Thursday, 07 March 2019 08:19

Punter goes cherry picking

Written by  Pam Tipa
MyFarm’s Con Williams. MyFarm’s Con Williams.

It is not always the fastest-growing or biggest returns which influence decisions on investment in various sectors, says MyFarm head of research Con Williams.

MyFarm has begun promoting investments in permanent crops in about eight different sectors, he told a recent Auckland gathering. 

Worth about $20 billion to $22b in market capitalisation, those sectors have grown about 10-12% per annum over the last five to six years. 

“That is going to start to slow up because some of those asset values are starting to get a little bit ‘toppy’ – quite ‘toppy’ if you are talking about SunGold in the Bay of Plenty – and probably [future investment] is going to be more organic, bare land development and that sort of stuff,” he says. 

 When assessing permanent crops, MyFarm looks at the stage of growth of a sector – whether it is steady, upturning, booming, in its peak or in downturn. 

“We think about that from asset valuation, sector production value and sector prices points of view.”

They also look at capacity expansion including access to labour, intellectual property and capital and where MyFarm has a specific advantage. They look at investor demand and the real estate cycle. Some sectors have good returns but the volatility can be high.

In the kiwifruit sector, the ability to shift growing production of SunGold into a range of markets and hold prices at $10/tray orchard gate price is an impressive result, he says. 

“Zespri has seen some challenges historically in China and how they operated there. They have changed that model and you’ve certainly seen some success when they achieve 22% compound growth of SunGold varieties or all kiwifruit volumes into that market year on year.”

The North American market is also growing, providing the industry with two very large markets.

But SunGold orchards in Bay of Plenty are now selling at $1.1 million to $1.2m per canopy hectare depending on quality. Whether there are better investment opportunities elsewhere needs to be assessed.

The investment company has financially analysed bare land lease models or a full ownership and development models outside Bay of Plenty. 

“That certainly shows that within four-five years you can probably get return on your contributed capital of 15 to 18%. 

“When you think about risk/reward versus paying over $1m per canopy hectare at 7-8% [return] using an $8.50/tray orchard gate price long term… the numbers suggest perhaps you should be looking at bare land development in those other regions.”

In apples, Williams says New Zealand is ranked world class. Productivity averages 60 tonnes/ha and some of the new club variety, PVR protected apples at high planting density are achieving 100-130t/ha.

Apples probably have one of the better export market spreads in Europe and across Asia.

“Asset values have probably got potential upside when we look at the returns and some of the location factors. Hawkes Bay generally is growing quite strongly. PVR and club varieties preferred by Asian markets are still a big theme. It has got a lot of growth potential.” 

Williams says the owners of smaller orchards with older structures or older varieties have the opportunity to regraft into new varieties. 

“You have got a lot quicker turnaround to production. The trade-off is that the lifespan of that is probably 12 to 15 years and then you need to replant. A lot of investors like the return in the earlier years instead of waiting five to six years for apples.”

MyFarm is promoting investment in hops, which Williams describes as a niche industry for investors with good IP. 

“NZ has some unique varieties that we think the global brewer market will appreciate and we think there is growth opportunity there. 

“The focus is in Nelson because that is where all the industry structure is and it is a known area to grow hops consistently and there are reasonable land prices.”

Challenges include getting skilled staff for larger gardens, the supply chain model direct to brewers still needs to be proven to achieve premiums and some global volatility around the market is dominated by Germany and the US.

MyFarm’s most recent investment offering, a cherry orchard in Central Otago, is higher risk, higher reward, Williams says.

Cherries are a high quality product with a specific export window – the Chinese new year. China takes about 90% of NZ exports.

“It is a highly perishable product. In two to three days it is on its way to the Asian market; it has a shelf life of maybe four to six weeks if you push it.”

Williams says cherry growers have had a good run in China with high disposable incomes for high quality products going into the gift market and festive season purchases.

Central Cherries (an investment partnership between Freshmax and MyFarm) will be a big part of industry growth set to double in the next few years.

“Quality is absolutely important. If you look at the price premium between, say, 28 to 32mm cherries with high Brix levels versus something 26mm in size, there is an 85% price differential.”

Sweet success

The Manuka story is still very strong, says Williams. 

“The big change in the market place is that the Government has come out with a formal definition of what is manuka honey. 

“A lot of other honey that had previously been blended with manuka honey has dropped in value right back and the high UMF honey is continuing to hold its value or even go a bit higher. That has been a key market change and will continue to be a driver of the value of high UMF honey.”

Waimarie Manuka Ltd Partnership is MyFarm’s first offer for investors to invest in a manuka honey plantation. It is the result of a partnership with Comvita which has considerable commercially sensitive IP gleaned from 12 years of research on 1000 different sites.

“DHA, which is the precursor for UMF activity in manuka honey, is a lot higher in plantations than wild capture. That comes down to the husbandry, but also the set-up, the types of genetics in manuka plants; that is going to be key to success.”

There is competitive pressure from forestry and carbon and meat farmers putting some pressure on asset prices.

“The commercial model is not entirely proven around that. There is also some informality in the sector and how it works.”

The industry still has a lot more work to do to protect its brand, Williams says.

With carbon forestry, the big advantage of carbon is that it provides cashflow in via manuka or forestry plantation. It is also added to returns.  

 

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