Gas falls below $3.50 in Kansas

Dorothy is probably happy since gas prices fell below $3.50 in Topeka today. In my May 31 post, I referred to the EIA's (Energy Information Agency) projection that gas prices could fall below $3.50 by the end of the year. Friends scoffed at the notion. Hmmm... Now to see what impact the backed-up traffic jam on the Mississippi River is going to have.

Coping with a down economy

As promised, here are a few strategies to consider for coping with a down economy. Some of these steps are radical, while others are a more milder form of defense. Implement them according to the conditions you experience in your market area.

1. Conserve your cash. Don't spend a dime on anything that isn't absolutely necessary to your operation. Examine every personal expense you have to find alternatives to any spending patterns.
2. Refinance anything and everything you can. Stretch out the payments because getting cash later on will be difficult as more people will apply for loans and banks will become very picky.
3. Work out a worst-case scenario cash flow projection that projects your company having a decrease in sales. As part of this, determine what expenses will be unavoidable. Look through your cash disbursements. Pre-plan a less expensive alternative to any expense category that you can.
4. Know your costs well because poor pricing can put you out of business faster. Assume that cost-side pressures caused by a recession will last about two years after a recession is over.
5. Beef up your advertising/marketing. Everyone else is cutting back. Now is the time to gain "mind share."
   
6. Slowdowns mean layoffs. Therefore, new hires become available and are sometimes available at a lower rate of pay than your current rate. Take advantage of that fact.
7. If part of your fleet is going to be idle for some time, try to store unused vehicles and get a reduced rate of insurance due to non-use.
8. Selling off assets during a recession is difficult. Nevertheless, selling off unused equipment reduces insurance and registration costs and property taxes. Convert anything you don't need into cash well ahead of any signals that your area will be hard hit.
9. Apply for credit long before you need it. You may have to "borrow" your future, and banks will raise interest rates on high-risk loans as conditions worsen.
10. Look deeper in your own markets. Can you offer your current customer base a more diversified line of products and/or services?
11. Review your business insurance to make sure your premiums have been adjusted for the depreciated value of your vehicles and equipment.
12. Take a look at your estimated tax payments made to the IRS. Decreased earnings call for decreased estimated tax payments.

Cash is "king" during economic slowdowns no matter how mild or severe. Expect your customers to also feel the effect, which means they will pay you at a much slower rate than during the good times. That's precisely the reason that you'll need additional working capital to finance your receivables if nothing else.

Run a cash flow working capital projection using 60 days, 90 days, 120 days and even up to six months to be paid from some of your customers. How much cash do you need to survive? Find the answer to that question. Prepare and save for that eventuality and you'll be ready for a downturn.

These are the good old days...

Interesting commentary from Jeff Jacoby in yesterday's Boston Globe (click here). Goes back to the adage of whether you consider the glass half full or empty, or just another thing to wash!

There are a lot of comparisons in the media of today's economic conditions to the inflationary 1970s and even the Great Depression and the 1930s (see shaded areas below). The chart below shows the annual Misery Index from 1930 to 2008, calculated as the sum of a) the CPI inflation rate and b) the unemployment rate.

Notice that today's single-digit Misery Index of 9.7% isn't anywhere near to the double-digit levels throughout both the 1930s and the 1970s, with peaks around 20% in both decades. The Misery Index is also lower today than during most of the 1980s.

Not to dismiss the current economic contraction, but a long-term perspective on the part of green industry managers is needed. This is the 11th "recessionary" time period over the last 60 years. My point -- it is not the first, nor will it be the last -- on average they occur every 6 years.

We could even go so far to say they are a part of normal business cycles. A clear-minded, deterministic, strategically visionary mindset will probably be the only thing separating those who survive and those who don't. Stay tuned to future posts on specific strategies to compete in a down economy!

Yet another successful OFA!

In spite of current economic conditions, attitudes were fairly positive at OFA this week. Several conversations with greenhouse growers across the country once again confirmed the fact that those employing differentiation strategies are holding their own. A few reported anecdotally of sales increases this spring [one said ~20%), with strong carryover into June.

If you missed it, check out the new OFA blog entitled "On Location At Short Course" from the staffs of Greenhouse Grower magazine and Today's Garden Center magazine.

Click here to view.

Canada welcomes U.S. H-1B skilled workers

According to Tennessee immigration lawyer Greg Siskind, "While our Congress buries its head in the sand and refuses to update our antiquated skilled immigration system, our neighbors to the north are seeking to take advantage of the paralysis. This is just embarrassing."

Alberta, Canada is now actively recruiting dissatisfied high-skilled H-1B workers in the U.S. (discouraged by sometimes waiting 7 or 8 years for a green card), by promising expedited "Permanent Residency in Canada.

Middle class expanding -- globally, that is.

While much attention has been placed on the shrinking middle class here in the U.S., Jim O'Neill, chief economist at Goldman Sachs, offers an interesting commentary of the expanding middle class globally in this weeks Financial Times:

In the midst of the current widespread gloom and doom in the west, it is important not to lose sight of the true structural themes shaping our era.

Linked to the current mood, commentators often depict an embattled and shrinking middle class, with sharply rising financial inequality. However, globally, this is simply not true. One of the most startlingly positive phenomena for many generations continues to unfold around the world. We are in the middle of an explosion of the world’s middle class - about 70m people a year globally are entering this wealth group.

The phenomenon may continue for the next 20 years, with this global middle accelerating to 90m a year by 2030. If this happens, an astonishing 2bn people will have joined the ranks of the middle class. This demonstrates that, contrary to widespread opinion, global inequality is declining significantly, not increasing.

It is important for everyone in the so-called developed world to be constantly aware that these powerful shifts in global wealth are good not only for the developing world, but for them too. If you take a look at a chart of recent US export growth, you may well think you are looking at the wrong data series. But you are not. US exports are indeed growing at close to 20 per cent and it is this that is stopping the housing and credit crunch from driving the US into a deep recession. Aspects of the same phenomenon can be seen in Japan, Germany and even the UK.

The new middle-class explosion is going to remain the market opportunity for us all, or certainly for those of us who are prepared to respond to the new realities.

This, of course, makes trade and regulatory policies all the more important for green industry-related imports and exports. The current APHIS Q37 and other free-trade negotiations (e.g. Columbia) have perhaps even more far-reaching implications than we otherwise surmised. I'll be speaking at a colloquium at the annual meeting of the American Society for Horticultural Sciences this week discussing this issue in more detail.

Click here for the full FT article.
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Guess Who's Coming to Dinner?

The Changing Face of the U.S. Consumer

An excellent article appears in this months Advertising Age (click here) that highlights the changing demographic profile of consumers in the U.S. The following helpful hints were provided for marketers:

1. GENERATION AARP

THE TREND: The average age for a U.S. head of household is 49.5— just six months shy of getting a sign-up pitch from AARP. The first boomers will turn 65 in less than three years.

MARKETING CHALLENGE: Older consumers tend to be more risk-averse and less open to new ideas.

WHAT TO DO: Don't pander ("60 is the new 40"). Play up messages suggesting advantages such as guarantees, safety and experience.

2. CONSUMER CHASM

THE TREND: The gulf is widening among consumers when it comes to attitudes and behavior. The online- and wireless-centric consumer lives in a different world from the older newspaper reader.

WHAT TO DO: Rethink strategies for target marketing. Put more emphasis on ethnographic research into the culture, beliefs and activities of the target consumer

3. REGIONAL DISCONNECT

THE TREND: One nation, but hardly united or homogeneous. The Northeast is older, largely white with fewer children; the West is younger and more diverse. Two thirds of recent immigrants have settled in the South or West.

WHAT TO DO: For products aimed at older consumers, consider looking north and east. If you want younger consumers, pick your regions and then make sure the message resonates with a multicultural audience.

4. NEW FACES

THE TREND: The median age of U.S. Hispanic women is about 28—14 years younger than the median age for white, non-Hispanic women. Two in five consumers under 45 are Hispanic, Black or Asian (vs. one in five for 65- plus). More than half of household heads in California and Texas are Hispanic, Black, Asian or multiracial.

WHAT TO DO: If you want to be the choice of a new generation, embrace the cultures and voices of that generation.

5. IMMIGRATION IMPERATIVE

THE TREND: In the past seven years, 40% of U.S. population growth has come from immigration. Five big states (New York, New Jersey, Michigan, Illinois and Connecticut) would have seen their work forces and populations shrink were it not for new immigrants.

WHAT TO DO: Marketers need to engage in the national debate about immigration. Immigrants, after all, are a source of labor—and a prime source of new consumers.

Be prepared!

On Wednesday, at the educational sessions of the Southwest Growers Conference, Dr. Marco Palma gave an excellent presentation on "hiring a legal workforce" for nursery and greenhouse operators. Conference attendees were also presented with their very own copy of the newly revised Immigration and Labor Handbook that is hot off the press (click here).

As part of the discussion, it was was pointed out that increased I-9 and immigration compliance audits of businesses are expected. To prepare, ANLA has revised their employer audit guide (click here). ANLA also reports an increase in DOL wage and hour investigations targeting nursery employers using the H-2A agricultural guest worker program. Auditors are closely scrutinizing job descriptions and performance of non-agricultural work that can result in the loss of the agricultural overtime exemption.

Well put, Bob.

Robert Barr, an economist in the Washington, D.C. area, and frequent contributor to the SAF Floral Trend Tracker offered the following comment in the latest issue:

These are confusing times for consumers and businesses. Gas prices are way up, home prices in many places are dropping, and employment has shrunk in each of the first five months of the year. If we're not in a full-blown recession now, we're just skirting past one.

So this has been a time of fear and concern. Our economic health is vulnerable, and we know it. But while we batten down the hatches, keep in mind how resilient our economy has been. Economic conditions aren't as bleak as you probably imagine them to be, or as the popular media usually suggests. Growth was at a low 0.8% annual rate in the six months ending in March, surprising many experts who expected to see an outright contraction. Despite all of the problems and concerns, the economy continues to expand, albeit it mildly.

Naturally, consumers are holding back, as purchases of big-ticket items are being deferred, particularly in real estate and autos. On the other hand, business owners are more encouraged, as durable goods orders outside the auto sector are doing quite well. And, and in a big switch from recent years, net exports are contributing to, not detracting from, economic growth (actually accounting for most of it lately).

Feds to the rescue? One important development in early June suggests that the Federal Reserve will be acting soon to counteract one major economic threat: the weak dollar, as Chairman Bernanke cited the weak dollar as a major culprit in pushing up consumer prices. That's reassuring, as the Fed needs to reassert itself as an inflation fighter. As discussed in this column in the last issue of the Floral Trend Tracker, a few months ago the Fed was cutting interest rates to help cushion the economy from the fallout from the credit crisis. But those low rates were causing the foreign-exchange value of the dollar to slide. Now, the Fed has signaled no more rate cuts for a while, as it waits both for its previous rate cuts to have their peak impact and for the tax rebates to course their way through the economy.

No short-term solution. A shift to inflation-fighting policies probably won't have much impact in the short run for consumers and small-business owners, whose day-to-day buying and selling decisions will ultimately determine whether the rest of 2008 is able to improve on the low growth of its opening months.

Part of the answer will lie with oil prices and our adjustment to gasoline at $4 a gallon (as we write this. We hope that price doesn't sound like a deal as you read this). On the other hand, a recommitment from the Federal Reserve to maintaining price stability could quickly boost financial markets. They would need to realize that the Fed is more satisfied with a smoothly functioning credit market and that its concentration is back on suppressing inflation.

On net, we expect to see sluggish growth in the rest of 2008 and well into 2009. Most of the current problems holding down the economy - residential real estate, high (and rising) energy costs, and the credit crunch - will take time to reverse. Meanwhile, the recessionary feeling of today will probably linger in many big-ticket consumer industries.

I particularly appreciate Bob's comment regarding the resiliency of the economy and despite how things look, we have managed some growth overall. As I have said before, the impacts of this economic contraction are not universal and are quite worse in some areas of the country than others. The next several months leading into the fall will be interesting to track as far as economic indicators are concerned.

Stay tuned for more commentary about fall marketing strategies in light of these economic trends.

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Better benchmark for gas prices

Warren Meyer added a twist to Mark Perry's analysis of what 1,000 gallons of gas costs as a percent of per-capita disposable income (click on graph for larger image). The key for households, Warren maintains, is not how much it costs to buy 1000 gallons, but how much it costs to buy the gas required to drive their typical annual miles. Using 15,000 as an average driving miles per year per person, he gets the result above. So, while I too think paying $4 for gas is not my favorite way to dispose of my income, in terms of average household pain created, gas prices are quite far from their historic highs.

The effect of the media on gas prices

Harvard economist Martin Feldstein explained in today's WSJ (click here) that the relationship between future and current spot oil prices (spot price + carrying cost = futures price) implies that an expected change in the future price of oil will have an immediate impact on the current spot price of oil.

When oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply.

University of Michigan economist Mark Perry also notes that the spot price of oil will fluctuate even without speculators playing a role. After all, speculators have no control over the global supply of, or global demand for, physical barrels of oil. Speculators respond to market conditions, they don't create market conditions.

Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today's price of oil with policies that will have their physical impact on oil demand or supply only in the future.

Increasing the expected future supply of oil would reduce today's price. Any steps that can be taken now to increase the future supply of oil, or reduce the future demand for oil in the U.S. or elsewhere, can therefore lead both to lower prices and increased consumption today.