Since mid-2021, the Netherlands has had to cope with an explosively rising energy price, which affects greenhouse horticulture in particular substantially. The higher gas price is the result of a wide range of both structural and temporary causes.
For example, much less gas was extracted from the U.S., and the mild summer in 2021 resulted in less wind energy being generated in the Netherlands. In addition, Dutch gas supplies were exceptionally low last winter. The sanctions against Russia will also increase the price of energy for a long time. Furthermore, there is an incredibly high demand for gas in the world and particularly also in Asia, due to economic recovery after the initial COVID-19 wave.
Dutch horticulturalists have also been affected by COVID-19; the ornamental horticulture and hospitality suppliers par excellence. Energy is about one-fifth to one-fourth of the total costs incurred by growers. The high price of energy may confront horticulturists with impossible tasks: continue to grow crops and possibly suffer losses, or not grow and sell contracts or lose customers.
In addition, the increase in the price of gas also has an effect on other components of the cultivation chain, such as the cost of fertilizer, packaging materials and transport. Growers with variable supply contracts suffer particularly badly from the high gas prices. Often part of the energy is purchased on a variable basis and part at a fixed price. There are also market gardeners who buy all their energy at a fixed price or all their energy at a variable rate. It is expected that in the end the gardeners with fixed contracts will also suffer from the energy price.
Our analysis shows that it is likely that within the next 5 years a substantial part of the greenhouse growers will lose their profitability due to the increase of energy costs: the net result will become negative and the solvency can decrease strongly. This can lead to continuity problems.
In order to investigate the consequences of increasing energy costs for greenhouse horticulture, JBR has made an estimate of the future net result and solvency of greenhouse horticulturists. The analysis shows that a substantial number of greenhouse horticulturists are at risk of losing profitability within the next 5 years due to the rising cost of energy: the average net profit is at risk of becoming negative and solvency may drop sharply. Basis for the estimate are the average financial results and balance sheet figures 2017 - 2020 of greenhouse horticulture companies from Agrimatie (2020, Wageningen University and Research) and assumptions on development scenarios of energy costs, operating income, and depreciation costs.
Figure 1 shows the development of the net result of an average greenhouse company in scenarios with different average annual growth rates of energy costs. In this estimation, operating income and all other costs are held constant over the forecast period.
If the turnover of horticulturalists remains the same, and energy costs will increase by 15% annually, it is likely that the net result will be negative in 2026 (see also Table 1). In this estimate, depreciation costs and all other costs have been held constant over the forecast period.
In addition to the increase in energy costs, horticulturalists today are expected to become more sustainable and to take steps towards an energy transition. Increasing depreciation costs due to investments in sustainability will put further pressure on the future net result (see also Table 2). In this estimation, operating income and all other costs were kept constant over the forecast period.
Data from Agrimatie shows that already about 28% of all greenhouse horticulture companies have a solvency below 50% and about 17% have a solvency below 35%.
We expect the entire sector to fall below 50% if energy costs rise. In combination with rising depreciation costs, equity capital will become negative for a significant proportion of greenhouse horticulture companies. Given the circumstances, horticulturalists have little financial scope to invest in the energy transition. This can further reduce their solvency, which can lead to continuity problems.
Despite the volatility facing greenhouse farming, there is a positive climate for mergers and acquisitions. For example, there is a lot of international and private equity interest in covered cultivation and vertical farming. The Netherlands has traditionally been one of the leading countries in innovation and success in greenhouse horticulture, which is a good place to take a stake. In addition, there is a lot of money available at low interest rates for investments. Economies of scale are an important consideration for mergers and acquisitions in greenhouse horticulture. In 2020, the number of acquisitions in greenhouse horticulture was higher than in the past 10 years, with 85 mergers and acquisitions. This is almost double the number of mergers and acquisitions in 2017: at that time, there were a total of 45 mergers and acquisitions in greenhouse horticulture companies. In 2021, a strong merger and acquisition climate developed for suppliers and installers in particular. For example, Atrium Agri has taken stakes in several agri companies since 2019 with eight current collaborations, including with a focus on sustainable and innovative cultivation.
It is likely that gas prices will remain high for the foreseeable future. The scarcity of gas is expected to remain very high with the uncertain course of the sanctions against Russia and the ongoing international conflict. Incidentally, taxes on gas consumption will also rise due to the increasing price ofCO2, among other things. Costs may also rise for more sustainable energy solutions, such as the use of geothermal heat, because they are indirectly linked to the price of natural gas. To keep up with the energy transition, substantial investments will have to be made and subsidies will be reduced over the coming years. In addition, with rising interest rates, investments will become less attractive. Investments will also result in higher depreciation costs and will therefore also put pressure on the operating result. Because of international competition, it is questionable whether both the high energy price and theinvestment costs can be passed on to the end user.
Temporary solutions offered by horticulturalists include postponing cultivation and production and starting the season later. For some horticulturalists, it will be more profitable to supply energy back to the grid than to use it themselves, with the result that greenhouses will become vacant. In addition, market gardeners can switch to growing "cold" crops, i.e. crops that thrive under lower temperatures, such as cabbages and peppers.
Many horticulturalists with less financial room for flexibility and low solvency will have to adopt other strategies. It is necessary to look closely at where there is room in a business for financing the energy transition, innovation and/or digitization. To make market gardeners future-proof, new revenue models can be developed to increase turnover and business operations can be restructured. Scenario analyses and liquidity models can help with this. One of the outcomes of an internal and external analysis of a company in greenhouse horticulture could be that it is more profitable to take knowledge abroad, and thus to internationalize, where greenfield sustainable technology is most profitable. Strategic partnerships can also be identified and established so that risk is shared and investments are more sustainable. Finally, the analysis may show that it is more profitable to sell the company or to grow it through acquisition.
This publication is part of a series of articles on the future of greenhouse horticulture in the Netherlands. Previously, we wrote about innovation and automation in greenhouse horticulture.