November, 2008

Fruits of Thought

Produce Is The Silver Lining

What was the hot topic of discussion at the Produce Marketing Association convention in Orlando? Was it food safety? Traceability? Food security? Sustainability? The election? Actually, it was the state of the 401-K plans of industry members. How could it be otherwise?

It is not a matter of being a wild speculator. If your money was in an index fund of U.S. stocks, you are probably down around 36 percent this year. Which — be thankful for small things — is at least better than the poor folks in Iceland, who are down about 90 percent for the year.

And the booming economies of the BRIC (Brazil, Russia, India and China)? Well, those markets are down over 40 percent in Brazil, almost 65 percent in Russia, just shy of 50 percent in India and just short of 65 percent in China. The loss of wealth has been dazzling.

A hit to a stock-market portfolio is a punch to the gut, because your deflated portfolio doesn’t mean the prices of houses, cars, jewelry, etc., have dropped as well. It really and truly means you are poorer, and that explains why October sales at upscale retailer Nieman Marcus were down an eye-opening 27.9 percent over the past year’s sales level.

This downturn has characteristics that will be felt differently than those of other recent recessions. First, recent recessions were focused on blue-collar jobs and, specifically, in the rust belt. This downturn is hitting highly paid white-collar workers all around the world. Second, recent recessions impacted specific asset classes. This time we are seeing downturns in the value of virtually all assets, which means the reverse “wealth effect” is kicking in as people feel poorer and thus rein in spending. Third, this downturn has had so much the air of crisis, with emergency federal bailouts and foreign governments needing loans, that it somehow seems unseemly to spend money. Ostentation is positively out of fashion and this leads to more conservative spending.

Our new president will doubtless try to right the ship of state but even if his prescriptions are correct, his freedom to act is constrained by the financial situation. Having just spent a trillion dollars bailing everyone out, there just isn’t the money for many new programs.

All of which means it is a great time to be in the produce industry!

First, we are selling a non-discretionary product. Oh sure, people can choose to eat in rather than go out; they can elect to eat potatoes rather than raspberries; they can even buy canned or frozen rather than fresh — nobody is completely insulated — but, by and large, people do have to eat and they will eat lots of fresh produce. As long as people do that, we have the path clear to sustain our livelihood. That is not as obviously true of those selling $5,000 pocketbooks at Nieman Marcus.

Second, in the season of the credit crunch, we can give thanks to Ronald Reagan and his Deputy Secretary of Agriculture John Norton for the PACA Trust. John realized that a provision in the Cattleman and Stockyards Act could be adopted and broadened for fresh produce, and it has turned supermarkets almost into Triple-A credits for the produce industry.

The biggest risk in a financial crisis is that the customers won’t pay their bills. Though there is no perfect defense against this problem and due caution is always advisable when extending credit, the backstop of the PACA Trust makes the produce industry exceptionally strong in the current environment.

Third, man does not live by bread alone. In a recession, people don’t usually splurge on the big purchases. They hold off on the beach house, the lavish vacation, the new car. Still, they don’t turn into monks, and all this restraint can actually serve to increase their income available for less dramatic purchases.

Combine more home entertainment with a minor sense of deprivation from not making big-ticket purchases and you have a hunger for small indulgences. Maybe it is buying some papaya or mango, since you aren’t going to that warm-weather vacation spot. Or maybe it is a few perfect raspberries to drop in champagne when friends are coming over. Perhaps a few colored peppers to add zip to life. If life becomes drab, fruits and vegetables are the kind of inexpensive pleasures that can delight without being extravagant.

And what about those 401-K statements? It is a bit counterintuitive, but because the nature of produce means most of the industry can continue to work and save through the downturn, most will benefit from lower prices for securities. It is a simple matter really; just ask if you are going to be a net buyer or seller of securities over the next few years. If you will be buying because you continue to invest for your retirement, the lower prices of today will allow you to buy more shares. So it is much in your interest to have lower stock prices now while you are buying.

So the non-discretionary nature of the produce industry combines with its solid credit situation and small-indulgence appeal to create a solid opportunity to work, earn and save during this downturn in the economy. This ability to make it through a downturn gives those who work in the industry a fantastic opportunity to buy distressed assets others have to dump because their industries are not as stable.

It is a dual win and as we approach the holiday season, it gives us all something to be thankful for.  pb