Orchard values and their relativity to commodity prices

As is the case with pastoral property, the value of Hawkes Bay orchard and horticultural quality land in general, is directly influenced by relevant commodity prices. In Hawkes Bay this generally means export apple prices. Over the past 15 years the seemingly inevitable cycles of high and low apple export prices, have been significantly shorter than experienced in the pastoral industry, reflecting the relative sensitivity and vulnerability of overseas markets to oversupply. As a result orchards have fluctuated in price quite significantly over the past 20 years.

Unlike the pastoral industry (especially the sheep and lamb trade) which enjoys a substantial cost of production and efficiency advantage over most overseas competitors, the apple industry faces intense competition from a number of regions e.g., South America, South Africa and China, who have, or are rapidly developing, substantial apple industries. This competition has intensified as northern hemisphere growers and wholesalers have adopted new, extended apple storage techniques enabling their produce to be sold out of season at a time New Zealand southern hemisphere growers and exporters traditionally enjoy a substantial quality and price advantage.

An important factor behind the ability of overseas growers to compete successful with New Zealand has been the New Zealand Industries past failure to license the many outstanding apple varieties bred or discovered within New Zealand (a shortcoming shared with the Kiwi Fruit industry – with similar results). New Zealand bred apple varieties such as Royal Gala and Braeburn, are now grown in large quantities throughout the world, successfully competing with our own exports.

A current Industry strategy likely to have long term implications in re-establishing a competitive edge in world markets is the continued breeding and development of new and better export apple varieties – and their commercial protection through international plant patents. The objective is that these new varieties are grown in controlled quantity under license in New Zealand (as well as overseas in controlled numbers to ensure a seasonal continuity of supply) to avoid over production, so maintaining satisfactory market demand and prices.

Competition from overseas growers within over supplied export markets significantly lowered the export price for apples paid to
Hawkes Bay growers for the 2005 harvest season. 2005, returns for conventional orchards, especially those with predominantly older apple varieties now grown in quantity by overseas competitors, were been described by Pipfruit New Zealand as “a catastrophe”. Earlier projections to growers from exporters – of $16 to $22 per carton on the swamped European market, were followed by actual returns of around $8; approximately half of the production and marketing cost to growers. The immediate result was a drop in the price expectation for apple orchards, now commonly quoted in the range of $60,000 per canopy hectare (for conventional orchards – as opposed to high density dwarf plantings), compared to the 2003 – 2004 (approximate) average price expectation of $70,000 per canopy hectare for well managed properties.

A more substantial collapse in orchard prices (expected by many on-lookers) was due in large part to significant competition for orchard quality and horticultural land for alternative uses such as Japanese export squash (pumpkin) prices. This price buffering effect undoubtedly had a significant influence on the majority of orchard bank managers and lenders who, seeing the value of their client’s equity largely maintained in the face operating losses, chose to support loss making orchards through to another season.

The 2006 export season experienced significantly improved apple prices. Early market reports suggest that these improved prices have been sustained for much of the recent 2007crop. As a direct result orchard prices have stabilized at about 2004 levels.

A more substantial collapse in orchard prices (expected by many on-lookers) was in part due to significant competition for quality horticultural land for alternative uses such as Japanese export squash (pumpkin) prices. This price buffering effect undoubtedly had an influence on the majority of orchard bank managers and lenders who, seeing the value of their client’s equity largely maintained in the face significant current operating lossesand overdrafts, chose to support their clients through to another season.

The 2006 export season experienced significantly improved apple prices. Early market reports suggest that these improved prices have been sustained for much of the recent 2007crop. As a direct result orchard prices have improved and stabilized at about 2004 levels.

Filed under: Hawkes Bay, Investment, Moving to New Zealand, Orchards