Originally a bedding and pot plant grower that sold locally, MSG contract-grows crops year-round for large growers in a 1,200-mile radius. The 50-plus-acre operation consists of 10 acres of glass houses for growing bedding, potted and foliage plants. It also has cold frames and outdoor perennial production.

Before being purchased by Southern States Cooperative in 1996, MSG's regional market dictated that hundreds of small orders be delivered over miles of mountain roads. Shipping costs were eating into revenues.

"The business at the time Southern States became involved was not well positioned for that market approach," said Bob Barnes, district manager of SSC. "The market niche and demographics the former owner attempted to cover were not sufficient to support a 10-acre greenhouse complex. The costs involved with expansion within the existing market plan were astronomical."

SSC, an agricultural products supplier in Richmond, Va., performed a one-year market/sales analysis to determine what should be done with MSG. SSC officials decided to change MSG's customer base and how it did business.

Getting started

Starting contract growing was relatively simple. MSG general manager Heidi Warner, who handles most of the contract negotiations, said the process begins with informing large growers in your area, usually by letter, that you are interested in contract growing for them. Growers with less than 200,000 square feet can participate in contract growing very successfully if they go the extra mile in market analysis and cost control. Large growers cannot efficiently grow small quantities (10,000 units or less) of less-than-mainstream crops. These small orders are perfectly sized for smaller growers.

A major task at MSG was changing management and determining new company policies. There were also changes in job descriptions and responsibilities, expectations and working hours. Be prepared to purchase new equipment to meet contract growing specifications.

"We realized that to be effective in this venture, we would have to purchase more carts, revamp our shipping and shell out the funds to support a shipping coordinator," Barnes said. "We then had to redesign how the sales, shipping and production teams worked together. Everyone had to accept changes to their routines."

The changes were implemented within two months, and the staff is fine-tuning operations. One of the biggest efforts was reorganizing the operation.

"Once the plan was established, I think all the staff realized that to make contract growing work we had to be efficient, grow consistently and obviously put in some additional overtime," said production manager Deanna Felton. "Our contract scheduling required that we'd be growing twice as much plant material during a given period of time than our local market would have demanded. We had to make more greenhouse space available.

"My crews were able to work more efficiently because we were planting large numbers of the same item and could keep a line running an entire day without constantly changing pot sizes and crops. Improvements to the office environment were also evident. Our availability sheet was reduced from 20 pages to four. It's so much easier for all of us to keep track of a few large crops than to struggle with over a hundred small crops."

Another area that was improved dramatically was shipping. Many of the contract buyers now pick up their orders, which reduces the strain on the small fleet of MSG trucks. The company reduced its deliveries by half along with its shipping costs.

Advantages and disadvantages

Large growers benefit from contract growing because they can command a large-volume advantage with chain stores without costly expansion and increases in labor. Large growers must contract yearly with chains. Contract growing gives large growers control over expansion risks.

Contract growers benefit because they sell to a limited group, delivery is efficient, schedules are well planned and the product diversity is low and there is less shrinkage. Contract growing provides increased borrowing power for small growers to upgrade their infrastructures, expand facilities and cover past debt.

There are also some adverse effects that could occur to unwary or unrealistic growers contemplating contract growing. The first is an expected loss of the local market.

"If you are dependent upon local sales and leave them high and dry without proper notification, you'll likely not get that business back if contract growing doesn't pan out," Felton said. "Secondly, your staff will face increased schedule pressures if you try to handle both your present 'random sale' market and your contracts. Don't try to do both. If your crews are not careful, detail-minded and persistent, you are in big trouble.

"The third is single-client dependency. You want to avoid doing most of your business with only one firm."

Beware of the volume-discount game. Contract growing does not mean "grow cheap for someone else." Don't be talked into lower prices in return for a larger contract volume unless you know your exact costs. Large growers know their costs and will make offers below the break-even point if you let them.

Barnes said walking away from a bad contract offer is the most valuable skill to learn. "You must always have contingency plans to market your product should a contract not be agreed upon or later go into default," he said. "Diversifying your contract base is the only sensible course of action to reduce risk.

Tips for contract growing

The specific process that MSG used for contract growing is fairly straightforward. First, you or a consultant can perform an analysis of the market to point out potential buyers, what is likely to be asked to be produced, shipping costs and when products would be needed. Knowing seasonal sales potential is as important as having a diverse set of contractors.

Spreading out orders maximizes success. You may do pot crops for one grower in winter, spring bedding plants for another and fall bedding plants for a third.

Realistic income projections can be drawn up and compared to current sales under your existing market positioning strategy. A few inquiries will determine if large growers in your area are interested; this will provide a better picture of feasibility.

You must work well in advance to minimize shortfalls and space-availability errors. Large growers have a planning schedule and you must be ready to work with them when they are ready, usually nine to 12 months in advance.

Warner and Felton meet several times weekly to go over production plans, delivery schedules and supply acquisitions. They communicate with clients weekly.

"We can't afford to make any mistakes and downtime caused by material shortages is unthinkable," Warner said. "When you're growing contract crops, you have to run a tight operation."

Avoid contracts to produce high-risk crops. "It's easy to get roped into an Easter lily crop or be asked to grow a rush job for someone who is behind or trying to close on a last-minute general order or pick-up order with a chain store," Felton said. "These situations double the stress and can be costly because you are buying into their risk and poor planning, on top of the usual risk in growing these crops."

Production pointers

Planning is critical. More than 20 percent of your staff hours should be dedicated to crop production and shipping planning. This is double the time most growers report is dedicated to planning.

Always perform mid-crop cost assessments. Just like scouting, successful contract growing requires an extra bookkeeping step that can make all the difference. By calling for a review of material costs, labor and crop incidentals, managers can assess how closely costs were estimated and better control profit erosion.

Hiring consultants and implementing scouting programs are much like buying crop insurance. Consultants can provide an unbiased, realistic view of what you are doing and can make significant changes to management processes and your returns. You must control insects and disease with greater precision or face profit loss.

Preparing for client visits

Once you decide to do contract growing, there are some house-cleaning tasks to take care of. You are now selling your business and your product image. Cleanliness, organization and appeal are keys for you.

MSG went through a six-month refurbishing and an intensive two-month upgrading to make every aspect of the operation efficient and visually appealing. "This means redoing washrooms, employee lunchrooms, intensive cleaning of the greenhouses and even remodeling the office," Felton said. "Your office has to look as good as your greenhouses."

Office staff must be trained to deal with clients on a frequent basis. "Good phone manners and unrestricted availability of management staff via pagers, car phone and e-mail are essential," Warner said.

A digital camera and the ability to send crop photos to clients over the Internet are essential to your business. Large growers will be just as nervous about your crop as you are and they'll likely ask for weekly photos and assurances. Another advantage to owning a digital camera is you can send close-up photos to consultants and extension personnel if you suspect pest or nutritional problems. The cameras are easy to use, too.

Avoid the risks

Before you start doing contract growing, ask an attorney to prepare a contract. I have yet to meet a grower who has tried to write his/her own or even used a contract template that did not encounter some legal difficulties. You should seriously consider hiring an attorney familiar with contract law.

Educate yourself as much as you can. Be informed of your state regulations, Uniform Commercial Code and any other legal entities that might affect profit margins, such as shipping regulations for out-of-state trucking. Responsibility ultimately falls to the grower who signs the contract. Paul A. Thomas is associate professor of floriculture, University of Georgia, Department of Extension Horticulture, Athens, GA 30602; (706) 542-2340; fax (706) 542-2375; e-mail pathomas@arches. uga.edu

Mountain State Greenhouse Inc. Built in: The 1960s, owned by Southern States Cooperative since 1996. Size: 455,000 square feet of heated glass-house production. 15,000 square feet cold frame production. 25,000 square feet outdoor production and expanding. Employees: More than 44 full-time staff, one production manager, four full-time growers. Shipping range: 1,200 miles including Ohio, Georgia, Michigan and New York. Contracts: Hanging baskets, bedding plants and perennials. For more: Mountain State Greenhouse Inc., Route 1, Box 56, Flemington, WV 26347; (304) 739-4339; fax (304) 739-4841; e-mail MountainState. Greenhouse@mail. sscoop.com Southern States Cooperative Inc., 1200 Alverser Drive, Midlothian, VA 23113; (804) 281-7712; fax (804) 281-1426; e-mail Bob. Barnes@sscoop.com

. © 1999 Branch-Smith Publishing