Local businesses feel squeeze of falling prices

During the third week of every month, Eddie Cox sits down with his files to review how much lumber he has on hand, how fast it's selling and what it cost him.

Cox, purchasing director at Roper Brothers Lumber Co. Inc.in Petersburg, clicks on the green-bordered "Random Lengths" Web site to check wholesale wood prices. Then he spends half a day calculating what the lumber yard's inventory is worth.

His one-page report indicates if it is time to cut prices. It's been saying for months now that it's time to cut prices.

That trend is happening in lots of businesses -- and a steady slide of tumbling prices is already translating into lost jobs and failing companies.

Economists worry about a spiral of falling prices, slowing sales and growing unemployment.

In Amelia County, farmers Jimmy and Donna Kerr slit open the envelope from the cooperative each month that tells them what prices they've been getting for their milk over the past 30 days.

Those prices have been falling, too -- down 40 percent in Febru ary, down a bit more last month.

"All we can do is to try to run as tight as we can and hope it doesn't last too much longer," Jimmy Kerr said.

J. Theodore "Ted" Linhart, chairman and CEO of Dominion Auto Group, which owns nine Richmond-area franchises including seven GM brands, said automakers have insisted he cut prices on new cars.

Consumers' caution about spending is keeping a lid on used-car prices as well.

Cox, the Kerrs and Linhart worry a lot about what the falling prices indicate for the future.

Economists have a word for their worst fears: deflation.

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Deflation is when prices fall, and keep falling, so that businesses' revenue drops and owners start cutting operations and laying off people.

The Great Depression, during which more than a quarter of workers lost their jobs, saw consumer prices fall 25 percent.

Most economists aren't betting on a 1930s-style spiral of falling prices and rising unemployment now. The latest Survey of Professional Forecasters, the longest-running quarterly review of economists' predictions, puts the odds of deflation this year and next at one in 20.

But some put the odds higher.

John C. Williams, executive vice president and research director of the Federal Reserve Bank of San Francisco, puts the odds at 30 percent this year and 85 percent next year.

Many economists think consumer and business expectations about prices respond to the Federal Reserve's policy on inflation and growth. Williams believes people base their expectations on prices.

The key question for either forecast is where buyers -- whether of milk, lumber or cars -- expect prices to go.

If they think waiting will mean getting better bargains, and they hold off buying goods and services, things could get rough.

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Some bargain-hunting is going on, at least at lumber yards, said Cox of Roper Brothers.

But all too often these days, it ends with a builder saying "I'll get back to you" and shopping some more instead of buying.

Because falling prices still aren't boosting sales, Weyerhaeuser Co. shut 12 Southern sawmills at the end of March. International Paper will close its lumber mill in Franklin at the end of May, idling 123 workers.

Announcements of closings and cutbacks at Southern mills are routine these days, Cox said.

"Mills that used to operate 24/7, three shifts, are now barely working one shift," he said. "It's like a week doesn't go by without some announcement a mill is shuttering."

He said mills regularly call to tell him to cut prices to try to move more lumber.

That's pretty much what the automakers have done, too. They've asked dealers to quote prices on new cars that match the discounts automakers give their employees, Linhart said.

It isn't having a big impact: In March, sales of new domestic cars, excluding trucks, dropped 49.5 percent compared with the same period in 2008, according to the Virginia Automobile Dealers Association. That was an improvement from the 53 percent decline recorded in February.

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And when it comes to used cars, people are shopping around. Lots.

"People just don't have cash," Linhart said. "If I had a car that cost me $8,000, I'm not going to sell it for $10,000 -- no one's walking in with $2,000. . . . They may have $500, so the price is $8,500."

Online shopping means price changes across a wide area -- 250 miles is the usual benchmark -- are instantly available. Shoppers are checking them out -- "our hits and clicks are way up," Linhart said, even if sales aren't.

Dealers are checking the online prices, too. Linhart said some dealers these days automatically mark down prices to match lowest available. That keeps pressure on.

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When consumers feel there is always a discount available, marking down prices won't help much, said David J. Urban, a professor of marketing at Virginia Commonwealth University.

When consumers "hear the same message over and over again, after a while, they begin to ask when is a sale a sale," he said.

So far, bargain-basement prices for dairy farmers aren't translating into big discounts for milk, cheese and other dairy products on supermarket shelves.

The Kerrs hope that will happen soon and spark more demand for their raw milk.

With the farm price for raw milk now at $1.40 a pound, down from $2.50 in summer 2007, the Kerrs aren't covering the day-in-day-out costs of running their farm.

Michael Myatt, general manager of the Cooperative Milk Producers Association in Blackstone, thinks as many as 10 percent of the state's roughly 700 dairy farmers may decide to close their doors this year.

"Even the best, efficient operators, they've got to be asking: Do I use equity to get through, or borrow money and dig myself into another hole that's going to take me a couple of years to work out of?" Myatt said.

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Kerr is using his savings to help keep operations at his farm going.

The Kerrs raise most of what their cows eat on the 650-acre farm that Jimmy Kerr's grandfather started. Now he's looking to cut costs by lowering the amount of "subsoiling" he'll do -- basically, running a 14-inch spike through the fields he will soon plant with corn to loosen up compacted soil.

"If it rains enough, maybe we can get away with it," he said.

Cox, at the lumberyard, basically tries to keep his inventory as lean as possible. Although he does his replacement-cost calculation once a month, he checks daily on how fast his inventory is moving off the shelves and tries to buy carefully to replace it.

Linhart, the car dealer, is looking for every edge he can find.

Last month, he headed north to buy 18 low-mileage cars coming off leases in Canada. These are cars he can price in the key $8,000 to $12,000 range, where there's demand but not enough local cars available. He also has added lower-priced lines of parts.

"You've got to dig in to equity you've built over the years," Linhart said. "If you're in business now and you're not thinking three or five [years] out, you're not going to be in business. And when this is over, it's going to take years to build back to where you were when this started."

Contact David Ress at (804) 649-6051 or .

Contact Louis Llovio at (804) 649-6348 or .