Emerging from the Global Financial Crisis

sw_giant_oct2011The turf and forage grass seed industry is small when compared to the major grain and animal agriculture sectors. However, it is nonetheless important to a slice of the agriculture industry. The epicenter of this industry is the Willamette Valley in Oregon. It is in this valley, measuring about 120 miles long and 30-50 miles wide, that just over 50 percent of the world’s commercially traded turf and forage grass seed is grown.

I chose the word “epicenter” for its reference to earth-shaking events. The Global Financial Crisis of 2008 sent shock waves through the industry, causing a ripple of financial pain and uncertainty for turf and forage grass seed companies throughout the world. But it was in the Willamette Valley where the most significant economic damage occurred.

While the sudden drop in the value of securities (mortgage-backed securities and collateralized debt obligations) tied to real estate, especially home values, is usually seen as the trigger for the recent financial crisis, the events of September 2008 set off a drop in inventory and crop values that was greater in percentage than the drop in real estate values. Worldwide production and consumption were at their highest levels in 2006-2007 and seed prices were escalating. However, in just one week in September 2008, over $144 billion was withdrawn from money market mutual funds in the United States, 20 times the normal rate in a period of uncertainty.

The impact on seed orders and shipments was immediate. Many of my colleagues in the business saw sales and contracts for future delivery drop 35-50 percent. Inventory values also dropped immediately, and the value of future contracts came into question. Estimates of the drop in inventory values for Willamette Valley growers, producers and seed companies in 2008-2009 are $175-$200 million dollars.

After three long and painful years, we are emerging from the GFC. We must employ the best new strategies we can implement in order to avoid a repeat of our recent painful and costly experience. I am reminded of the wise counsel of an earlier writer of this column. In “Surviving the Next 25 Years”—printed in the December 2010 issue of Seed World—Rurik Halaby of AgriCapital Corporation writes, “The way to survive is a mindset: be adaptable. Anticipate and welcome change. And the best insurance? Be adequately capitalized, and your banker will call you up and invite you to lunch!”

In the turf and forage grass seed business, we have often not paid much attention to being adequately capitalized. Perhaps our biggest error is in failing to account for the risks inherent in multi-year production contracts. During the past three years, worldwide production has dropped dramatically in response to the lack of demand and the emptying of the supply chain.

However, as we emerge from the GFC, it is important that we remember how painful it is when assets such as seed inventories and current production lose 30 percent, 50 percent or even 65 percent of their value. Such losses were typical during the 2008-2009 crop year. Remaining fiscally responsible and planning with realistic sales and profit goals in mind will be the mark of a forward-looking turf and forage seed business. Remaining well capitalized and taking measured and appropriate risks should lead to success.

When demand appears, we in the grass seed business are often too quick to respond by putting in production acres, hoping we can take advantage of that increasing demand. While hope is a good attitude to maintain, the creation of realistic growth plans with profitability in mind is a better goal. Perhaps I should call my banker and take him to lunch.

Mike Baker, General Manager, Pennington Seed, Inc. Oregon Division