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Risk Management for the Green Industry. Dr. Robin G. Brumfield Rutgers Cooperative Extension Risk Management Workshop June 7, 2000. Distribution of Farms and Land in Farms By Region, 1998. Top 6 Commodity Groups in the US. Beef Dairy Corn Soybeans Broilers
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Risk Management for the Green Industry Dr. Robin G. Brumfield Rutgers Cooperative Extension Risk Management Workshop June 7, 2000
Top 6 Commodity Groups in the US • Beef • Dairy • Corn • Soybeans • Broilers • Green Industry 11% of crop cash receipts for farm crops in 1998.
U.S. Floriculture • 23.5 million sq. ft. of construction in 1997 • $37.2 billion in green industry expenditures • 9.8% growth 1986 - 90 • 3.4% growth 1991 - 95
Top 10 States in Cash Receipts • 1996%1987 % • California 20 California 22 • Florida 11 Florida 14 • North Carolina 8 Texas 7 • Texas 8 Pennsylvania 4 • Ohio 5 New York 3 • Oregon 5 Michigan 3 • Michigan 4 Oregon 3 • Pennsylvania 3 New Jersey 3 • Oklahoma 3 North Carolina 3 • New York 2 Ohio 3 • Source: Floriculture & Environmental Horticulture, Oct. 1997
Impressive green-industry growth • Total US growth has been extraordinary • Most states have expanded cash receipts • Market shares - some states have increased cash receipts, but failed to keep up with the growth in other states
U.S. Retail Expenditures • ItemBillion $ Per Capita • Cut Flowers & Greens 6.5 $26.80 • Flowering Potted Plants 3.4 $12.80 • Foliage Plants 2.9 $10.90 • Bedding Plants 2.6 $ 9.90 • Env. Hort. 21.2 $79.90 • Total 37.2 $140 • Source: Floriculture & Environmental Horticulture, Oct. 1997.
Percent of Households Buying Plants Plant% Annuals 25% Perennials 20% Rose Plants 13% Flowering Trees 9% Source: National Gardening Survey, 1994-95
43 • out of every • 100 • households • do not buy floricultural products!
Top 10 Crops CropShare of Value Roses 9% Mums (cuts & pots) 8% Poinsettias 7% Geraniums 6% Ferns 5% Carnations 3% Impatiens 3% Palms 3% Lilies (cuts & pots) 2% Petunias 2% Source: 1987 Census of Ag.
Only 6 • of every 100 • households • buy poinsettias, the number one potted crop!
Percent of Households Buying Lawn & Garden Products • Vendor% • Garden Center 51% • Mass Merchandiser 36% • Home Center 22% • Supermarket 17% • Source: National Gardening Survey, 1994-95.
Factors Impacting Demand • Income $35,000 vs. $30,000 • Education - 54% have one year of college • Age - 44% are over 18 • Housing Starts • Source: Gineo and Omano, 1990, Waldrop, 1993.
Factors Influencing Outlet Selection • Plant quality • Selection • Location • Price • Professional Assistance • Source: Padgett et al., 1995.
Limits to Expansion: Retail Firms • Market Demand • Available Capital • Labor • Competition • Source: Dole and Schnelle, 1993.
Value of an Acre of Production • Crop $ • Corn $350-$400 • Vegetables $4,000-$8,000 • Fruit $8,000-12,000 • Greenhouse flowers $350,000
How Does the US Stack Up? • Rank Share • Size of Consumer Market 1 31% • Value of Production 3 14% • Area in Production 3 9% • Importer 1 29% • Exporter 1 29% • Economic Output 1 22% • Source: Floriculture & Environmental Horticulture, Oct. 1997
US Weaknesses • Not having a good handle on the financial side of the business • Not thinking internationally
US Strengths • Next to the largest consumer market • Financially conservative • Operate under a wide range of conditions • Optimistic
Marketing/Advertising/MediaTrends • Market segmentation • Superstores and warehouse stores • Consolidation
Marketing/Advertising/MediaImpact on the Industry • Low prices from large producers • Decline of large, homogeneous, middle class • Not sure who the target market is • Many specialized production niches
Marketing/Advertising/MediaSolutions • Promote quality, not price • Promote service • Try new ideas as well as proven winners • Use cable TV to target local customers • Use 1-900 numbers • Develop good signs • Get involved in the community
Social/Lifestyle/ConsumerTrends • Consumers are more sophisticated • Growth of 2-income families • Consumers want “shopping experience” or “event marketing”
Social/Lifestyle/ConsumerImpact on the Industry • Can’t shop 9-5 • Limited time to work on landscapes • Limited time to shop
Social/Lifestyle/ConsumerSolutions • Create “shopping experiences” and “event marketing” • Market After Hours • Stand behind the product • Give your 800 number to customers • Sell processed and lightly processed items to save consumers time
Business/ManagementTrends • Global marketplace • Switch from producer-driven to consumer-driven economy • Information age
Business/ManagementImpact on the Industry • Competition from low cost countries • Age of surplus rather than shortage • Must offer quality prices to attract customers • Producers are farmers who have difficulty thinking of marketing from the consumer’s perspective
Business/Management Solutions • Become computer literate and train employees on the computer • Learn to surf the internet • Consider a webpage • Make electronic sales tax payment • Create value added products, don’t compete on price • Do things in slow months • Make your farm a shopping destination
Political/Legislative/RegulatoryTrends • Government regulation • Deer overpopulation • Increasing environmental/health concerns
Political/Legislative/RegulatoryImpact on the Industry • Deer damage • Consumers reluctant to purchase plants that deer may eat • Increasing demand for native, organic, and environmentally friendly plants • Loss of minor use pesticides • Recycling • Composting landscape wastes
Political/Legislative/Regulatory Solutions • Deer fencing, human hair, relocate deer, etc. • Sell and educate about biological pesticides • Start recycle programs • Chip trees and give away compost • Recycle water • Proactively present producer concerns to regulators • Educate on recycling, environmentally friendly landscapes, etc. • Be environmentally aware and responsible
Workforce/WorkplaceTrends • Low unemployment • Declining work ethic. How do farmers find, train and retrain motivated employees with skills they need at affordable wages? • Improved communications technology
Workforce/WorkplaceImpact on the Greenhouse Industry • Difficult to find part-time work • Wages are increasing • Difficult to find good help
Workforce/WorkplaceSolutions • Set up a training program for employees • Automate • Make daily lists of tasks • Make shopping more self-service
Financial Management is Critical to Success • Budgeting • Managing Cash Flow • Controlling Credit • Pricing • Obtaining Capital • Profitability • Planning
Investment InterestLabors & Management SalaryRisk Profit Producers have returns to:
Income Statement Is Critical For Measuring • Profitability • Return on assets • Return on equity • Financial efficiency • Ratio of operating expenses to value of production • Ratio of debt service to value of production
Income Statement • Total Revenue • Value of plants sold $1,290,181 • Change in inventory 40,125 • Increase in supplies 897 • Misc. cash income 14,601 Total Revenue $1,345,803 Less Cost of Goods Sold $878,633 (Prefinished, cost of production) ______ Gross Margin $467,170 Less Operating Expenses $392,924 ______ NET REVENUE (before taxes) $74,246
Net Profit Margin Focus on Factors Affecting the Income Statement
Interpretation Net profit margin = profit per dollar of sales after paying the owner’s salary and accounting for opportunity cost of capital invested.
Common Problems With Profit Margin • Wrong pricing system • Prices have not been increased as costs have increased • Costs are too high relative to size of business • Not enough sales for the resources allocated • High overhead costs • Wasteful spending on inputs • Poor production
If Costs Are Too High: • Are we over-mechanized? • Is labor being used efficiently? • Do we have too much labor? • Do we have the right type of labor? • Is there too much labor in slack periods? • Is there a labor shortage in peak periods?
If Costs Are Too High: • What Costs Are The Highest? • Are These Controllable? • Are The Costs Necessary? • Can The Same Function Be Done A Better Way? • Would mechanization reduce costs?
Every Dollar Saved By Cost Control Equals A Dollar Of Profit!
Balance Sheet Or Net Worth Statement Is A Financial Snapshot Of Business On A Specific Date Shows: • Assets - Valuables The Business Owns • Liabilities - Claims Of Outsiders • Net Worth - Claims Of Owners
Balance Sheet Segregates, Assets and Debts Into: • Current • Non-Current