Keeping You

Farming: Hayward anyone?

07 Dec 2018

Had a Hayward lately? You might have, if you are like us and eat Kiwifruit every day. Although, like the Asians, we prefer Zespri Gold.

The Europeans prefer the green Kiwifruit, Hayward, which has a tarter taste, not so sweet, although their tastes are migrating slowly to the Gold.

Kiwifruit seeds arrived in New Zealand with two missionaries returning from China in 1904. The original name of the fruit was ‘Yang Tao’ or Chinese Gooseberry, but in 1952 the locals thought that the furry fruit looked more like the brown-feathered native bird, the kiwi, so that name was borrowed, and it stuck.

All this information from one of our dear clients, Steve Martin, of Oamaru, who until recently owned a Kiwifruit orchard with his wife Fleur in Katikati. He commuted monthly, between Oamaru and Katikati, for 20 years while Fleur did the heavy lifting at their Guthrie Bowron shop in Oamaru.

“I loved the kiwifruit orchard and I still love it. I think about it every day and I dream about it too,” Steve tells me over the phone this morning.

Steve has good reason to dream about kiwifruit. Three years ago, when I first met Steve, his Zespri shares were worth $1.75. Now they are worth $8 a share. And Steve collected a bundle of shares over the years. It is a story worth telling.

In 2001 Steve and Fleur owned promissory notes given by Zespri which represented funds they had loaned to the company to help get it started. In 2001 those promissory notes were converted to shares, or cash; they were given a choice. 40% of promissory note holders took the cash while Steve and Fleur took the shares option. As a result, Zespri were then short of cash and offered shares on an advantageous basis to the existing shareholders. Steve and Fleur bought as many shares as they could afford, using all the savings and borrowed money they could muster. To use Steve’s words, “When shares became available the lights went on for us. We believed in the future of Zespri.”

As their production of kiwifruit increased on the orchard the Martin’s were able to buy more Zespri shares, up to a limit of 4 shares for every tray of fruit they exported through Zespri.

Steve’s various advisers questioned all that money going into one company. Surely such a lack of diversification was risky? “Yes, said Steve, and I like that risk. I study this company every day and I knew every mover and shaker in this industry. I have made it my life’s work to know and understand what makes this company tick.”

On another occasion, Steve told me that he always thought there was gold in Zespri, only it happened a lot faster than he thought.

How good has it really been? A move in the share price from $1.75 to $8 in three years represents a return of 66% per annum compound. On top of this, dividends have grown to more than 8% in 2018 and 13% forecast for 2020. In 2017, for instance, the shares paid a regular dividend as well as a special dividend that together totalled $0.73 per share, fully imputed.

We hear about A2milk and before that, Xero, but not so often about Zespri. Good reason, I suppose, because Zespri is a private company. You can’t buy these shares unless you are a supplier to Zespri. Still, there are some take-aways that other food producers might learn from the Zespri story.

I asked Steve what, in his mind, were the success factors in the Zespri story, but first, a little bit of background to the company.

Zespri is a limited liability private company born out of a co-operative. It is watched over by Kiwifruit New Zealand, a statutory body, whose focus is to make sure Zespri operates fairly and according to the legislation that gave it a monopoly over the exporting of kiwifruit (except to Australia). Kiwifruit New Zealand provides checks and balances to the operations of Zespri which by its very nature could be anti-competitive.

Zespri operates as a single desk for the export of kiwifruit and was born out of a time when exporters competed with each other, exacerbating the boom and bust cycle that was prevalent at the time.

Zespri is not allowed to own orchards or pack houses or buildings. Their sole focus is to maximise the returns to their growers and shareholders in the exporting of kiwifruit.

They do own Grower Variety Rights which are the patent rights to new kiwifruit varieties, such as Gold and Sungold, developed in conjunction with Plant and Food Research, a government-owned organisation. Steve says that the research into new varieties is a key ingredient in the success of Zespri. At any one time there may be 10,000 different strains of kiwifruit under trial with 99.9% of them turning out to be useless.

Growing wild, over trees and along the ground, left to its own devices in China, its native land, the kiwifruit vine is a weed. New genetic material is constantly being sourced from China in the form of kiwifruit seeds.

Zespri is also famous for its market research, getting to know what each market is looking for in its fruit. Conducting research into the health benefits of kiwifruit is part of the marketing drive.

Another key ingredient in the success of Zespri is the ‘grade standard’. To export kiwifruit, the fruit must meet a grade standard for taste, size, shape, dry matter etc. Incentive payments are made to growers for fruit that meets the grade standard. Steve tells me that 85% of his fruit met the grade standard initially, but that wasn’t good enough. He worked away at the things he could control and got his acceptance rate up to 95% at times. Many things are involved in producing a quality kiwifruit, but one strategy is to drop 15% to 30% of the fruit on to the ground before too much energy is wasted in growing it. “Less is more, when it comes to producing quality food,” says Steve.

I asked Steve what he thought was the key ingredient to the success of the kiwifruit industry in New Zealand. “Having a single marketer for export fruit with a high grade standard is the key,” said Steve.

As an example of how not to do it, Steve cited Chile, where there are 60 different organisations marketing kiwifruit for export and they can’t agree on a grade standard and marketing strategies! Steve suggests that the price the New Zealand grower receives is 40% to 60% higher than the same fruit exported from Chile, in the same markets.

Although New Zealand is the third largest producer of kiwifruit worldwide, it is responsible for nearly half of the world’s kiwifruit exports. A great kiwi success story.

Are there parallels between growing kiwifruit in the Bay of Plenty and growing lamb or beef in the South Island …?

Should the venison industry have a single desk export marketing structure?

Keep asking great questions …


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