Does Money Grow on Trees?
24 Jun 2019
The growth of the horticulture industry nationally and internationally is blooming. Driven by healthy eating, superfoods and changing dietary preferences is resulting in land use change, which in the current economic environment is supported by financial returns.
How Does New Zealand Fit?
Like all international trends New Zealand will lead/follow these trends. Obviously we are limited by climate as to what we can grow. Current interest and growth has occurred in apples, cherries, avocados, hops, kiwifruit and berries within New Zealand. There is even talk of bananas. The focus is on export markets and fruit quality to create a point of difference for New Zealand produce. New Zealand has advantages due to our research, plant breeding, skills and knowledge across these sectors. As well as these advantages we have our natural features of soils, water and air quality. We are isolated which creates photo-sanitary appeal and to most markets we are counter-seasonal. We do have challenges around adequate labour, cost of labour and distance to markets which all have an impact on our international competitiveness. We are exposed to the climate and the whims of Mother Nature. Overall, we are internationally competitive and horticulture crops are well sought after in a vast array of international markets and by international consumers.
Is It Worth It?
Like many assets in recent times economic conditions have been favourable which has resulted in asset value appreciation. These same conditions have also assisted the growth and level of capital into the horticultural sector and various crop types. If you peel off the economic layer and consider the fundamentals of the horticultural sector they are positive. Growth and demand, new varieties and market returns have been generally strong. These underlying characteristics have contributed just as much, if not more, to this sector than general economic conditions. When these actors are combined they have created considerable interest as many see this sector as being a ripe for the picking.
Is It Sustainable?
Due to the low interest rate environment, capital has been looking for investments. Asset values have been appreciating while returns have now stabilised. The low hanging fruit investment opportunities have gone. Others are suggesting that the current value levels are full and the returns do not fully reflect the risk across some of the sectors. We are also witnessing developments of horticulture into new horticulture areas or crop types into areas not previously recognised for those crop types. This trend of sector growth and development is not unique to New Zealand; it is being replicated across a number of countries. Consumer food trends are continually changing which requires ongoing and leading development and research. Many of New Zealand crop types require relatively long lead-in times for breeding and establishment to crop. Are we quick enough? The short to medium term would suggest that the current environment is sustainable.
The production and marketing of horticultural crops can take many forms but all rely on water. With the National Water Policy in place there are numerous reviews of water allocation being undertaken throughout New Zealand which relate not solely to the horticulture sector but the wider agriculture sector. Until complete these reviews are introducing a level of uncertainty and will no doubt also result in further capital investment required through improved technologies in the management and use of irrigation of water.
Horticultural development requires significant capital outlay in securing suitable land and undertaking the above ground development. As technology evolves this outlay has also been increasing to now include crop covers and rain covers which have a two-fold impact regarding risk reduction and crop security during key times and fruit quality. These factors combined can result in significant asset values when considering any of the horticultural sectors. Horticulture assets current values range from $150,000 to $1,100,000 per hectare for the productive portion. The other key consideration across this sector is the level of control and internal competition that exists. New Zealand has a full range in this regard from the single desk Zespri model which has total control of development, production level, growth and marketing through to full open market deregulated exporters. This can influence the appeal to investors and is often reflected in value and risk levels achieved. The horticulture sector and its diversity has appeal in the market. Consumer food trends and discretionary spending to some sectors supports the current returns. While these factors exist and demand for quality food exists the sector has a strong position in the New Zealand rural economy.