Outlook 2017: Floral supply and demand in a global market
The only constant is change. The flower business is not an exception. Indeed, it is the very definition of fluidity and adaptation. The constant struggle to find the appropriate balance of supply and demand in a global market, combined with the rise and fall of costs that are influenced by an unimaginably large number of direct and indirect factors makes for this dynamic beast that we call the flower industry.
On the transportation side, airlines and truckers are reacting to changes in their environments and are pushing prices higher.
The airlines are actively moving equipment around the world in search of higher yields for each kilo flown. In the South American flower producing markets, Quito, Ecuador, has been adversely affected the most. Trans Caribbean Airlines recently ceased operations in this market, while LAN has decreased its flights by roughly 25 percent. This decrease in airline capacity comes at a time when the farms, due to declining markets in Russia and Europe, have been pushing ever-greater volume into the U.S. market; the end result is delays in shipments and increasing rates. Similar dynamics are playing out in Colombia in Medellin, while Bogota appears to be in balance for the moment.
Trucking companies are facing a drastic change that will be put into effect in December of 2017. The mandate for all trucks to use electronic logs will make it impossible for truckers to maintain two separate logbooks. Though some companies do not permit this practice, many independents and smaller companies do, covering more miles to deliver more product, more quickly. The obvious result of this change is that some carriers will either cease operations, or increase rates to compensate for the increased costs. Customers of the trucking companies will need to accept longer transit times and higher costs.
In the production sector, each growing region is facing challenges, sometimes the same problems from market to market, often completely different. Ecuadorian growers face the highest production and freight costs of the high altitude tropic producers due to a high minimum wage, little inbound freight that results in high outbound freight, and import duties of 6.8 percent on roses shipped to the USA.
Further exacerbating these challenges was the collapse of the Russian market that at one point made up as much as 40 percent of the sales of Ecuadorian roses. A recently passed free trade agreement between Ecuador and the European Union, coupled with increased shipments to China, could help the growers move their flowers elsewhere and lessen the over supply in the USA, but the strong dollar is proving to be an obstacle.
Ecuador will have a presidential election in 2017, and Rafael Correa will not be eligible to run. A turn towards a more pro-business president could be a boost to the floral sector, while the election of a Correa ally could further exacerbate the tough economic conditions in Ecuador.
Colombia is enjoying a period of weakness in the peso relative to the U.S. dollar, giving flower growers greater flexibility to compete on price. This devaluation however has reduced the amount of imports into Colombia from the USA, which, like Ecuador, has resulted in higher freight rates; I expect this situation to continue to play out in 2017. Another major challenge facing Colombian flower producers is the availability of labor, which has gotten tight with the growing Colombian economy attracting workers to higher paying jobs in factories and construction. Add in the newly mandated 48-hour work week and one can see that Colombian flower farmers will be looking to implement labor-saving measures in 2017 and beyond.
Ethiopia has become a player in the U.S. market over the last few years thanks to generous government support for the floriculture sector, as well as subsidized freight into the USA. This progress appears to be stalling out for the moment, as dissatisfaction with the government’s favorable policy towards certain ethnic groups, as well as certain investors, has led to sometimes-violent demonstrations, including the destruction of some flower farms. The Ethiopian government has declared a state of emergency and has arrested thousands of demonstrators. We will see if this situation calms down in 2017 or whether the situation becomes more difficult for all involved.
Kenya is another recent entry into the U.S. market. Located right on the equator, and blessed with high elevation, Kenya is well-situated for growing quality flowers. Readily available cheap labor is another advantage. However, a recent retroactive 25 percent wage increase has been a shock to Kenyan growers. Also, due to the lack of direct flights from Kenya to the U.S., transit times are long and freight is expensive. Kenya will eventually become a player in the USA, but I don’t think 2017 will see a marked increase in their presence here.
California flower production is facing one of the more profinteresting threats in its history. With the recently passed voter initiative legalizing marijuana, some flower growers are looking into converting production space to marijuana cultivation. We could see significant decreases in the production of gerbera daisies and lilies in 2017 and accelerating in 2018. Prices of both of these staples could rise.
The forecast for the consumption of flowers appears to be good for 2017 and beyond. Consumer demand for, and satisfaction with, flowers is high. Supermarkets continue to innovate and provide high value, while event planners are becoming a stronger presence in the market.
The retail florists and wholesalers that have survived the Great Recession are stronger than before, thanks to the implementation of technology such as e-commerce and, in many cases, the consolidation of regional competitors into a few strong players.
Cooperation among industry associations to promote floral holidays through such initiatives as Women’s Day, Memorial Day Flowers and Petal It Forward is a new and welcome dynamic, as most industry participants see the benefits of working together to increase the overall market as opposed to focusing on parochial interests. This cooperation will likely accelerate in 2017.
Frank Biddle is an owner at FBI Flowers & Sun Vista Farms in Vista, CA, and a partner in Tradewinds International in Boulder, CO. He can be contacted at frank@FBIflowers.com.