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Agriculture offers true or too good to be true?

When in the business of producing investment offers, as is MyFarm, it is critical that we get the forecasts as ‘right as possible’. We can only rely on the information to hand - inevitably the returns in the rural space are dependent on assumptions on three things; production yield, product returns and costs of production.

Currently we have an offer in the market, Rakete Orchards LP, that is gaining fantastic support, but also is receiving some questions, ‘is this too good to be true’? Questions are primarily about the very high forecast rates of return and the sustainability of pricing for the RockitTM apple.

The proposition is that we take over 28-year leasehold land and develop that land, under licence, into RockitTM apple orchards. The apples will be sold through a grower pool with all services provided by the Rockit Group.

The financial modelling shows that we will have returned investor’s money in 6 – 7 year’s time, and thereafter we expect to return more than 50% p.a. on an initial investment. We expect to return an investors funds 12.6 times over the life of the investment of 28 years and the Internal Rate of Return (a finance type calculation of per annum returns) is 25%. What is more, the investment is tax efficient; we expect to return tax deductions on a $100,000 investment of $35,000 in the first four years and over $60,000 over the life of the investment as depreciation.

If you have the patience to read on (it is an interesting case study even if you don’t have $ to invest), these exceptional forecast returns are generated for the following three reasons;

Firstly, the Pipfruit industry itself is going gang busters. Over the current and past three years, MPI shows that the average Pipfruit orchard is earning close to 18% p.a. This is from a mix of new and old varieties. The industry has got its productivity and marketing strategy right and is increasingly shifting towards apples protected by plant variety rights.

Secondly, investors are getting part of their return for Rakete Orchards because the investment is in developing long term lease-land (28 years). This means that we are not investing $80,000 - $90,000 per ha for the land and the lease rate is competitive.  Whereas land ownership is good, in this case because the cash returns are so strong, owning the land and then selling it in future only pulls the returns down. It is noted that the leases will be registered on the land titles.

Thirdly, in Rockit, we have an apple that is selling at twice the price of the next best apple. 

The question that many people have asked, is how can we be sure that Rockit will perform – that is selling apples at twice the price of competitors? We don’t know the answer to this of course but this is what we do know;

  1. They have four years of commercial success. Last year Rockit Global sold 40% more apples, they sold out 10 weeks earlier and they increased the price to growers by 9.6%.
  2. They are getting some fantastic sales channel partners coming on board. This includes some premier entertainment brand names and some of the best channels in new markets like Japan.
  3. Smart people have invested in the Rockit business; they have strong management and governance.
  4. They are following a successful model, most of which has been pioneered by Zespri. It’s a great story of innovation, targeting a new category of snack apple (small, sweet, great keeping quality) sold to a new channel (healthy snack as an alternative to processed foods typically sold at campuses, airports, events, café’s), protected by PVR’s in all the apple producing countries and by the time taken to develop new miniature apples (circa 15 – 20 years) and with innovation also in the value chain (long term lease reduces the weight of capital, independent growers, Grower payment pool concept with agreed royalties and costs to Rockit themselves). 

Those signing up to receive information on the offer can hear direct from the ‘horse’s mouth’. We are happy to share the recording of a session with Rockit Global’s CEO, Austin Mortimer covering strategy, sales channels and how they intend to maintain a high price point despite growing volumes. Austin sees the Rockit apple opportunity to be a once in a lifetime chance to create significant value for his shareholders and growers.

None of this guarantees that Rockit apples will continue to generate twice the returns versus other apples. But there are reasons to be optimistic.

Some people may ask, 28 years (the length of the leases) is a long time to generate a price premium over the competition?  We’ve run the model with the forecast orchard gate return halving after 10 years. The rate of return (IRR) reduces from 25% to 20% and the annual returns would be 15% per annum at that point. There are not many opportunities where you can halve the price and still get such a return.

A further question is whether or not Rockit can claim the snack apple space for such a long period. Surely there will be competition? The reality is that breeding programs are generally focused on larger, higher dry matter (sweeter) redder apples. Rockit was an orphan of Prevar’s breeding program in NZ. It takes up to 20 years to breed, refine and bring through to production new varieties. And if competitors sell immature versions of their own varieties as mini apples their pips will be green (not black), the core will be large relative to the apple and the fruit is likely to be sour.

Another question, is there another example of an industry earning annual returns of around $100,000 p.a. (Rockit is >$130,000 p.a.)? The obvious example is Gold3 Kiwifruit. At 15,000 trays per hectare and at $9 per tray the annual revenue is $135,000/ha. With orchard operating costs of $25,000 per hectare the EBITDA is $110,000 from a good Gold3 kiwifruit block. The problem is that these good blocks are worth more than $1 million per canopy hectare.

The exceptional returns may not occur, but investors are forecast to receive their money back quite quickly. And we know the Rockit team themselves believe in the proposition. Many of them including the orchard managers are going to invest in this offer – with many of the MyFarm team also putting some money in.

The return profile of this investment may be outside the return profile targeted by some investors. It does have to be considered a higher risk, higher return investment. But whilst we can't say that our forecasts are 'true', we are happy that they represent the most likely outcome.

The offer referred to in this article is open to persons investing no less than $100,000 and who fall within the exclusions applicable to offers made to 'wholesale investors' as set out in schedule 1, clause 3 of the Financial Markets Conducts Act 2013 (FMCA). You can obtain further information on FMCA requirements, and whether you come within the exclusions and their requirements.


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