A new report out by Rabobank says global demand for Zespri kiwifruit is forecast to rise to 300 million trays by 2028.
To keep up with demand, the report said significant investment would be required in the post-harvest segment (PHS) to boost production capacity in the years ahead.
As this would result in major capital expenditure, kiwifruit growers were urged to ramp up capital planning discussions with PHS providers and banks.
The report, The Time for Capital Planning is Nigh – Funding the Expansion of New Zealand's Kiwifruit Post-Harvest Infrastructure, was written by Rabobank senior horticultural analyst Hayden Higgins, who outlined what New Zealand growers would have to do to meet this demand.
"The production of New Zealand-grown Zespri kiwifruit will need to increase to around 225 million trays over this period with the balance coming from Zespri's global supply programme grown under licence outside of New Zealand."
The required lift in production of New Zealand-grown kiwifruit represented a 46 per cent increase on 2019 volumes, Higgins said.
"While the industry is currently doing everything it can to optimise existing infrastructure and expand production capacity, Zespri indicate they expect between $700 million and $750 million of capital expenditure will be required to handle 225 million trays of kiwifruit by 2028."
Listen to Jamie Mackay interview Hayden Higgins about this report on The Country below:
Both bank debt and shareholder equity would be required to fund new infrastructure, Higgins said.
"Fundamental to supporting this expansion will be the capacity of the PHS to borrow from banks and – given the strong recent performance of the sector over recent seasons – the sector appears well placed to do so."
"The PHS will also have to source equity, and our modelling suggests this will need to be more than one-third (approximately $250 million) of the forecast capital expenditure."
Kiwifruit growers had a vested interest in investing in the supply chain and were therefore the most likely source of the new equity required.
There were three alternative paths growers could take with regard to funding the new equity needed for PHS infrastructure, Higgins said.
• Growers could choose to directly invest and become shareholders of post-harvest operations and fund this from their own orchard operations.
• Growers could choose not to invest but potentially pay an increased packing charge to support a dividend stream suitable to non-grower investors.
• Growers could end up using a combination of the two.
With these options in front of them, growers should communicate with industry participants to plan for this future funding requirement, Higgins said.
"Growers should be engaging with their PHS providers to understand their plans to participate in the infrastructure expansion, how they expect this will be funded and their options for participation."
Communication with financiers was also essential.
"Banks will want to understand a grower's strategy and if it includes expanding production and owning shares or even owning shares without expanding production."
Other potential sources of equity
In theory growers could fund all required equity, but it was unlikely all would participate, the report said.
"Our analysis indicates growers could potentially afford to fund the total pool of equity required, and we've already seen a number of growers committing to supporting expansion by buying shares and committing supply," Higgins said.
"However, some growers will likely choose not to, possibly to avoid having all their investment eggs in one basket or because they'd prefer to invest in productive assets versus shares that they may be unable to use as security."
With additional equity likely to be required, the report said non-grower investors and corporate investors could be alternative sources of funding.
"Non-grower investors are considered likely to show interest in the sector. Especially in the current economic climate when asset yields have lowered."
This potential group of investors, which could include retired growers, may find the profile of a primary sector investment with a strong future outlook attractive, Higgins said.
Pre-Covid-19, corporate investors or investment funds were considered the third - though least likely - source of potential equity for post-harvest expansion.
However, the impact of the coronavirus pandemic on investment opportunities may have improved the likelihood of interest among this form of investors.
"There are a number of reasons why participation from this type of investor is less likely, including traditionally high hurdle rates (minimum rate of return) for this form of investor, equity requirements of individual post-harvest segment operators falling short of capital placement hurdles and potential Overseas Investment Act restrictions," Higgins said.
"However, with the arrival of Covid-19, some of these barriers or perceived barriers to participation may be less relevant, particularly in relation to return hurdles which have come down in the Covid-19 environment."
PHS competition set to rise
The report said each business in the post-harvest sector would have a different strategy when it came to industry expansion, ranging from non-participation through to significant expansion.
"Each PHS business will have a different appetite for debt and financial ability to expand and subsequently repay debt, and, on this basis, the opportunity will fall either to the incumbents who do have the capacity to grow, or to new entrants," Higgins said.
"Businesses that elect to maintain the status quo capacity will plan to keep their existing suppliers, but will likely face increased competition from those looking to expand or from new entrants seeking to procure supply. New entrants - especially if they have little or no experience - will also create competition for skilled employees within the sector."