A horticulture harvest for investors

Adviser Edge managing director Shane Kelly says forestry has underpinned the agribusiness sector for a number of years, but in 2005 this has changed.

“The overall trend is strong growth in horticulture projects,” he says.

“In 2002, timber accounted for 69 per cent of all projects, while horticulture was 25 per cent.

“This year we have 46 per cent of all projects as timber and horticulture is accounting for 42 per cent.”

Horticulture is regarded as covering mango, table grape, almond, olive and citrus fruit projects. Some industry observers include viticulture in horticulture projects as well.

Kelly says a big issue with some agribusiness segments is land. This is particularly true with timber, but horticulture has a better supply.

“There is an ample supply of land for horticulture and we are seeing an increase in projects in tropical areas such as northern Queensland,” he says.

Most of the horticultural crops offer investors quicker returns as there are usually one or two harvests a year, depending on the crop. This compares favourably to 15 years or more from a timber investment.

Kelly says the horticulture segment has also settled down to the more traditional crops such as mangoes. The exotic crops that were being proposed a few years ago have mostly disappeared.

“Most horticulture schemes are in mature markets where there is a supply chain and a demand both domestically and for export,” he says.

“Australian growers also have the opportunity to achieve a significant share of [horticulture product] markets.”

According to the Australian Agribusiness Group (AAG), Australia currently has 0.1 per cent of the world mango market, but its production has grown from 50,000 tonnes in 2001-02 to 60,000 tonnes in 2002-03.

While most of this production supplies the domestic market, during 2002-03 18.3 per cent of Australian mangoes were exported. This included the first sales to China.

Australia is also a very small producer (0.2 per cent) of grapefruits, but holds 0.6 per cent of the global export market, AAG said in a report on the sector.

Most exports are to Asia, but, with the Australian supply becoming available when northern hemisphere production is low, Australia has increasing export opportunities into Europe and Asia, the report says.

Almonds are another crop that is experiencing global growth and Australia is becoming a bigger exporter.

According to Timbercorp, which is expanding its almond plantations in Victoria, the international price for the crop has hit a seven-year high as consumption grows and global production has stalled.

This has led to Timbercorp announcing it will double almond production by 2009, with the group acquiring an additional 4,000 hectares of almond orchards in Victoria.

Michael Worthington, general manager — technology and new business at Timbercorp, says the Australian horticulture industry is well-placed to win export markets.

“Take almonds — 85 per cent of the world supply comes out of California, but it has a lot of old trees and environmental issues,” he says.

“In terms of supply, it is not matching demand. We are well positioned to compete with California to take some of the supply.”

Worthington says Australia is producing quality almonds and has attracted strong demand from the premium end of the market.

“Australia has the potential to be a world player in almonds,” he says.

“But the question is ‘do we have the size to be a big player?’. That is why Timbercorp is expanding production to get scale.”

Worthington says other crops, such as mangoes and table grapes, also have the potential to become global products on a large scale, although there will always be competition from South America and South Africa.

“We have good-quality produce but our costs are higher than those countries,” he says.

“It is not going to be plain sailing and the competition is going to grow.”

Australia supplies table grapes to the UK and Germany — two very large markets. However, Australia does not grow enough table grapes to supply those markets all year around.

Worthington argues cost hurdles can be overcome if the horticulture industry achieves more efficient growing and harvest methods and crops are grown on a larger scale by one organisation. Many industries, such as table grapes and olives, are still grown by small individual farmers, which creates inefficiencies.

“If we get the production right, at the right quality, then costs can be cut,” he says.

“But some costs will always be there, such as using back-packers to pick fruit. With scale we can create a pool of labour.”

But Worthington warns that Australia has to be careful to pick the horticultural sectors where it can create a competitive advantage.

“In Australia we have been able to introduce mechanical harvesting for olives because of our planting patterns,” he says.

“In Europe they still have to hand-harvest because of the nature of the groves, so Australia can cost production that is equitable to European prices. However, subsidies for olive growers in Europe are the biggest issue.”

Creating scale can be achieved in Australian horticulture, SAITeysMcMahon head of agribusiness Stephen Lynch says.

“Horticulture is an emerging sector in Australia that needs alternative funding to create a competitive industry,” he says.

“We see a lot of money going to timber, but horticulture provides the investor some diversification.”

It is a sector that can create better returns if the project manager is growing a product that is exportable.

Lynch says the population of Asia is growing and that means they will need more food and outlets. He says China is looking to increase its number of supermarkets to 9,000 this year and they will all need to be supplied with fresh produce.

“But competition and exchange rates will be a threat to the [horticulture] sector,” he says.

“Consolidation of growers will create bigger players, such as Select Harvests for almond exports. This will help to get things right and that will lead to a lot of growth in the sector,” he says.

SAI is offering an infrastructure fund for agribusiness that it believes will attract superannuation investment.

“The sector needs massive investment, but it has the potential to deliver high returns,” he says.

“We have just got to do things a bit smarter.”