Apples: A Growing Business?
By Tom Belford
“We’re very good at boom and bust,” said Leon Stallard, commenting on the economic fortunes of the apple industry. Stallard is chairman of Hawke’s Bay Fruitgrowers Association, representing the Bay’s 210 registered growers.
Recent media headlines send mixed signals. “Receivers sell apple concerns” and “Growers face poor returns” on the one hand; but to the good, the Australian market has been ordered to open to Kiwi apples. BayBuzz decided to look more closely at Hawke’s Bay single biggest cultivated product in terms of acreage … pipfruit (apples and pears). About 5,400 hectares in the Bay are devoted to growing pipfruit (compared to just under 5,000 hectares of grapes), and if national averages hold, approximately 95% of this acreage is used to grow apples.
Hawke’s Bay’s apple industry has been around since the 1880s, with the first apples exported about 100 years ago. The biggest HB player today is Mr Apple, with about 700 hectares in production; the average size for the industry is around 19-20 hectares.
Hawke’s Bay will harvest about 9 million cartons of apples during next year’s season, which peaks in March and April. About 80% of the total crop, more than 200,000 tonnes, will be exported. The HB industry employs about 4,000 permanent full-time and part-time workers, and 20,000 seasonal workers.
So apples are our game. To get the score BayBuzz talked to Stallard, John Bostock of JB Bostock, Paul Paynter of Johnny Appleseed, Peter Beaven of Pipfruit New Zealand, Phil Alison of Havelock North Fruit Company, folks at Plant & Food, and others in the biz. Not all are equally optimistic about their industry. Even the hard-charging Bostock predicted that 2011 will be “a challenging year.”
The picture that emerges is one of a viable but struggling industry – one that has no cost advantages over foreign competitors, operates on slim margins, carries high risk, needs better quality control and marketing, and holds limited growth potential.
An apple a day …
What makes the Bay’s apple business competitive in global terms? First and foremost, Hawke’s Bay has an optimal growing environment in terms of soil, water supply and climate. This combination pays off in high yields and (potential) quality.
Second, our infrastructure is well-established, including growers, supporting services (irrigation, etc), packhouses and cold storage, export capacity (services and port) and R&D. The number of growers has sharply reduced (down to 200+ from 600+ ten years ago), weeding out less viable growers, and we seem to have smart players at all sizes and levels of operation. Seasonal labourers required to harvest are now more assured with the advent of the Recognised Seasonal Employer Scheme.
And third, the Bay’s product is largely – and increasingly – pointed toward the best future market on the planet … Asia. Consumer tastes vary from region to region. Planting and marketing varieties best-suited to those tastes can make the difference between winners and losers.
Even within compact New Zealand, different areas, with their climates and even micro-climates, can be more hospitable to growing different varieties. Hawke’s Bay has conditions favourable to growing the varieties most preferred in Asia, such as Fuji, the Pacific series, and Royal Gala. This in contrast to Nelson (NZ’s distant second-largest producer at 2,700 hectares and 28% of NZ’s exports), where Braeburn is more dominant, but more favoured in the stagnant European market.
Who is unhealthy?
According to MAF (MY09 – the crop harvested in 2010), the average tray carton of NZ apples (across all varieties and regions) returned $21.75, against an average breakeven production cost of $21.00. Said one observer: “Margins are as thick as butterfly wings.”
And then things go bad!
Both hail and a cold, wet spring in Hawke’s Bay in 2009 reduced the 2010 harvest by approximately 20%. Of course, an act of god like hail can demolish the crop of one orchardist, while sparing his nearby neighbor. Loss of cash flow from a diminished harvest will constrain the grower’s capacity to replace trees, prepare for the next season and pay fixed costs, including debt servicing.
For many growers, payments can lag well behind the time when growing costs are actually incurred. And compliance costs to meet more rigorous (and differing) foreign buyer standards are increasing.
Additionally, the orchardist might be ‘stuck’ with the wrong trees/varieties. His Braeburns are returning $16.50 a carton, while his neighbor’s Fuji are returning $26. A switchover in varieties is costly in terms of time, capital and cash flow, taking three seasons before a newly planted tree returns income, and five years before full income.
Says Paynter: “Many growers in New Zealand have funded new variety plantings through capital gains in their land, not orchard profitability. The trend of liquidity driven appreciation of land values appears to be over. Orchard profitability must now fund new developments.”
Then add the ‘macro’ issues … worldwide apple consumption trending down, the global recession and the foreign exchange rate. Recession naturally dampens demand and sales prices, while a high New Zealand dollar against importing nations’ currencies is devastating to that already slim profit margin.
By itself, an unfavourable exchange rate – and today it’s the most unfavourable in decades – can put even the most well-managed orchard under water. If the NZ dollar appreciates such that a carton yields $5-6 less to the HB grower, at 9 million cartons that’s about $50 million sucked out of the Bay’s economy. Says Stallard: “We live or die by the exchange rate, which we have no control over.”
So, an orchardist can make good growing decisions, and good financial planning decisions, but still get swatted by bad weather or calamitous exchange rates. In the 2009/10 season, the combination made for a bad year for Hawke’s Bay orchardists … one the worst according to Paynter, and many will be lucky to tread water this year. Growers in trouble are those who “stuck their necks out too far at the wrong time,” he says. Stallard, looking to the coming harvest predicts: “Most will break even … but there wouldn’t be many overseas holidays.”
With so much of the Bay’s crop exported (66% of NZ’s apple export volume), and exposed to the vicissitudes of the global marketplace, a closer look at our international comparative advantage is warranted.
In terms of foreign competition, the story of our region folds into the story of New Zealand. As proficient as New Zealand is at growing apples, our harvest is barely a seed in the ocean – we supply less than 1.0% of the world market. Why do foreign buyers even bother with NZ apples?
Two main reasons, most argue – Brand New Zealand and superior quality.
Brand New Zealand has two dimensions to Peter Beaven. First is our country’s “clean, green” image to foreign consumers, which is hugely powerful in a global trend to socially responsible and health conscious consumption.
Of course, this positive image is a tide that lifts many NZ boats, not just apple exports. By the same token, it is not an image that orchardists alone can protect. Many, many different environment policies – water management, landscape protection, GMOs, mining, greenhouse emissions, etc – can work to enhance or damage that brand equity.
Speaking for example about GE, Beaven says: “We take the view that it’s important that the science community stay up with it, because it’s probably a matter of time before there’s public acceptance, but it’s certainly not something we’re investing in.”
The second dimension of the NZ brand is unique to the industry, and industry players can therefore shape it. The positive regard for Kiwis throughout the industry, the reliability and ease they bring to business relationships, our reputation for innovation, and the pace-setting commitments growers have made to product purity (i.e., low residue production) are industry-specific factors that ensure a place for NZ apples in the marketplace.
Which brings us to the second ingredient … better quality apples. “It’s simple,” says Phil Alison, “they buy on eye and they eat on taste.”
But growers can’t point to any international ‘tasting competition’ awards like their colleagues in the Hawke’s Bay wine business! Indeed, a 2006 report prepared for the industry claimed: “Market and industry comment supports the viewpoint that the quality of export pipfruit from New Zealand is not as consistent or at the perceived level of earlier periods. In particular, many believe Chile has surpassed New Zealand.”
Most interviewees dismissed the statement, insisting that NZ apples were the best in the world, hands-down, and generally amplifying their assertions with anecdotes. They say their buyers abroad – and their customers, the end-consumers – fully appreciate the superior qualities of NZ apples … from taste to colour to crunchiness! The result, they say, of our perfect maritime warm day/cool night growing climate, which is great for flavour development.
But there are naysayers. “New Zealand has always been the leader with respect to quality, but the rest of the world has probably caught up,” said one. Another critic, with decades of industry experience, commented: “The best of our apples leave the rest of the world dead. However, the challenge is to transpose the high standards of the top third of our growers and exporters down to the bottom two-thirds!”
In other words, an apple is not an apple, even when it comes from Hawke’s Bay.
Beaven notes that of all NZ apple exports, 70% earn a Class 1 rating, something no other country can match. But others argue that the supply chain – getting the apple from HB to a foreign consumer – can vary widely in quality control … “If the apple is mealy when the European customer takes a bite, so much for Brand New Zealand.” CRUNCH!!
Arguably, the proof is in the pudding … how does the market value NZ apples?
According to Beaven, overall, New Zealand apples command a 30% price premium over apples from Chile, our prime southern hemisphere competitor. He argues that reflects the positive NZ brand and the established quality of the product.
There are some practical factors too. NZ can get an apple to China in 15 shipping days, versus up to 55 days from Chile. And perhaps most importantly, we provide an off-season fresh supply to the big markets of the Northern hemisphere.
Like any other industry, pipfruit growers must continually innovate – pest control, growing techniques, marketing practices, and the product itself … apple varieties. Players in the apple industry proudly see New Zealand as the world leader in innovation.
While there are certainly ‘backyard’ experimenters, much of this innovation, especially with regard to cultivar breeding, is beyond the capacity of individual growers and is done on an industry-wide basis, with a $3 million annual spend, $1 million of that on breeding varieties. This budget is funded through government grants (FORST) and levies on industry players. It buys everything from research on foreign consumer preferences to new apple varieties.
Plant and Food, a Crown Research Institute based in Havelock North, is arguably the epicenter of the apple research world. They lead the R&D on new varieties, a program begun in earnest in 1984 by Allan White, building on the work of apple research pioneer ‘Dr Don’ McKenzie.
From the point of targeting a characteristic to bring forward – from enhanced taste or texture or storability to pest and disease resistance to enhanced nutritional content – to having a tree ready for commercialization, the process can take 15 years or more, even with the apple gene-mapped.
Work is underway now, for example, to develop a “red flesh” apple that would have exponentially more anti-oxidant content than a current apple and taste good. They’re still working on the taste part! This project has been underway since the late ‘90s, and might still be two generations of trees (ten years) away before having marketable fruit.
The closer the research gets to commercialization, the more proprietary the work becomes, according to Wendy Cashmore at Plant & Food.
The industry body that serves to commercialize varieties is Prevar, which decides, based on its ‘read’ of the evolving market, what features it wishes Plant and Food ideally to develop. Varieties must be both market suitable and grower friendly. Prevar owns the resultant apple portfolio. Once a variety is ready to be released, Prevar controls its marketing, negotiating terms with growers who wish to produce and market that variety. The system has its critics.
The Jazz apple is a recent example of the industry ‘betting’ on a new variety. Many think it’s a great apple in terms of quality; however, it has struggled to get traction in the marketplace, and growers who are producing the variety are earning only $20 per carton, in many cases not meeting costs. “A wonderful apple, poorly developed,” said one observer.
In some cases, growers are putting their own marketing savvy to the test. For example, Alison has licensed the worldwide rights to market a small-sized apple developed in this fashion, and owns the trademark ‘Rockit’ under which it will be sold. It’s now his ‘brand’ to succeed with … or not. Paynter has secured the marketing rights for a Prevar variety he has trademarked ‘Lemonade’.
All of niche marketing presumes a discriminating consumer. But as Andrew MacKenzie at Plant & Food notes: “You can satisfy a lot of consumers with a commodity apple. You’ve got to have something really special in a proprietary variety to justify the effort to invest, produce and market it.”
A steady state?
Even with innovation, it doesn’t seem practically possible that Hawke’s Bay (or New Zealand overall) can significantly increase its global market share. Here in the Bay the most suitable land is already under cultivation and our yields are already world-beating. There’s simply not much opportunity to increase production.
Nationwide, according to MAF: “Annual export volumes have settled in a band between 14 and 17 million cartons, with climatic conditions determining volumes within this range.” And the planted area in apples is settling around 9,000 hectares. All this leads to an export market valued in the $350-400 million range.
Given that, it appears the goal for the industry is more a matter of hanging on to the tiny slice we already own – reinforcing our premium niche with better quality control in growing and distribution, reducing middlemen in the supply chain, and perhaps shifting our sights to the more robust Asian market (as well as serving a domestic market in the $50-60 million range).
One challenge is getting the product mix right. Beaven comments: “The variety mix that we’re producing is no longer matched to where the macro-opportunities are.” For example, NZ’s #2 production apple, Braeburn, is not favoured in the Asian market. Braeburn is a fading 32% of the national crop, most going to Germany, with Nelson’s exposure almost twice that of Hawke’s Bay.
Targeting Asia will require a significant investment in replanting, costing $50,000 per hectare, to transition to apple varieties preferred in those markets. [56% of NZ exports still go to the UK and European markets; 17% to the North America.]
For individual growers, apart from the capital issue, the day-to-day issues are challenging enough, with each grower seeking to preserve their own piece of a static market pie that will not increase, hoped-for opportunities in Australia notwithstanding.
Says farmer Bruno Chambers, who recently pulled out ten hectares of apple trees: “We have fantastic growing conditions, some very good growers and a history of R&D that is not rivaled in the rest of the world. But that isn’t enough for the smaller grower. Costs of production and shipping plus increasing competition have made apple growing a perilous path to wealth, and I can’t see things changing dramatically.”
At the local government level, growers must also contend with land use and water regulation issues. They face rising rates, and the monetary and time costs of the consenting process. Bostock argues, in particular, that water management costs are becoming “unsustainable” and the process too adversarial, in the face of “woeful ignorance” about the resource.
As for land, the HPUDS guideposts, when codified in district plans, will protect and delimit the acreage available to be farmed (for whatever purpose) on the Heretaunga Plains.
Stallard says smaller growers who keep their debt down and have a good variety mix can do well … 25,000 cartons at $5 profit per carton is just fine. But, he concedes, with all the risks … “It’s not for the faint-hearted!”
Bostock says: “It’s a risk business. The name of the game is surviving through the tougher times and enjoying the good times.” He predicts survivors will fall into two categories. One is the super-conservative, older generation, generally smaller-scale, efficient and debt-adverse grower with a strong marketing partner. These owner-operators can make money and are content to make ‘enough’.
The other will be the most innovative, vertically integrated, non-corporate players … operations where the owners are still very much hands-on and in control, and entrepreneurial.
Taking the long view, he predicts: “There will be a global trend of people eating more fruits and vegetables, and that will be good for the consumers and good for us.”
[As an aside, Bostock is hedging his bets by moving into gold kiwifruit, where he sees “huge opportunity” in Hawke’s Bay (high quality and good yields), even as “temporary” crisis envelops that sector.]
Alison says: “It’s all about relationships.” Adding: “…industry has fallen into the trap of not enough producers getting alongside their customers and knowing what they want, how they react and how it all works.”
Paul Paynter notes a generational issue. Most orchardists (like most of farming) are in their 60’s and tend to be risk and innovation adverse … “more interested in protecting what they’ve got.” His horticultural manager got his diploma from Massey in 1985 with 75 other graduates; last year only three certificates were awarded.
He argues that integrated businesses, the only players with a shot at managing all the necessary variables, must lead the charge. “The future is not likely to be one with a few global winners, but of many niche varieties, that are professionally marketed to regional segments, often through limited retail chains.”
The winners will be operators who get much closer to their retailers and understand the dynamics at retail, becoming effective marketers. As he sees it, supermarkets are actually real estate managers … they’re “poor marketers,” and the growers and shippers are “mostly hopeless.” He continues: “There needs to be a mindset change on behalf of all participants and they need to become aspirational with regard to food quality” and able to sell “differentiated excellence.”
Said another: “The highest quality NZ apple, carefully distributed, will always have a profitable market … We need to sell an ‘eating experience,’ consistently over-delivering on quality.”
In other words, the winner will recognize that not all apples are created equal. That smart marketing to premium niches is vital. And that the aim, as Paynter put it, is to “get rich slow.”
What about organic?
Given the importance of NZ brand image and quality to success as a tiny global player, I inquired about the role of organic production in creating positive differentiation.
John Bostock is the champion of organic production in New Zealand. 100% of Bostock apples, about 1.2 million cartons, are organic. The company’s website reads:
“The fertile plains and superb climate of Hawke’s Bay New Zealand are ideally suited to quality organic production. With high sunshine, moderate rainfall and warm temperatures, our fruit can be produced without any synthetic pesticides or artificial inputs. The result – healthy, delicious, traditional tasting apples produced in partnership with nature, leaving our fertile soils, rivers and underground aquifer undamaged for future generations to enjoy.”
Taking the long view, Bostock says: “I’m hugely optimistic.” But adds that the past two years have been difficult for organic apples (“the market’s been saturated”), as will the coming year.
Bostock comments: “We’ve been attacked by the commercial mindset from day one … but one of the greatest things organic growing has done is move the conventional mindset a long way toward more sustainable production.”
Competitors praise Bostock, but they don’t emulate him! They argue that a true sustainability “balance sheet” does not favour organic production, because energy consumption and use of natural chemicals remains high, and organic yields are generally lower.
They do credit ‘organic values’ with moving the entire industry to greater environmental consciousness. Says Paynter: “It’s made all producers think about what they’re doing, why they’re doing it, and how they can produce things with less chemicals and lower environmental impact.” Conventional growers say the industry has come far from the days when, as Stallard says: “If it was Monday, we sprayed. We sprayed everything … killed everything in the orchard, it was terrible … like napalm.” Fortunately, New Zealand made an early commitment to Integrated Fruit Production and has led the world in IFP.
‘Mainstream growers say NZ apples are already perceived to be the ‘clean/green’ gold standard. No need to go further. Indeed, the industry branding promoted by Pipfruit New Zealand is “100% Pure Apples from New Zealand.” And, from their website, their brand promise …
The safest apples you can buy
Apple Futures and IFP – Integrated Fruit Production, low input non-organic programmes are followed by 89% of the industry. The remaining 11% are certified organic producers.
New Zealand apple export production programmes employ Biological Control Agents, insect mating disruption supported by environmentally benign chemistries and cultural practices. To prove just how safe New Zealand apples really are we support our production programmes with rigorous residue testing programmes.
Retail buyers of New Zealand apples have set extremely high and exacting parameters for our growers to meet. Our growers not only meet those parameters but exceed them threefold. We really do have the safest apples you can buy.
What does the marketplace say? Remember that $21.75 per carton average income for all NZ apples? Organic apples earn an average $36 per carton. According to Bostock, breakeven would be $30-33 dollars.
Says Bostock: “Organic farming is difficult. There’s been a lot of failures. You’ve got to be a good conventional grower to be a good organic farmer.”