How do you like them apples

The "Investors guide to the New Zealand produce industry" produced recently by Tim Morris and team represents an excellent snapshot of just how well the New Zealand permanent crop sector is doing. The excellent climate, particularly for fruit production, has combined with innovation in products/varieties, production systems, food assurance systems and product presentation and packaging to deliver on the horticulture sectors potential.

As typical with Coriolis reports it is full of excellent statistics. Global Fruit, Vegetable and Nut consumption has increased by a Compound Average Growth Rate (CAGR) of 2.2% over the last 50 years; fruit consumption has grown by a CAGR of 2.5%. And over the past ten years the volume of fruit traded globally has increased by 3% p.a.; the value has increased by 7% CAGR. Fortunately for New Zealand main demand growth has come from Asian countries (China, Thailand, Vietnam).

Kiwifruit and Apples together make up almost three quarters of the export value of fresh produce from New Zealand. The NZ Kiwifruit industry represents 54% of fruit exports and also 50.5% of all globally traded Kiwifruit. Apples makes up 23% of NZ fruit exports but represents only 6.3% of globally traded fruit (up from 3.7% in 2009).

In terms of our own analysis, it goes without saying that permanent crop Horticulture (to which we add viticulture) has been through its challenges. Industries such as Kiwifruit and Apples have had times of buoyancy, slumping later because of commodification of their product and the impact of low cost fruit production from, for example, Chile. Viticulture returns suffered post GFC resulting from high product volumes coming on stream, combining with a shortage of processing capacity, and a short-term reduction in demand. Kiwifruit also suffered the impacts of Psa, a virus which particularly affected the then new Gold variety which had been bred without some of the typical disease resistant attributes.

Innovation has come in four main areas. The first is the need to control product. Both Zespri (the Kiwifruit Single desk marketing agency) and the apple industry have responded with new varieties generated from extensive breeding programmes and which are protected by plant variety rights. The depth of these programmes was demonstrated by Zespri releasing the G14 Gold variety in response to Psa; the cultivar has proven to have high market acceptance, good storage, grows prolifically and importantly is Psa resistant. Zespri now owns the plant breeding program originally developed by Hort Research; there are a range of other pipeline cultivars including a new red kiwifruit being trialled on a MyFarm orchard. Pipfruit has a similar record with new varieties proving very popular to the Asian palate. The viticulture industry has its own recipe for control; Marlborough Sauvignon Blanc (MSB). MSB has now grown to be 87% of NZ exports; the plant produces well, the wine is cheap to produce and most quality wine lists will contain one or two MSB offerings due to its crisp ‘new world’ flavour. As per any successful appellation, production is limited by the land available with perhaps only 5,000 ha or 15% of land left to develop in the Marlborough region.

The second has been a focus on productivity. Techniques used to manage Psa have also led to increased yields. There is absolute science behind orchard or vineyard layout, establishment and management with a good array of professional managers available to implement orchard management plans. A good example of step change is evident with Pipfruit; modern establishments include planting trees at much higher densities in hedgerows with the trees grown on structures which are similar though taller than vineyard structures. Yields have almost doubled, strategies to obtain even colouring using reflective sheets and the potential use of automation are all benefits of the new orchard layout and management.

The third area of continuing innovation is based around management systems and technology. All the industries operate leading property and product management systems which minimise chemical residue and maximise product quality. Zespri in particular manages fruit quality closely with a continual ‘raising the bar’ on product taste (fruit dry-matter), size and appearance. The apple industry’s IFP program has seen NZ product being preferred over other countries due to much lower levels of chemical residues on fruit. As customers and consumers become more discerning, fruit quality is a key success factor that plays to NZ strengths.

The fourth area of innovation has been around packaging, product, category and channel innovation. There are numerous examples of each of these driving market growth, with strong support from regional R&D and pilot centres which provide advice, research facilities and pilot plants across five locations in NZ.

Continuing innovation will be required to maintain competitive advantage; the increasing sophistication of the product models does suggest that they are harder to replicate for lower cost operators. Whereas cost and access to labour has been a competitive disadvantage, for example, the advance of automation for orchard management, harvesting and packing is likely to be to NZs benefit.

The Coriolis report goes on to look at emerging fruits, selecting Avocado and Cherry production as industries to watch. Cherry exports are growing by 25% CAGR over the past ten years, Avocado has grown by 15% p.a.

The external drivers for growth are noted by Coriolis as the desire for Health and Wellness, the desire for Authentic and Responsible food, the need for Convenience, and a taste for Indulgence. New Zealand product is well-placed in these areas.

At MyFarm we specialise at making quality rural investments accessible to our investors. With our two most recent investment offers (a Kiwifruit orchard and apple development) closing early, it does look like the investing public is getting a taste.