Strong returns and strong risk management: explaining the prospects of the kiwifruit industry

It’s always good when the fundamentals are working in your favour. In the kiwifruit industry, one of those fundamentals is a strong and growing worldwide demand for fresh, healthy produce that’s high in vitamin C—exactly the profile of kiwifruit, and particularly the SunGold variety that Southern Cross Horticulture specialises in. This demand is one of the reasons that SCH and our investment banking partner, Antipodes Capital, think the returns on kiwifruit investment are a good bet, good enough to put our own skin in the game alongside co-investors.

Let’s look at those fundamentals, starting with Zespri’s forecasts illustrating the scale of demand and the likely growth trajectory. Zespri is the world’s largest marketer of kiwifruit and the exclusive exporter of New Zealand kiwifruit to the world.  

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• Demand is growing significantly: Zespri’s most recent Five Year Outlook, published in December 2020, forecasts “an increase in total global Class 1 supply from 176 million trays in 2020/21 to 238 million trays in 2025/26. This is equivalent to 35 percent volume growth …”.
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• Demand for SunGold is particularly strong: Out of this total growth, Zespri predicts, “New Zealand supply of Class 1 conventional SunGold Kiwifruit increases from 84 million trays in 2020/21 to128 million trays in 2025/26.”
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• As well as growing volumes, the price obtained for SunGold kiwifruit has been growing steadily: Most recently, “the November 2020/21 forecast shows the Zespri SunGold Kiwifruit average OGR [orchard gate returns] per hectare at $172,083, which is up from $161,660 in the 2019/20 season.”

If those forecasts represent the direction the industry is sailing in, then the drivers of growth represent the wind in the sails. Those drivers include:

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• A worldwide population that’s ageing, with Zespri pointing out that, “The number of people over 60 is expected to double by 2050 … in most markets as people age, they spend and consume more fruit, as seen in Japan”.
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• An increased demand for healthy in-home snacking: Zespri are seeing an “increased health focus and healthy eating drive due to concern over rising health issues such as diabetes, obesity etc.”
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• While COVID-19 has posed challenges for us all, it’s accelerated the demand for kiwifruit from consumers seeking to boost their immunity with fruit that’s high in vitamin C. In fact, Zespri’s most recent Annual Report notes that “one of the most popular searches on Google in 2020 was for foods high in Vitamin C.”

This strong demand creates opportunities for growers and investors to enjoy strong returns based primarily on cash yields and supported by tax efficiencies and capital gains.

• Investing in kiwifruit is a long-term proposition. It takes time to build a top-quality orchard from scratch, and for the vines to begin producing fruit. Once that happens, the sale of the fruit generates income typically from around the three year mark with investors starting to receive cash in their hands around year five.
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• In the meantime, investors may be able to offset any losses against their income to achieve tax efficiencies.
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• There’s also the potential for the orchard land and assets to gain in value over time, supporting the main return on investment.
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• Where appropriate, we purchase Zespri shares as part of our investments: Owning Zespri shares is exclusive to kiwifruit growers and orchard owners, so becoming a co-investor with us creates an opportunity to access these shares which themselves generate good returns. They also provide some hedge against rising prices for SunGold growing licences.

Of course, any investment has risks associated with it—the important thing is that they’re managed. We want to make sure our co-investors have a good understanding of risks and risk management from the outset.

That starts with our robust framework for general risk management, grounded in SCH’s experience and unique business model.

• Our approach to innovation helps keep us a step ahead. For example, we’ve used our knowhow to develop “Supercharger” plants, replacement plants grown in our nurseries that can be planted out with established leaders for accelerated growth. Superchargers reduce the time to replace a plant back to full production by up to 3 years.

• Our speed to crop is significantly faster than the industry average: It’s capable of producing a harvest as soon as 21 months after first planting. This speed is a key way that we reduce investment risk, because it generates a positive cash-flow much sooner than would otherwise be the case.

• Our ‘end-to-end’, vertically integrated business model also reduces risk: In plain English, we manage every aspect of an orchard, from selecting and procuring the site, to building and planting the orchard, to running our own nurseries, then managing and harvesting the crops. That gives us the ability to control every stage of the process, using quality materials and people we trust.

• Because we’re committed to quality, we build orchards that last: We think it’s better to do it once and do it right than have to come back and fix a problem created by taking shortcuts. That also means our crops have industry-leading protection.  

Andrew Dunstan, CEO of SCH, says, “We work hard to influence all the risks we can influence, like frosts and spraying and growing techniques.” But he goes on, “some risks are outside our control, and those things we really want people to understand before entering the industry.” Here are some, along with the risk mitigations that are in place:

• Biosecurity and disease risks include: the unappealingly named Brown Marmorated Stink Bug which “pierces kiwifruit resulting in fruit drop and rot.” To date, there is no breeding population of the bug in New Zealand. It’s present in Europe but that’s good news for us because, as Zespri points out, that “gives us the opportunity to test management options” that could be used here. Samurai wasps, a natural enemy of the bug, have already been cleared for release in New Zealand if a breeding population is found.    

• Weather risks include: severe storms, like the hail storm that hit Nelson orchardists last year. Kiwifruit is often better protected from weather events than other horticultural crops, because it’s a higher value crop, but sometimes there can be damage. Zespri has hail insurance in place for events like these and has also created a hail fund to support the Nelson growers to the extent they weren’t covered by the insurance.

• Regulatory risks include:    
  
  – the Environmental Protection Authority’s current review of the use of Hi-Cane, a chemical sprayed on kiwifruit vines to enhance budbreak. At the end of September, the Authority published a draft recommendation to phase out Hi-Cane over the next five years, and they’re now seeking feedback. Change without appropriate notice time could have significant effects on green kiwifruit and some on other varieties. SCH and others in the industry are already trialling alternatives. 
  
  – the rising cost of labour and the COVID-related restrictions on seasonal workers who usually come from overseas to help with tasks like picking kiwifruit. In September 2021, Zespri advised that the kiwifruit industry as a whole is likely to be short of 6,500 workers in 2022. We’ve responded by overhauling our recruiting and marketing to attract the workers we need, and Zespri is leading industry-level discussion and an Action Plan to adapt to this challenge. The Government recently announced that the borders would be opened to some additional RSE workers from October.

• Geopolitical risks include: “opposition to free trade … as trade concerns are increasingly tied up with foreign policy ones and as competition for geostrategic influence increases,” according to Zespri. Over-reliance on a single market like China would expose the kiwifruit industry, and Zespri has been working hard to diversify its customer base.

• Intellectual property theft is also a risk: widespread illegal plantings of SunGold kiwifruit are now established in China after budwood was stolen from a New Zealand orchard, which creates competition and could undermine SunGold’s brand. Zespri is working with the Chinese industry and government to try to protect its position.

Zespri’s approach also helps to reduce risk for the whole kiwifruit industry, especially around demand, supply chains, sustainability and innovation. Zespri manages the relationship between supply and demand very carefully, and its strong and flexible supply chains helped it navigate not only the Suez Canal blockage but the disruption of COVID-19. Zespri proved to be nimble in the crisis of the pandemic, and it’s as committed to innovation as we are. You can read more about the Zespri difference here.

We believe in the future of the kiwifruit industry, and with up to 25 percent of an investment orchard funded by our family-owned business, we put our money where our mouth is. We don’t take risk lightly, and nor should you, but we have a strong track record of managing that risk to create value for investors. And with the fundamentals working for us, we’re looking forward to partnering with co-investors who want to be part of the kiwifruit investment success story.

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