Ag sectors smart from housing slowdown

The once-thriving home construction sector has taken a major downturn over the past several months as housing starts hit a half-century low. Houses currently under construction are being offered at drastically reduced prices, but there are very few buyers.

Like toppling dominoes, collapse of the state's real estate sector is pulling down a long list of related business sectors. While overall prices for many farm products were strong in 2008, timber, nursery and landscape products have all been hard-hit by the real estate collapse—and experts say the worst may not be over.

Consumer prices fell at a record rate in November and housing starts plummeted to a level not seen in nearly half a century. Analysts say residential building permits as of November were down by nearly 50 percent from the previous year.

"You may ask, 'What isn't down?'" said Cynthia Kroll, senior regional economist for the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley. "Well, nonresidential alterations and additions are holding steady—up about 2 percent."

Interest in wholesale timber supplies, however, has dried up with the slowdown in home construction. Redding-based timberland manager Len Lindstrand Jr., who is chairman of California Farm Bureau Federation's Forestry Advisory Committee, said the economic downturn affects production of a variety of wood products, such as framing lumber, but also moldings, doors and window frames.

"My crystal ball doesn't work any better than anyone else's, but most of the people I know don't see a very bright year for 2009," he said. "We've got our fingers crossed for 2010. We're looking at sales lows that we haven't seen in nearly 30 years. The last time it was this low the decline lasted for about two and a half years."

He said timber companies are tightening their belts because they still have taxes and land management expenses. But for some, cinching hasn't helped.

Between January 2000 and April 2008, 24 mills have closed, leaving 38 currently in operation, according to the California Forestry Association. The forest products sector accounts for one in 10 jobs in 11 of the state's northern counties.

Unemployment is up to 8.2 percent statewide and the gap between the U.S. unemployment rate and California's is widening. Many Central Valley counties are at more than 9 or 10 percent unemployment. Kroll predicts these numbers are likely to go even higher in coming weeks.

Mendocino County logger George Hollister said, "There's a big lumber inventory right now. We started to see a slowdown in 2006 with the price of Douglas fir dropping, followed by the price of redwood lumber."

Redwood prices are still relatively high, he said, but last fall the mills in Mendocino County announced they wouldn't take any more logs.

"There's a lot of uncertainty now about whether we'll be able to sell any logs at all this year—redwood or fir," said Hollister, who is a Mendocino County Farm Bureau director. "There's a lot of uncertainty. One of our local mills went into bankruptcy in 2008 and they'd been in business since the 1940s."

In neighboring Trinity County, "the largest impact of the slowdown in housing construction is that the mills aren't buying the wood and if they're not buying the wood, then our employment rate starts rising," said Ron Michener, a timber producer and president of the Trinity County Farm Bureau.

"Right now the mills are putting things on hold," Michener said. "Lumber is backing up and the price is down. It's going to be a year or two before the market comes back."

The gloomy real estate picture has commercial nursery operators holding their collective breath. The sector supplies homeowners and developers with bedding plants and landscaping material.

Cash-strapped homeowners facing foreclosure don't spend money on gardening materials. The abrupt halt to building and development leaves landscape plants—trees and shrubs—backing up in nurseries.

"I wish I could see clearly into the future, but in the past landscaping has been a lagging indicator and follows what happens in the larger economy," said CFBF Director Norm Groot, who is vice president for Azusa-based Monrovia Nursery, one of the world's largest producers of container-grown plants.

"Typically we see that as people cut back and spend more time at home, they look at their yards and decide they need to do something to make them more presentable," he said. "This time around, however, we're seeing that the recession is so bad people are cutting back in all areas."

He said now Monrovia is working on crops for 2010 and 2011 and admits planning that far ahead is taking a chance. If the economy recovers in 2010, as some are predicting, then it might pay off.

He said throughout the fall of 2008 there was some price cutting going on, but the cuts weren't "catastrophic." Landscape and garden markets are regional and sales depend on the strength of local economies, which sometimes can be hard to anticipate.

In California people garden and do commercial landscaping throughout the year, he pointed out. Those year-round markets show more resistance to recession, Groot said, compared with markets that have a short season like in the East.

"Our greatest concern," Groot said, "is that the consumer is so shaky that they can't spend anything."

It has been very bad for large ornamental growers and it looks like it will get worse, in the view of nursery operator Mike Vukelich, an executive with Colorspot Nurseries, and also a CFBF director.

"We sell to Lowe's and Home Depot and their overall business is down," he said. "Some locations, however, are reporting nursery departments are doing better than other areas of their stores.

"In times like this nurseries need to advertise," Vukelich said. "People are lined up to buy Starbucks coffee, but jumbo packs of beautiful bedding flowers only cost $1.95. Beautiful flowers for less than a cup of coffee!

"But here's the biggest thing I've seen—larger houses on smaller lots have reduced space for gardens. People also are spending a lot more time indoors with electronic entertainment. Gardening just isn't as popular as it used to be. If you add an economic downturn, the nursery business really gets hurt," Vukelich said.

He said the housing slump has hurt the nursery sector, but stressed that the real estate market always goes up and down and nurseries are prepared for the cycles; it's just that the current recession's dip makes for one heck of a roller-coaster ride.

Kirk Lesh, real estate economist for the UC Santa Barbara Economic Forecast Project, said for those farmers who've been looking at their agricultural holdings as a retirement fund, that nest egg has gotten a lot smaller.

"But if a farmer is looking at a 10-year timeline to retirement, then the current downturn may not affect the investment all that much," Lesh said. "The wild card in this is the availability of water. It impacts farming, but it also impacts the ability to develop new housing."

University of California Los Angeles' highly regarded Anderson Forecast said in its most recent outlook report that California will join the nation in a "nasty recession," though researchers predict its impact will be felt differently by regions across the state.

Jerry Nickelsburg, UCLA Anderson Forecast senior economist, said the outlook for California shows weakness in the first three quarters of 2009, with the "glimmer" of a better fourth quarter. Hope remains that recovery in the rest of the nation and in Asia will stimulate demand for California goods and services.

The Anderson Forecast puts the unemployment rate as high as 8.7 percent this year, with a prediction that it will remain at that level through 2010.

"By and large, agriculture hasn't seen the kind of labor shortages we feared," said Bryan Little, California Farm Bureau Federation director of labor affairs. "Part of the reason is the collapse of residential housing construction. Keep in mind, however, that a lot of light commercial construction is still going on."

Little said there have been reports of workers showing up to help harvest crops in the kinds of trucks used in the building trades, with plumbing and electrical gear still in the back.

But with growers reducing operations due to a lack of irrigation water and shrinking markets, both domestic and international, some fear the unemployment rate in San Joaquin Valley farm towns will top 50 percent in coming months.

Foreclosure tracking services show that California cities now fill out eight of the nation's top 10 foreclosure markets, including Stockton, ranked No. 1, followed by Merced, Modesto, the Vallejo-Fairfield area and the Riverside-San Bernardino metro area. Also making the top 10 were Bakersfield, Salinas-Monterey and Sacramento.

(Kate Campbell is an assistant editor for Ag Alert. She may be contacted at kcampbell@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.