“SPE or Free” What would happen to the Nelson kiwifruit grower in a deregulated environment?

The question I want to explore in this project is, “would Nelson kiwifruit growers be better off in a de-regulated environment or with the status quo”, the status quo being the “Single Point of Entry” structure that is protected by legislation where Zespri is the only marketer of choice.

I wanted to draw on several recent examples as opposed to what economic textbooks tell us what in theory should work. The case studies chosen are New Zealand kiwifruit industry (multi exporter era and current), the New Zealand pipfruit industry and the South African pipfruit industry.

A “Regulated” trading environment has a perception of inefficiencies, lack of innovation and abuse of a protected position of strength and can be an easy target for groups, for example disgruntled minorities within the industry or politicians, to remove legislation that protects the SPE structure.

De-regulation in many instances comes about through political interference as a result of pressures internally or externally. Many countries that New Zealand’s agricultural I horticultural industries compete against provide their farmers with significant subsidies or other forms of political protection, by contrast the New Zealand government offer virtually no assistance to its farmers with the exception of minor contributions into areas of research. E.g. Public Good Science Fund.

Two international examples of farm subsidies that exist currently:

• In Northern Italy apple growers do not have to pay tax from their orchard income. As postharvest companies they are also offered a 50% subsidy on packhouse/coolstore development if growers join together in larger groups.
• Australia does not import apples from any other country. They have achieved this protectionism based around the fear of importing unwanted pests into their orchards. Unfortunately for apple growers around the world this is not based on science and hence after 80 years of waiting New Zealand has recently brought this to the attention of the World Trade Organisation (WTO).

It is important that New Zealand politicians must not be bullied into the notion of being “pure” and free from any government support in light of our major trading partners being non compliant in this area. At recent WTO talks on Agricultural trade in Geneva “monopolies” such as the Canadian Wheat Board and potentially Zespri were at risk, New Zealand trade officials, if pressured, could and would have de-regulated the kiwifruit industry with a stroke of a pen.

The point here is that Zespri is considered a monopoly, and yes in terms of supplying fruit to global markets growers have little choice however it was grower choice that in 1987 the kiwifruit industry called for a report, which ultimately led to the creation of one single exporter of kiwifruit protected by legislation; i.e. Zespri. This regulatory environment was called upon because the existing multi exporter system was turning out to be a disaster for those with their livelihoods at stake.

Both the New Zealand and South African apple industries have been through deregulation in recent times, both for differing reasons and after many tough years that has seen grower numbers fall significantly, both industries now appear to be in reasonable shape.

After seven years of de-regulation the New Zealand apple grower has lost a lot of money in the market place as a direct result of competing against other New Zealand growers, this is an unfortunate position but is inevitable when the same commodity is offered to many importers by many exporters. New Zealand apple growers are beginning to overcome this issue by growing new, licensed varieties that keep supply at a level where prices can be maximised.

The fundamental reasons that the New Zealand and South African apple industries are now enjoying success include:

1. Production has dropped allowing balance of crop to be sold at more economical prices.
2. Increase in innovation, i.e. new varieties that pay higher returns.
3. Transparency through the supply chain and clearer market signals back to growers.

Zespri has worked hard to eliminate the perceived issues that have caused issues with other historic producer board monopolies:

• Zespri spends significant money in areas that will create future grower wealth. E.g. New varieties, better production techniques, improved pest management etc.
• Zespri has a supply chain structure that is competitive and transparent and is built around involving both the grower and postharvest entities; the people who have the greatest investment within the industry.
• Zespri provide benchmarking that measures Orchard Gate Return against its competitors, namely Chile and Italy.

It is ultimately hard to predict the exact consequences if the industry de-regulated however there are valuable lessons from the past that should not be ignored, also current examples that give a good indication; these include:

• The current Australian market provides a glimpse of the future if multi exporters existed in an uncontrolled way – basically unknown volumes and unnecessary price destruction due to the volatility of volume.
• Historically we have seen the behaviour of multi exporter’s pre 1988, the facts are well documented and in the end the vast majority of growers called for a unified marketing approach in order to save their livelihoods.
• Just as the New Zealand and South African apple industries have shrunk so would the kiwifruit industry, only the biggest and or best would survive; potentially not a bad thing however downsizing would be certain at considerable financial and emotional cost to many growers.
• If the kiwifruit industry was to be de-regulated the surviving suppliers would target the highest paying markets which would result in downward pressure due to oversupply.
• Many Nelson growers would change crops if kiwifruit margins decreased beyond today’s levels; hops, apples and grapes are all currently performing well.

In conclusion I believe it is in the Nelson kiwifruit grower’s best interest to support Zespri and the SPE structure as it is providing current premiums over competitors and also committing significantly to areas of research that will provide continued financial success.

The reasons that the South African and New Zealand apple industries are starting to feel optimistic about their future i.e. new varieties, transparency and efficient supply chain, Zespri has also identified and are dealing with effectively. Zespri will need to continue to benchmark these critical areas of their business.

Having competent executive and strong leadership from the board of directors is critical and will ensure growers remain profitable and have the ability to re-invest into new varieties and growing techniques well into the future.

As one executive said “The problems experienced by Producer Boards tend to be management problems and the answer is to do something about that. It is illogical to try and solve a management problem by adopting a weaker marketing strategy.”