Horticulture is one of the stand out performers of the New Zealand primary sector. However, it is now facing constraints of capital, despite rising revenue and earnings.
There is no direct government incentives and both foreign investment and bank credit terms are restrictive at present. This is leaving it largely to New Zealand owner-operators and companies with some support from banks to fund growth.
It's an unusual time in many respects with the good market returns and expanding production since 2012 defying many of the normal 101 rules of economics that apply to fresh produce and food products.
In terms of sector expansion in horticulture, the big three of vineyards, kiwifruit and apples are leading the charge with their greater critical mass, which allows them to move quickly. However, in terms of the rate of growth there are some other rising stars with increasing critical mass such as hops, cherries and manuka honey.
While the blueprint to success varies due to each sector having a different structure, back story and markets, there are also many commonalities in what is driving earnings growth.
The sectors are delivering unique products, often with protected intellectual property. The best current example is SunGoldTM kiwifruit, which is protected under licence for the next 20 years. It has been both a market hit, but also yields well. There are many other examples across the pipfruit and berry sectors.
New Zealand horticulture is generally targeting affluent market segments in high growth Asian countries and traditional western markets. The cherry industry is a great example having created a luxury fruit purchased for festive occasions during the Chinese New Year which has supported prices.
Operators within horticulture are often vertically integrated with a high degree of collaboration between supply chain participants. This results in efficiencies, consistent quality and market access to desired consumers. In a development that was unthinkable a decade ago, the New Zealand cherry sector, for example, is selling increased volumes through e-commerce channels in Asia which accelerates the time it takes for a product to get to the consumer and thus lowers supply chain costs.
Growers and industry organisations have also invested in strong brands that emphasise uniqueness, quality, service and the New Zealand story. This is best demonstrated by Rockit™ miniature apples which are not only a great product, but Rockit™ has also curated a strong brand around its unique packaging.
Growers are incentivised with market-based payments that reflect the quality characteristics most desired by customers. Green kiwifruit may be viewed as a commodity, but growers are heavily rewarded for quality (40% of Orchard Gate Returns) and this means New Zealand products achieve significantly higher premiums than other producers.
The industry focuses on high margin, high growth product categories within the health, wellness and convenience segments of a market channel. Manuka honey is a great example where a wide range of health and wellness products, such as throat lozenges, have been created off the back of its special properties.
Finally, the sector has a great record of applying best practice management from orchard through to the end customer and innovating through all stages of the supply chain, from production to processing, storage and distribution.
Thanks to these factors, the sector's growth has been fantastic. But it has also brought with it challenges. The perennial issue of access to labour at key times of the year has become more acute, the growing demand for water is seeing the need for new investment in dams and irrigation technology, while root stock of key cultivars is sometimes limited.
What is perhaps more surprising is the recent tightening in the sector's access to capital to help solve some of these issues and fund further expansion. This is a surprise especially since the current blueprint is lifting confidence in the sector's ability to maintain the current healthy earnings performance into the future.
The main culprits of tightening access to capital is the government's current restrictions on foreign investment in New Zealand farmland and tighter bank credit. Tighter bank credit is being driven more at the macro level by the low interest rate environment and regulatory changes related to how risk is assessed on an orchard or farm. It also reflects increasingly onerous requirements on the amount and type of capital banks need to hold against loans to the sector.
Of course, money never sleeps, and others are stepping up to the plate. Many involved in the kiwifruit sector are using recent earnings to diversify and invest in other horticultural sectors. Iwi groups are doing a similar thing with treaty settlements and to provide employment opportunities.
There are also some new institutional investors building horticultural portfolios. In MyFarm's case we are partnering with others in the various sectors to create investment opportunities. This can take a range of forms depending on the opportunity and partner requirements.
In the wine sector we are buying vineyards and leasing them to wine companies that want to secure future supply. Some do this themselves, but in other situations they are better to use their limited capital to produce product and support their marketing activities.
In other cases, it's about rapidly increasing the growth and supply of a product as it's commercialised, or when market dynamics are favourable. A great example is the commercialisation of RockitTM apples where demand for the product is well outstripping supply. In this case MyFarm investors are helping provide capital to support production and RockitTM takes care of everything else.
These relationships are providing a new avenue for those outside of the sectors to put their money to work in an area that has traditionally been difficult to access.
Con Williams is Head of Investment Research for MyFarm which syndicates primary sector investment opportunities for wholesale investors.
You can contact Con on 021 241 6321 or firstname.lastname@example.org