by Timothee Sallin, Cherrylake Co-CEO
The availability of ornamental trees and nursery plants for landscape and retail markets in Texas and the Southeast United States will continue to be in short supply in 2021 and for the foreseeable future. There will likely be an acute shortage in the Spring of 2021 due to the sudden and unexpected reduction in supply and a likely increase in demand resulting from the Texas freeze. While the freeze is anticipated to have a significant impact on availability in the months ahead, the industry was already in a shortage situation prior to this event. Long-term economic fundamentals and demographic trends have been driving an increase in demand for ornamental trees and plants over the past decade. The global pandemic has led to a more recent surge in home gardening and landscaping, adding significant demand to the market. Meanwhile, nursery inventories have not kept up with these increases in demand due to various factors, including rising input costs, labor challenges, increased risk of natural disasters, insufficient new investment, and farm succession issues.
The Texas Freeze
The winter outbreak during Valentine’s Week 2021 brought not only snow, sleet, and freezing rain to Texas but also extreme cold temperatures lasting for several days. This was one of the most impactful winter events in recent history, bringing multi-day road closures, power outages, loss of heat, broken pipes, and other societal impacts for the region. While the damage is still being assessed, this will likely go down as the most costly weather disaster for the state of Texas in history, surpassing even Hurricane Harvey from 20171.
Temperatures in Dallas/Fort Worth reached minus 2 degrees Fahrenheit, the coldest recorded temperature for the area since December 1949.2
Texas is both a major producer and consumer of ornamental trees and plants. The impact of the freeze will likely be twofold, affecting both sides of the supply and demand equation. On one side, a spike in demand for landscape material is expected as property owners seek to replace a substantial amount of cold sensitive trees, palms, shrubs, and tropical materials which froze in the landscape. On the other side, nurseries and tree farms in Texas have likely lost a significant amount of inventory to the freeze, and they will need to rehabilitate cold damaged material prior to shipment, resulting in a lower supply of plant material available.
It is difficult to assess how these impacts will be felt, as well as how deep and long lasting they will be. Many of Texas’ tree farms are located in the Northeast region near Dallas, where freeze temperatures were particularly extreme. While it is almost certain cold sensitive tree varieties, such as Elaeocarpus, Podocarpus, and Ligustrums, will be severely impacted, it is less clear how cold tolerant species such as live oaks will fare in the coming weeks and months. Shrubs, palms, and tropical plants were likely the most affected items in the landscape, and early indications point to pervasive major losses throughout the landscape as a whole. Significant shipments of replacement material have already been shipped to Texas in the past few weeks.
The global pandemic has fundamentally altered our society and our economy. The impacts of the pandemic have varied by industry with certain sectors of the economy experiencing devastating losses, while other sectors have seen an increase in demand. The nursery industry has benefited from an increase in demand. Quarantines, shelter-in-place orders, and work-from-home routines have led to a dramatic increase in home gardening and home improvement investments. As a result of the pandemic, independent garden center sales, home-improvement store garden sales, and online plant sales surged in late Spring 2020. The term “Covid Gardener” was coined to describe the new wave of garden enthusiasts who have been driving demand for ornamental trees and plants.
In April 2020, Reuters published an article titled “Home gardening blooms around the world during coronavirus lockdowns”.3 In September 2020, the Financial Times published “How coronavirus changed gardening forever.”4 These articles, and others like them, capture the powerful trend connecting people to their yards and gardens. Associations linking mental wellbeing and immune system health with gardening is driving the demand trend. Combined with the simple fact families are spending more time at home, people are more interested and available to work in their gardens.
Whether or not this trend will be long lasting remains to be seen; however, it is clear that in the short and medium term, the additional spike in demand coming from this phenomenon will have an immediate and significant impact on the market for ornamental trees and plants. It is also vital to keep in mind that most nursery products take years to produce, and nurseries are unable to adjust to sudden changes in demand without significant lead time.
COVID-19 had a positive impact on demand; but on the other hand, the pandemic has negatively affected nursery cost structures, labor markets, and investment outlooks. In most states, nursery businesses were considered essential, managing to stay open throughout the pandemic. That being said, added safety and sanitation measures, in addition to disruptions to supply chains, have increased labor and input costs. Global uncertainty amid the pandemic has most likely adversely affected investment decisions and capital flows into the nursery industry, further slowing the growth of supply.
Long Term Fundamentals
The Texas freeze and the global pandemic were both unexpected and unforeseen shocks to supply and demand. These events have caused and will continue to cause significant impacts on availability and pricing of plant material this Spring and beyond. This comes at a time where the industry is already in a protracted shortage, reaching as far back as 2014. The Great Recession of 2007-2009 had a massive impact on nursery supply. The sudden collapse in demand resulting from the housing crash in 2007 led to an oversupply of nursery stock between 2007 and 2014. The oversupply caused a dramatic decline in nursery prices and grower profits, resulting in a significant number of nursery bankruptcies and closures. The industry never fully recovered. Today, total inventory and production acres may be as low as 50% of the 2008 peak.
The data on USDA insurance nursery liabilities is one of the few reliable indicators of total nursery inventory. The chart below shows USDA nursery liabilities for Florida farms. Total liabilities peaked at $1.25B in 2008 and stand at $640M in 2020.5 Assuming this is a fair representation of the overall change in nursery inventories, then approximately half of the total inventory exists today as in 2008.
Population and Housing Statistics
New housing starts are one of the most important indicators for nursery demand. After the 2007 crash, housing markets eventually recovered, and new housing starts in the Southeast have been steadily increasing since 2010. This growth in housing is fueled by low interest rates, millennial household formation, baby boomer retirement, and general population migration from other areas of the country into the Sun Belt states.
The Bureau of Economic and Business Research (BEBR) estimates the Florida population will reach 34 million by 2070, a growth rate of approximately 1,000 people per day.6
According to the US Census7 the states with the highest population growth in 2019 were:
Growth in population correlates to a growth in housing, which ultimately correlates to a growth in demand for ornamental trees and plants.
Housing starts for Florida in 2020 were 162K. This is the highest since 2006 and 8% higher than the 40-year historical average of 150K starts per year.8
Housing starts in Texas have been somewhat less volatile than in Florida, but the overall pattern since 2005 is similar. Texas housing starts reached 222K in 2020, the highest of any year in history.9
Not surprisingly, low 30-year fixed mortgage rates have helped fuel the growth of new housing in Florida, Texas, and other Sun Belt states. As of February 25th, 2021, average 30-year fixed mortgage rates were below 3%.10
30-Year Fixed Mortgage Rate Average in the United States
Unlike the housing bubble of 2004-2006, the growth in housing starts and permits is not causing a build of housing inventories. On the contrary, housing inventories are declining as sales of new homes are outpacing the construction of new homes. This is best captured in the total Months of Inventory Metric (MOI).
The MOI in Florida has been dropping consistently since 2012, despite very strong growth in housing starts. In December 2020, this ratio dropped below 2.0 for the first time, reaching 1.8 months.11 In Texas, the MOI has fallen to 1.7 months.12 An MOI of 6.5 to 5.5 months is considered a balanced housing market.
Forecasting Total Nursery Demand
These housing statistics are quite useful for gauging the overall demand for ornamental trees and plants. In a previous market update, published in 2015, we shared our methodology for correlating total nursery demand to the Florida housing starts. We estimate that $5,500 in total demand for nursery material is created for every housing start in the state of Florida. Using this correlation, we can forecast the total demand for nursery material to be around $858,000,000 per year.
The supply of nursery material can be measured in terms of total USDA insurance nursery liabilities. In 2020, total liabilities in Florida were $640,534,313. By modeling supply and demand in this way, we can gain a sense of how under-supplied, or “short”, the market is for ornamental trees and plants. The model is not perfect by any means, as the data we are using is not a complete and accurate representation of supply and demand. Nevertheless, this is the best model we have, and it has proven to be an accurate and reliable representation of market dynamics for the past decade.
According to our model, the shortage of ornamental tree and plant material will persist for the next several years, and the market will not reach equilibrium until 2025. This is based on the assumptions that Florida housing starts will level off around 156K starts per year, in addition to nursery inventories growing at an average annual rate of 6% per year.
Long Term Outlook for Nursery Supply
Favorable demand trends and the prolonged shortage of ornamental trees and plants would suggest that new investments in nursery and tree farm production would flow into the industry. This has not happened at the rate or scale needed to close the gap. There are several reasons for this lack of new investment. Nursery production is capital intensive. Large investments in land, irrigation, infrastructure, and inventory are required to get started. The long production cycle means investments will not begin to cash flow for many years. The risk of natural disaster is high, seeming to increase with time. The recent Texas freeze, the numerous hurricanes of the past five years, combined with the carnage of the Great Recession, have given investors plenty of reasons to avoid the nursery business.
Existing producers may also be limited in their ability and desire to expand. Input prices, including irrigation parts, containers, fertilizers, agri-chemicals, and labor, have been rising steadily; meanwhile, plant material prices have not kept pace with these increases, causing grower margins to decline.
Labor issues have become increasingly difficult for farmers to manage. There is an aging agricultural workforce with fewer options for farmers to hire legal workers. Increased immigration enforcement, rising minimum wages, affordable and agricultural workforce housing shortages, and a plethora of regulatory challenges relating to building a strong and stable agricultural workforce have created a significant obstacle to farm expansion and growth.
Declining profits, increased risk of natural disaster, and growing labor challenges are limiting the growth of nursery supply. Meanwhile, a number of factors are likely to reduce nursery supply in the coming years. Chief among these is the population and housing growth discussed above. Many productive farms are located near major metropolitan areas. As population and housing growth push the suburban sprawl outwards, there will be mounting pressure for farmers, as well as nurserymen and women, to sell their land to development.
Another factor is nursery succession. There is an increasing number of nurseries facing succession challenges as founders and owner-operators approach retirement age. Many of these owners are struggling to transition their business to the next generation. Not all children want to spend the rest of their lives on the farm. Inevitably, many owners will be looking to exit without a succession. If the nursery market remains undersupplied and land prices are high, a liquidation sale may be their best exit strategy.
Forecasting supply and demand for ornamental trees and plants is a messy business. The data we have to rely on leaves us wanting more. Predicting the impacts of never before seen events, such as the global pandemic and the Texas freeze, is fraught with ambiguity. Our understanding of the market is obviously imperfect; however, we can rely on our 40+ years experience of marketing ornamental trees and plants in Texas and the Southeast United States. We can also trust our quantitative models described in this article to make an informed assessment. Our assessment is that we are in the middle of a decade-long cycle of undersupply. This cycle is being accentuated by the combination of the Texas freeze and the global pandemic. We believe prices have been undervalued for the past year, and we are entering the Spring season with a historically low inventory relative to demand. We believe this was the case before any impacts resulting from the Texas freeze. We expect very strong demand this Spring, resulting from the combination of strong housing markets, robust garden center and retail sales, and an extraordinary demand resulting from the freeze. Purchasers should expect price increases ranging from 5-25% and significant shortages of material.