1. Risk Management for the Green Industry Dr. Robin G. Brumfield Rutgers Cooperative Extension Risk Management Workshop June 7, 2000

2. Distribution of Farms and Land in Farms By Region, 1998

3. Top 6 Commodity Groups in the US u Beef u Dairy u Corn u Soybeans u Broilers u Green Industry 11% of crop cash receipts for farm crops in 1998.

4. U.S. Floriculture u 23.5 million sq. ft. of construction in 1997 u $37.2 billion in green industry expenditures u 9.8% growth 1986 - 90 u 3.4% growth 1991 - 95

5. Top 10 States in Cash Receipts 1996% 1987% 1996% 1987% California20 California22 California20 California22 Florida11 Florida14 Florida11 Florida14 North Carolina 8 Texas 7 North Carolina 8 Texas 7 Texas 8 Pennsylvania 4 Texas 8 Pennsylvania 4 Ohio 5 New York 3 Ohio 5 New York 3 Oregon 5 Michigan 3 Oregon 5 Michigan 3 Michigan 4 Oregon 3 Michigan 4 Oregon 3 Pennsylvania 3 New Jersey 3 Pennsylvania 3 New Jersey 3 Oklahoma 3 North Carolina 3 Oklahoma 3 North Carolina 3 New York 2 Ohio 3 New York 2 Ohio 3 Source: Floriculture & Environmental Horticulture, Oct. 1997 Source: Floriculture & Environmental Horticulture, Oct. 1997

6. 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

7. U.S. Retail Expenditures ItemBillion $ Per Capita ItemBillion $ Per Capita Cut Flowers & Greens 6.5$26.80 Cut Flowers & Greens 6.5$26.80 Flowering Potted Plants 3.4$12.80 Flowering Potted Plants 3.4$12.80 Foliage Plants 2.9$10.90 Foliage Plants 2.9$10.90 Bedding Plants 2.6$ 9.90 Bedding Plants 2.6$ 9.90 Env. Hort. 21.2$79.90 Env. Hort. 21.2$79.90 Total 37.2 $140 Total 37.2 $140 Source: Floriculture & Environmental Horticulture, Oct. 1997. Source: Floriculture & Environmental Horticulture, Oct. 1997.

8. Percent of Households Buying Plants Plant% Annuals25% Perennials20% Rose Plants13% Flowering Trees9% Source: National Gardening Survey, 1994-95

9. 43 43 out of every out of every 100 100 households households do not buy floricultural products! do not buy floricultural products!

10. Top 10 Crops CropShare of Value Roses9% Mums (cuts & pots)8% Poinsettias7% Geraniums6% Ferns5% Carnations3% Impatiens3% Palms3% Lilies (cuts & pots)2% Petunias2% Source: 1987 Census of Ag.

11. Only 6 Only 6 of every 100 of every 100 households households buy poinsettias, the number one potted crop! buy poinsettias, the number one potted crop!

12. Percent of Households Buying Lawn & Garden Products Vendor% Vendor% Garden Center51% Garden Center51% Mass Merchandiser36% Mass Merchandiser36% Home Center22% Home Center22% Supermarket17% Supermarket17% Source: National Gardening Survey, 1994-95. Source: National Gardening Survey, 1994-95.

13. Factors Impacting Demand u Income$35,000 vs. $30,000 u Education - 54% have one year of college u Age - 44% are over 18 u Housing Starts Source: Gineo and Omano, 1990, Waldrop, 1993. Source: Gineo and Omano, 1990, Waldrop, 1993.

14. Factors Influencing Outlet Selection u Plant quality u Selection u Location u Price u Professional Assistance Source: Padgett et al., 1995. Source: Padgett et al., 1995.

15. Factors That Impact Determination of Price

16. Factors Limiting Overall Expansion of Nursery Business

17. Factors Limiting Geographic Expansion of Nursery Business

18. Limits to Expansion: Retail Firms u Market Demand u Available Capital u Labor u Competition Source: Dole and Schnelle, 1993. Source: Dole and Schnelle, 1993.

19. Value of an Acre of Production Crop$ Crop$ Corn$350-$400 Corn$350-$400 Vegetables$4,000-$8,000 Vegetables$4,000-$8,000 Fruit$8,000-12,000 Fruit$8,000-12,000 Greenhouse flowers $350,000 Greenhouse flowers $350,000

20. How Does the US Stack Up? RankShare RankShare Size of Consumer Market131% Size of Consumer Market131% Value of Production 314% Value of Production 314% Area in Production3 9% Area in Production3 9% Importer 129% Importer 129% Exporter1 29% Exporter1 29% Economic Output122% Economic Output122% Source: Floriculture & Environmental Horticulture, Oct. 1997 Source: Floriculture & Environmental Horticulture, Oct. 1997

21. US Weaknesses u Not having a good handle on the financial side of the business u Not thinking internationally

22. US Strengths u Next to the largest consumer market u Financially conservative u Operate under a wide range of conditions u Optimistic

23. Marketing/Advertising/Media Trends u Market segmentation u Superstores and warehouse stores u Consolidation

24. Marketing/Advertising/Media Impact on the Industry u Low prices from large producers u Decline of large, homogeneous, middle class u Not sure who the target market is u Many specialized production niches

25. Marketing/Advertising/Media Solutions u Promote quality, not price u Promote service u Try new ideas as well as proven winners u Use cable TV to target local customers u Use 1-900 numbers u Develop good signs u Get involved in the community

26. Social/Lifestyle/Consumer Trends u Consumers are more sophisticated u Growth of 2-income families u Consumers want “shopping experience” or “event marketing”

27. Social/Lifestyle/Consumer Impact on the Industry u Can’t shop 9-5 u Limited time to work on landscapes u Limited time to shop

28. Social/Lifestyle/Consumer Solutions u Create “shopping experiences” and “event marketing” u Market After Hours u Stand behind the product u Give your 800 number to customers u Sell processed and lightly processed items to save consumers time

29. Business/Management Trends u Global marketplace u Switch from producer-driven to consumer- driven economy u Information age

30. Business/Management Impact on the Industry u Competition from low cost countries u Age of surplus rather than shortage u Must offer quality prices to attract customers u Producers are farmers who have difficulty thinking of marketing from the consumer’s perspective

31. Business/Management Solutions u Become computer literate and train employees on the computer u Learn to surf the internet u Consider a webpage u Make electronic sales tax payment u Create value added products, don’t compete on price u Do things in slow months u Make your farm a shopping destination

32. Political/Legislative/Regulatory Trends u Government regulation u Deer overpopulation u Increasing environmental/health concerns

33. Political/Legislative/Regulatory Impact on the Industry u Deer damage u Consumers reluctant to purchase plants that deer may eat u Increasing demand for native, organic, and environmentally friendly plants u Loss of minor use pesticides u Recycling u Composting landscape wastes

34. Political/Legislative/Regulatory Solutions u Deer fencing, human hair, relocate deer, etc. u Sell and educate about biological pesticides u Start recycle programs u Chip trees and give away compost u Recycle water u Proactively present producer concerns to regulators u Educate on recycling, environmentally friendly landscapes, etc. u Be environmentally aware and responsible

35. Workforce/Workplace Trends u Low unemployment u Declining work ethic. How do farmers find, train and retrain motivated employees with skills they need at affordable wages? u Improved communications technology

36. Workforce/Workplace Impact on the Greenhouse Industry u Difficult to find part-time work u Wages are increasing u Difficult to find good help

37. Workforce/Workplace Solutions u Set up a training program for employees u Automate u Make daily lists of tasks u Make shopping more self-service

38. Financial Management is Critical to Success u Budgeting u Managing Cash Flow u Controlling Credit u Pricing u Obtaining Capital u Profitability u Planning

39. Investment Interest Labors & Management Salary Risk Profit Producers have returns to:

40. Income Statement Is Critical For Measuring u Profitability – Return on assets – Return on equity u Financial efficiency – Ratio of operating expenses to value of production – Ratio of debt service to value of production

41. Income Statement Total Revenue u Value of plants sold $1,290,181 u Change in inventory 40,125 u Increase in supplies 897 u 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

42. Net Profit Margin Focus on Factors Affecting the Income Statement

43. Margin Management from Income Statement

44. Interpretation Net profit margin = profit per dollar of sales after paying the owner’s salary and accounting for opportunity cost of capital invested.

45. Common Problems With Profit Margin u Wrong pricing system u Prices have not been increased as costs have increased u Costs are too high relative to size of business u Not enough sales for the resources allocated u High overhead costs u Wasteful spending on inputs u Poor production

46. If Costs Are Too High: u Are we over-mechanized? u Is labor being used efficiently? u Do we have too much labor? u Do we have the right type of labor? u Is there too much labor in slack periods? u Is there a labor shortage in peak periods?

47. If Costs Are Too High: u What Costs Are The Highest? u Are These Controllable? u Are The Costs Necessary? u Can The Same Function Be Done A Better Way? u Would mechanization reduce costs?

48. Every Dollar Saved By Cost Control Equals A Dollar Of Profit!

49. Balance Sheet Or Net Worth Statement Is A Financial Snapshot Of Business On A Specific Date Shows: u Assets- Valuables The Business Owns u Liabilities- Claims Of Outsiders u Net Worth- Claims Of Owners

50. Balance Sheet Segregates, Assets and Debts Into: u Current u Non-Current

51. Current Assets Will Become Cash Within One Year u Cash u Inventory u Accounts Receivable u Marketable Securities u Prepaid Expenses

52. Non-Current Assets u Vehicles u Equipment u Securities u Buildings u Land

53. Assets Current Assets u Cash on hand $35,502 u Accts. Receivable202,085 u Plant Inventory818,389 u Supply Inventory 15,004 Total Current $1,070,980 Long-term Assets u Machinery/Equipment $214,885 u Bldgs./Fixtures430,107 u Land176,754 u Less depreciation (357,423) Total Long-term $464,323 _________ _________ Total Assets $1,535,302

54. Current Liabilities Are Payable Within One Year u Notes Payable u Accounts Payable u Rent u Taxes u Interest u Portion Of Intermediate & Long Term Debt Due Within 12 Months u Loans Against Cash Value Of Life Insurance

55. Non-Current Liabilities Term Loans u Mortgages On Building u Mortgages On Land u Less Principal Due In 12 Months

56. Balance Sheet Is Critical For Measuring: u Liquidity u Solvency

57. Liabilities Current Liabilities u Accts. Payable$30,000 u Short-term notes 28,326 u Taxes 11,080 Total Current $69,406 Long-term Liabilities u Mortgages $120,000 u Long-term notes146,000 Total Long-term $266,920 ______ ______ Total Liabilities 336,376 Net Worth $ 1,198,926 ________ ________ Total Liabilities and Net Worth $ 1,535,302

58. Asset Management Focuses on the asset side of the Balance Sheet.

59. Asset Turnover Ratio How Well Do I Manage My Assets?

60. Interpretation Asset turnover = income generated per dollar of assets

61. Common Problems With Asset Turnover Ratio: u Too much equipment for the sales volume u Wrong type of equipment u Low prices u Poor production

62. Return on Assets How Well Do I Manage the Farm? How Well Do I Invest My Money?

63. Rate of return of firm assets measures profit generated by firm assets. Measures managerial ability without regard to how the firm is financed. Interpretation Rate of return of firm assets measures profit generated by firm assets. Measures managerial ability without regard to how the firm is financed.

64. Common Problems With Return On Assets u Low sales u Low prices u Poor production u Too much equipment relative to size of firm u Too few enterprises relative to size of firm u Wasteful spending for inputs u High overhead costs

65. Leverage Situation How Much of the Business Do I Own?

66. BASE MODEL

67. Interpretation u Return on equity = how much return the owner’s money is generating in the business. u Highly leveraged firms are vulnerable to rapid losses in net worth or rapid gains if successful.

68. Common Problems With Return On Equity u Return on assets is less than the cost cost of capital u Too much equipment for the size of the firm u Too few enterprises for the size of the firm u Wasteful spending for inputs u High overhead costs u Low prices u Poor production

69. Cut Overhead Expense as a Percent of Sales by 3 Percent

70. Increase Gross Margin by 2 Percent

71. Increase Inventory Turns By 1

72. Reduce Receivables to 30 Days

73. Combined Effects

74. Conclusions u Market is now consumer driven rather than production driven u Producers can generally handle production, but are less confident about selling at a reasonable price u Producers are looking for help in marketing, labor management and business management