch experts to provide insights on how to plan and navigate the changing market climate for growers. Each summer during Cultivate, they address the trends they’ve observed during the first half of the calendar year and where they think the horticulture industry is going.

Kicking things off as always was Ken Fisher, president and CEO of AmericanHort, who noted that for the past three years, the industry has fared pretty well in the market. While there have been economic ebbs and flows, consumers are still buying nursery and greenhouse stock, builders have continued to build out and landscape continues to grow across the country.

“I’m a market optimist … I can’t tell you how continually I’m impressed at the management teams running the companies in our industry,” Fisher said. Horticulture today is a $350 billion market sector, supported by 2.5 million jobs. But it’s not all sunshine and daisies.

“What I want to make sure is we understand the analogy of the boiling frog,” Fisher said. “If you put a frog in really, really hot water, he jumps right out. He’s alarmed. He saves himself. But if you put a frog in a saucepan full of just warm water and you turn the heat up slowly, the frog sits there, happy as can be. And the water’s getting a little warmer until the water starts to boil and the frog boils to death.”

He said it’s a powerful metaphor for hard-to-notice threats that have potentially devastating consequences, because the changes in our business world are incremental. Over time, we become inured to the circumstances. He asked those in attendance to think about the existential threats to their businesses and the industry. The other speakers dove a little deeper into those waters.

Craig Regelbrugge, executive vice president of advocacy, research and industry relations for AmericanHort, listed some key priorities for their advocacy efforts: ensuring an adequate workforce, business practices, regulation and compliance, research and innovation and sustainable tools, technologies and practices. The first – labor – continues to be a major concern.

Priority: Labor

“On the workforce front, I would be misleading you if I did not describe the environment we’re in politically as about as difficult as I have seen in 30 years,” Regelbrugge said. “Against the daunting backdrop, we have issue champions that we have cultivated for years to find ways forward.”

He said there are marker bills pending – bills introduced in Congress to signal policy ideas and gather support for those ideas, most often with a goal of inclusion in an omnibus bill (like the Farm Bill).

The Farm Workforce Modernization Act, which passed the House in both of the last Congresses, has again been reintroduced. Regelbrugge said it’s a piece of legislation that’s “far from perfect but measurably moves our goals in H-2A reform” and provides opportunities for the earning of status for members of the current migrant workforce. Other goals include bringing cost containment to H-2A and various other benefits.

“There is no easy path forward – this is a long game,” he added. That’s because the bill is also working on eliminating the requirement for only seasonal (10 months or less) work for H-2A.

This is “strategically, critically important for our industry” as more operations are becoming year-round businesses, he said.

Fisher said that while automation and mechanization can help, horticulture needs more workers – “end of story.” The U.S. Department of Labor reports there are currently 1.6 unfilled positions for every unemployed person.

“The perfect solution does not exist for the migrant worker program,” Fisher reiterated. He believes that if the country can’t properly phase in the E-Verify program (a web-based system that allows enrolled employers to confirm the eligibility of their employees to work in the U.S.), our labor situation might get worse. Only 10 states currently require the use of E-Verify.

“Labor availability is what it is, and until we have some comprehensive immigration reform, we can expect the same labor availability struggles,” added Charlie Hall, Ph.D., Ellison Chair in International Floriculture, Texas A&M, chief economist for AmericanHort and co-chair of the advisory council for Seed Your Future. He noted that it’s also the cost of labor that’s an issue. Per his data, everybody outside of agriculture is paying 18% more for labor since 2019; meanwhile, ag wages have increased 25%. That makes profit margins that much tighter in horticulture.

Priority: Plant Health

Fisher highlighted for the need to continue to invest in research, including at land grant universities, before Regelbrugge stated that because we’re in a Farm Bill cycle, focuses for the horticulture industry include specialty crop research initiatives; plant, pest and disease mitigation; disaster prevention programs; and various risk management tools – “go-tos for us as we attempt to solve problems.”

“With plant health, there’s a lot going on,” Regelbrugge continued. Last spring, USDA inspectors began rejecting tissue culture fern plants, and this put at risk the supply chain for the Mother’s Day hanging basket fern crop. A short-term fix was achieved and late last year it was made permanent.

More recently, we saw young plant plugs (a major greenhouse supply chain aspect) coming primarily from the Netherlands being rejected in inspections because of the presence of minor amounts of moss – and there’s nothing you can do to stop moss spores from entering ventilated environment, he said. But eventually a resolution was found there as well.

“Very recently, we heard two chrysanthemum synonyms (Xeranthemum and Leucanthemum) that were going to be prohibited entry because they were trying to streamline how these are treated versus how chrysanthemums are treated,” Regelbrugge said. “This would’ve put into jeopardy a supply chain that, even though these are relatively minor plants, at the grower level are worth about $30 million annually.” Again, a resolution was negotiated.

There was a Ralstonia incident this year which was rather disruptive and, in AmericanHort’s view, based on a faulty test result – so they’re now deep in the throes of renegotiating how the testing process works for Ralstonia (which causes bacterial wilt).

On the nursery side, the organization is taking the threat of boxwood tree moth seriously. He said there’s a very intense research effort going on, with USDA and AmericanHort’s Horticultural Research Institute seeking natural enemies of the moth. For a long-term solution, they’re looking to use classical natural biological control (parasitic wasps) to manage this pest on a landscape scale.

Regelbrugge added there’s “a lot going on behind the scenes on modernizing plant certification programs and developing systems approaches for clean plant trade.”

Priority: Farm Bill & Other Legislation

There are legislative risks that surface every other year or so, Fisher stated; for example, some growers would be at risk if they lost the cash accounting provision in the tax code.

“Changes in stepped-up basis, removal of estate tax advantages for grantor trusts, elimination of certain business valuation methodologies, increasing marginal tax rates on high earners, changes in like-kind rules – if any of those are hitting your hot button, know that we have them on our radar screen,” said Fisher. “And it takes support from you for advocacy.”

Regelbrugge said, “Our number one goal in the Farm Bill debate is to hold on to what we’ve got and build on it where we can.” As noted above, a new marker bill was introduced recently – this one dealing with investing in automation and mechanization research for specialty crops, including greenhouse and nursery horticulture.

He noted new regulations are coming at the industry “fast and furious,” including new H-2A rules and discord between approved pesticides and endangered species protections. There are also new regulations expected to be proposed dealing with heat illness in the workplace, changes to overtime exemptions and various other worker protections.

“Even though the current Farm Bill expires September 30, it’s doubtful the work will be done,” Regelbrugge said. “We’ll probably see at least one extension into later in the year, possibly into the beginning of next year. This will be front and center in our efforts with the Impact Washington Summit.” He added it will be important to keep the pressure on Farm Bill crafters through any extensions.

“Calling all frogs – we invite you to attend our legislative summit, the Impact Washington Summit,” Fisher told attendees. The AmericanHort event, which takes place Sept. 18 – 20, offers an insider’s look at what’s happening in our nation’s capital and opportunities on Capitol Hill to have personal conversations with congressional offices. To learn more, visit americanhort.org/events-calendar/impact-washington-summit.

“We need to insist on more from our elected leaders, and in our own personal lives we need to take the opportunity to bring people along in their understanding,” Regelbrugge stated. “Our industry’s political power doesn’t come from our sheer size; it also doesn’t come from the amount of money we throw around. It comes from the authenticity of your voices as hardworking people, running businesses, hiring people, paying taxes, sustaining local economies, sustaining communities.” He said the industry needs to use its voice.

Priority: Finances & the Economy

As usual, Dr. Hall began his presentation with a recap of the first half of 2023. The top line gross sales for January through June this year, compared to last year, were up for 76% of the businesses surveyed. That meant 24% experienced negative comps, but Hall believes much of that was due to “less than stellar weather conditions” in certain regions.

“We’re recession-resistant but not exactly weather-proof,” he said. “Compared to 2019, every single grower indicated top line sales were above that year, even if they were not better than last year.”

As for net profits from the first six months of this year, Hall reported 69% were above this time last year. For those who were down, he said some of it is tied to rising input costs. While some businesses have increased their prices to cover at least a portion of those increases, perhaps they haven’t raised prices enough to cover them – thus the negative profitability.

Other good news tidbits included the fact that 78% of businesses surveyed were up in number of unit sales, and that revenue compared to last year is up 2.3% (but again, varying by region). There’s also been a 3.2% increase in transaction counts.

“We’re still capturing some of those 18.5 million new gardeners” that sprouted during the pandemic, Hall said, but keeping them will continue to be a challenge. “It’s one of those unseen things that we frogs must deal with, keeping those folks engaged. Historically, we have done a really bad job of keeping any new customers we obtain through economic downturns. I’m encouraged by this type of data.”

He added that landscape sales are also still strong, but are slowing down a bit from those record-high pandemic levels.

What will impact the industry going forward? Hall said projected input costs are up 1.9% (which is good; he originally forecast the increase at 3.5%). He’s projecting just a 1.6% increase for next year. He added that business owners need to be aware of these percentages to increase their sale prices accordingly.

The latest information puts inflation at 3% in June. Whether or not it stays there is up to the Fed to determine. “Personally, I feel it will be increased another 25 basis points,” Hall said.

He noted that the capacity to spend continues to increase along with disposable personal income, excess personal savings and consumer credit. “Even if we go into a recession or some sort of an economic correction early next year, we should still have the capacity to buy flowers, shrubs and trees next spring, if we so desire, if we continue to make ourselves relevant to those customers,” he stated.

So is another recession on its way? Hall said the U.S. Leading Economic Index – the one number he suggests growers follow every month to get a general feel for the economy – continues to signal a recession within 12 months. Based on data, there is a 71% to 79% chance of recession occurring the next year.

“I predict a high probability of a mild, short-lived downturn in early 2024, but I don’t expect the impact on spring sales to be very much,” he said.

Hall closed with a “three-point sermon.” First, resist irrational exuberance – don’t be lulled into complacency like the frog in the pot. Second, manage your working capital wisely – and pay down debt. Third, focus on value – start with the “why” so that we can continue to make a positive influence on our customers.

“We like say that our industry is recession-proof … but I worry about the frog in the room,” Fisher said. “In a recession, it’s survival of the quickest when it comes to managing expenses, debt levels, inventory levels and conserving cash, because things move quickly.”

And while investing in our plants and our businesses is critical, Fisher said we also need to invest in personal relationships.

“It’s said it takes a long time to grow an old friend. Invest your time and talent and treasure. Our industry is a team sport,” he concluded.

by Courtney Llewellyn