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Rotten apples

By Rebecca Macfie

Tuesday 28th February 2006

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Catastrophic. Disastrous. Heartbreaking. Devastating. Shocking. There are as many descriptors of the state of New Zealand's $400 million pipfruit industry being bandied about as there are apple varieties in the nation's orchards.

As the rest of New Zealand was -winding down for Christmas, apple growers were discover-ing the full horror of the 2005 selling season. In any normal year - if such a thing exists in the roller coaster, weather-beaten world of orcharding - growers would, from mid-November onwards, be heading down to the bank to deposit their final export payments. But last year many were instead receiving a bill from their export companies demanding clawbacks of their early season advance payments.

Why? Simply put, their apples cost more to produce than they earned in the marketplace, and few saw it coming at the start of the season. It costs around $18 to grow, pick, pack and ship a carton of export apples, but last season the average grower earned only $12.60 per carton (averaged across all varieties). According to MAF figures, that translates to a loss on the average Hawke's Bay orchard of $189,000.

For some growers the situation will be even worse, depending on the mix of varieties they grow. For New Zealand's two key varieties - Braeburn and Royal Gala, which make up 70% of the national crop - the picture is nothing short of dire. Braeburn returned prices of around $8 a box - less than half the cost of production - and Royal Gala around $10.

So it's not surprising that upwards of 10% of New Zealand's commercial apple trees are thought to have been felled in recent months, and the number of growers in the industry severely pruned from over 900 in 2004 to just 700.

One of those unlikely to go back to growing apples after the 2006 season is Robert Sykes. The 41-year-old Hawke's Bay orchardist has seen tough times before in the industry - in 1998 he was sold up by his bank after a period of rapid expansion and since then has run leasehold orchards. But like others in the industry, he knows the 2005 season isn't just another tough year: it's a watershed for a sector still learning how to organise itself post-deregulation, and how to refine its product for a global market awash with apples.

The industry's single desk export system was dismantled in 2001 after more than 50 years in the iron grip of the Apple and Pear Marketing Board. Sykes recalls that for the first two years of deregulation things were relatively easy: the exchange rate was favourable and growers and exporters enjoying their first taste of liberty were "out to conquer the world".

But in 2004 things started going wrong. The exchange rate rocketed, record New Zealand volumes were exported, soaring production from South America's low-cost growers was crowding New Zealand's traditional markets in Europe, and dozens of rookie Kiwi exporters started slugging it out with each other in the marketplace.

Still, after that rotten year, things could only get better, right? Wrong. All the factors that made 2004 tough were repeated in 2005, and a few more besides. By the time New Zealand fruit started arriving in Europe the market was glutted with apples, in part because of a supply overhang created by the use of new SmartFresh storage technology to prolong the selling window for Northern Hemisphere fruit. On top of that, Europe was sweltering in a heatwave and consumers were reaching for thirst-quenching juicy fruits rather than crunchy apples. Poland, a major apple grower, had joined the EU, adding to the oversupply. And to make matters worse, most New Zealand exporters had expected the US market to be a disaster, so more fruit than normal was dispatched to Europe. (As it turned out prices in the US market were much stronger).

The result, says industry stalwart John Paynter, a director of Yummy Fruit, was that the market for New Zealand Braeburn collapsed with only 20% of the fruit sold.

Overlaid across all these factors is a larger and more pervasive issue - fresh fruit consumption in the developed world is stagnating while global production is increasing. In 1999 the average Dutch person chomped through 30kg of apples; by 2002 that had fallen to 25kg. And the bulk of new apple production coming on stream is from developing countries that can produce a case of apples for a fraction of New Zealand's costs - the world's two major apple exporters are now Chile and China.

All of which boils down to one all-too-familiar diagnosis: like many of New Zealand's traditional agricultural exports, apples are a cheap and abundant commodity. A New Zealand Braeburn may be tastier and crunchier than a South American one (and everyone agrees ours are the best in the world), but in a world awash with fruit that counts for nix.

Can the New Zealand apple industry salvage a future from this? A lower exchange rate would help alleviate the short-term pain, as would convincing the Australians to dismantle their 84-year blockade against Kiwi apples (their officials recently recommended lifting the outright ban on Kiwi apples, but a raft of new barriers looks set to keep our fruit out for a while yet). Getting local exporters to cooperate on market intelligence and leveraging New Zealand's favourable image would help, too, and moves are underway in that direction now, with the development of a new country-of-origin label.

But none of these measures alone will be enough to hoist our mainstay crops, Braeburn and Royal Gala, above commodity status. If there is a future for the apple industry, it lies in a clever blend of smart marketing and distribution, and delectable, tightly-controlled new varieties sold to the world's wealthy consumers under compelling brands.

This is already happening in nooks and crannies of the industry. Take a look at Heartland fruit, a vertically integrated Nelson exporter owned by five large growers producing around 2% of New Zealand's export crop. By developing close relationships with supermarkets, maintaining stringent control over fruit quality, and customising distribution to retailers' precise requirements, Heartland achieved returns more than 30% higher than the industry average in the 2005 year. As general manager Ken Tipler explains, if a UK retailer wants small, highly coloured fruit, that requirement is worked into orchard management practices right from the start of the season to ensure the company can deliver. If a French client wants three containers of apples delivered weekly for 20 weeks, Heartland will tailor its distribution accordingly.

Despite the prevailing gloom, Heartland's shareholders clearly see a future for the industry; since setting up the company in 2001 they've expanded production by 30%, and will expand a further 11% in the 2006 season.

As for new varieties, some hard lessons have been learned since Braeburn and Royal Gala were produced by New Zealand's horticultural scientists as exciting new varieties 30 to 40 years ago. No one thought much about protection of intellectual property, branding and marketing back then - hence the proliferation of those varieties around the world. The newest, hottest variety on the block today, Jazz, is being marketed to the world under a radically different model. ENZA (once the brand of the Apple and Pear Marketing Board and now owned by listed company Turners & Growers) owns the exclusive worldwide marketing rights to Jazz, and plans to build a global appetite for it as a boutique product by tightly controlling supply and quality. By 2011 there will be just six to eight million cartons produced globally, of which around three million will be grown in New Zealand.

So far New Zealand's Jazz crop is tiny - less than 1% of total apple exports - but growers have been rewarded with returns of over $30 a carton. It's a similar story with another premium variety, Pink Lady - which ironically hails from Australia. It is tightly controlled by a global Pink Lady Association, which issues marketing rights to exporters and controls international branding of the fruit. The rewards? New Zealand -growers have earned between $27 and $35 a carton over the last five seasons. The catch? Pink Lady accounts for only 1% of the national crop.

But returns like these are tantalising for growers desperate for a way out of the commodity price trap. That's why there are high hopes that a new joint venture set up last year to develop, license and control the intellectual property relating to new varieties will produce hot new products that consumers will pay top dollar for.

The joint venture company, Prevar, is owned by Pipfruit New Zealand (45%), its Australian counterpart (33%), the international nursery-men's association (12%) and HortResearch (10%). Its brief is to spot market trends, speed up the development of new varieties that will tickle consumers' fancy (apples with coloured flesh, novel tastes and so on) and develop global commercialisation plans for new varieties develop-ed by HortResearch scientists. Thanks to New Zealand's long-standing expertise in pipfruit breeding, there are already some 30 varieties (apples and pears) under development.

But given that it takes five years to get a decent crop off a new tree, the transformation of the apple industry into a consumer-led purveyor of high-value branded apples will be painfully slow. And for some growers who spent Christmas wondering how to pay their bills, much too slow for survival.

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