It’s a Gas, Gas, Gas

Vic Turkot

Tim Powell smiles these days when the fuel delivery truck leaves his yard. The thousand gallons of diesel that was just pumped into his tank cost him $1,820. No small amount by any stretch of the imagination, but … it was $1,040 less than he paid for the same amount this time last year when diesel was $2.86 a gallon.

Considering that the Mickleton, New Jersey, grower goes through about 5,000 gal. of diesel a year, he’s looking at $5,200 a year in fuel savings if gas prices stay low. It could be the easiest $5,000 he’s ever realized. Not that it’s going into his pocket.

“The help all want raises, the workers comp keeps rising, rental trucks are more expensive and insurance costs are not going down either. I figure the savings from fuel offsets the other expenses of deliveries,” says Tim.

How about savings on heating his 50,000 sq. ft. of greenhouses? Not so much of an immediate impact.

“I buy my natural gas from Direct Energy and lock in for three years and I am in the middle of the contract. My current deal is $11.58 a dekatherm and I’m very comfortable with that,” he says.

With that contract, Tim saw a savings of over $6,000 from 2014 to 2015 for heating his houses. Mostly due to milder weather in 2015.

Bill Swanekamp of Kube-Pak in Allentown, New Jersey, takes the same strategy for heating his 200,000 sq. ft. Bill heats his houses with natural gas, using oil only as a backup.

“Oil costs almost three times as much as gas,” he explains. Bill contracts for his natural gas in advance also. “We do two-year contracts right now,” he says. “I don’t go any longer than that because I think the prices will stay low for quite a while.”

Bill is currently paying $5.50 a dekatherm delivered. He can figure out his overhead a lot closer, knowing approximately what his heating bill will be—weather contingent, of course.

As far as fuel for his trucks, Bill has a storage capacity of 16,000 gal. at his yard. At the peak of the season, Kube-Pak puts twenty-two 26-ft. straight trucks and 12 trailers on the road. Over the course of the year, Bill will buy around 50,000 gal. of diesel. His last shipment of fuel cost him $1.75 a gallon—roughly $1 a gallon less than last year. Do the math and it adds up to $50,000. But like a lot of other growers, the savings on fuel gets eaten up by other costs.

“Truck rentals have been climbing steady at 4% a year for the last few seasons,” Bill mentions. “Tolls, insurance and the cost of drivers go up every year, too. We find we have to pay more to get the drivers we need, when we need them. We are competing with other businesses, not just nurseries, to get good drivers.”

Norman White of White’s Nurseries in Chesapeake, Virginia, has 820,000 sq. ft. under glass to heat. Norman takes a little different approach in purchasing his fuel. He currently is not under contract for a supply of natural gas; he feels comfortable buying as he goes.

“The current price is low and our supplier works with us, so we thought it best not to sign a contract and go with the flow,” he explains. Norman also saw savings in heating his greenhouses in 2015 as compared to the previous year, more due to the mild weather that many growers enjoyed, than to lower natural gas prices.

As far as deliveries go, Norman says he buys most of his fuel on the road. He delivers as far west as Chicago and as far north as the Boston area. Despite the lower fuel costs he finds on the road, his overall delivery expenses are costing him more this year.

“I figure transportation adds up to about 10% of our overhead,” he states. “The savings on fuel is nice, but it’s not enough to cover for everything else going up.”

Like the other growers mentioned, he cites the rising costs of truck rentals, drivers, insurance and the like. “We try to run our own trucks,” he says, “Because contracted trucks cost you a fortune. We are in the process of hiring drivers right now and it’s tricky finding all the part-time help you need.”

Fuel by the numbers
A quick look at the financial pages shows how the price of a barrel of oil has dropped dramatically over the last year. The average price of gasoline is hovering around $0.30 a gallon lower nationally than 2015. The first three months of 2016 showed the cheapest gas prices in the last 12 years according to the AAA Texas Fuel Guy. The average American driver saved $565 in gas in 2015.

The U.S. regular gasoline retail price, which averaged $2.43/gal. in 2015, is projected to average $1.89/gal. in 2016. Prices are forecast to average $1.97/gal. in 2017 according to U.S. Energy Information Administration (EIA).

The lowest average gas price in the continental U.S. this year is in Oklahoma at $1.79 per gallon. The highest is in California at $2.79 a gallon according to online source Gas Buddy. If you’re up north in Canada, prices are roughly 30% higher than on American soil.

Does cheap at the pump mean cheap in the greenhouse?
How long are growers going to be able to enjoy lower gas prices? According to EIA, “large global inventory builds are expected to continue in 2016, with oil prices expected to remain near current levels. Global inventories are expected to grow in the year 2017 as well and maybe balance out by the fourth quarter of 2017.”

That being said, a reasonable question a grower may ask when opening his invoices is: “Why aren’t my expenses going down? Why aren’t the price of my trays going down. And the pots? And the sleeves? How come I’m not saving any money on things related to the price of a barrel of oil?”

The answer is not real cut and dry. Oil is a big component of pots and containers, but so are your different resins. Resin, a derivative of oil, makes up a major portion of the cost of goods sold to plastic companies. Different types of poly resins are used in different types of containers. And the prices of the resins aren’t dropping nearly as fast as a barrel of oil. According to Zacks.com, a marketing analyst, a $10 per barrel decline in oil prices translates to 4 cents per pound decline in polyethylene prices.

Zacks also states that “in the case of rising raw material costs and increased fuel surcharges, manufacturers tend to hike prices and pass the increase on to customers. But in the wake of lower oil prices, they are much slower to respond.” So no big drop in container prices for the time being.

Franz Bach, President of Koba Corporation in Middlesex, New Jersey—whose company has been making pots, planters, hanging baskets and more since 1965—explains the different types of plastics used in the industry.

“There are three main types of plastics used: Polypropylene is used mainly in injection molding, which produces your planters, hanging baskets and many hard-walled, single-color planting pots. Polystyrene is used in shuttle trays, inserts and most thermoformed/vacuum formed pots. The third type is polyethylene, which is used in perennial pots, blow-molded or thick-walled injection pots.”

Here is his answer to the question, “Shouldn’t they be cheaper, considering the lower cost of oil?”

“There are many contributing factors to prices, including false assumptions, incorrect correlations, greed and smart business practices. The list goes on and on,” he says. “Back in 2009 when oil prices spiked, many producers of horticulture plastics revised their process to utilize other sources, like natural gas. Now, as oil has slid back down, the manufacturing equipment is still running on alternative supplies, which haven’t had such a volatile ride. It is believed this is a short-time affordable era, as oil prices may creep back up.

“Producers have cut back on production to create a false shortage, paired with a reshoring of production from overseas, allowing them to maintain sizeable profits.” Franz also notes that there are “quite a few new changes coming and contributing factors that will realign the industry once again.”

A chat with Tracey Gorrell of SHS Griffin Supplies sheds some more light on the subject.

“There are only a handful of companies that manufacture resins in this country and a few overseas,” explains Tracey. “So despite lower oil costs, there is no drop in price in the resins used to make the containers. It is partly a supply and demand issue. So the containers’ costs are not going down in proportion to oil prices.”

Another component to container costs is the freight. Yes, fuel costs are lower, but many other factors are more expensive. Costs of new trucks, tires, insurance, labor and government regulations offset any savings realized on lower gas prices.

“We used to be able to make 24 to 30 stops a day with one driver,” says Tracey. “With the new regulations, we are limited to about 12 stops a day.” Also, qualified drivers are getting harder to find, so freight charges don’t seem to be going down any time soon.

Another insight on the situation comes from Dr. Charles Hall, Texas A&M Department of Horticultural Sciences.

“Prices may be adjusted when growers are buying for next season. There are the obvious reductions in costs associated with transportation, and since plants are generally ‘heavy,’ this could mean better margins for floral wholesalers (a much needed shot in the arm). Growing costs are reduced, as well as energy costs of heating greenhouses.

“But one thing to bear in mind,” he adds, “While these costs are important, they are not the most expensive items in the toolbox. Labor takes that title and any changes that can reduce labor costs will have a greater influence than reduced fuel prices.”

There is some good news for growers as far as the resin market goes. There are a few more companies planning to enter the resin market in the near future, which might soften up the market and eventually lead to lower costs in a few years.

As Tim Powell notes, “the cost of pots and trays didn’t go up this year. That is unusual. We try to keep from raising our prices to the garden centers because we know some of them are having a hard time of it. This makes it easier for us to hold our prices. We all want to stay in business.” GT

Vic Turkot has been in the flower and garden center business since 1979. Vic and his wife Cindy run Freshest Flowers in Haddon Heights, New Jersey.