Q&A: Zespri eyes more Chinese kiwifruit production deals like Shaanxi MoU
While New Zealand-based kiwifruit marketer Zespri has been producing fruit overseas for many years, it made history last week by signing a Memorandum of Understanding (MoU) with the Shaanxi Provincial Government in China to start production trials in the province around April-May, 2016. In conversation with www.freshfruitportal.com, Zespri COO Simon Limmer explained how the move fit into a much broader plan in a rapidly changing market.
So how is everything going in China? I imagine you've got a lot on your plate after making this agreement.
China is always a busy place. We had a meeting yesterday (Nov. 23) with our China Advisory Board which meets every few months, and we've always got plenty to talk about - just the pace of change here, the opportunities, the dynamic nature of the change. It's constant.
Which is why you've got to get in early to secure deals like this?
Establishing a brand here and getting the take-up is one thing, and that's a great story for us, but when we look at the production of kiwifruit in China we estimate about 1.3-1.5 million [metric] tons (MT); that's more than the rest of the world put together with a number of different varieties, an increasing focus on food safety and quality, and branded products.
It's both quite an amazing opportunity and a slightly ominous threat. It's important for us to understand what that all means and work out what our strategy looks like going forward.
That's probably even more relevant considering estimates that one third of the country's planted vines aren't bearing fruit yet.
It's really hard to get specific numbers but we believe that there are probably groves in the ground for the next five years which probably takes them to two million MT. Currently, most of that's being consumed domestically so that's a good thing to the extent there’s a big market for kiwifruit in China, which we already knew but it’s much bigger than what we're servicing.
I guess it poses the question as to when would they start exporting. We've seen it with the apple industry in China over the last couple of decades, so it's not as if there aren't examples for us to consider.
What will this mean for New Zealand growers and Zespri investors?
For a long time we've had a 12-month strategy up and running so we know that we can supply kiwifruit out of the Southern Hemisphere into the Northern Hemisphere markets for anywhere between six to nine nine months of the year.
So it's important for us to fill the other three to six month periods with Northern Hemisphere product. We've been doing that for a number of years, predominantly out of Italy but also out of France, Japan and Korea; I guess this is just an extension of that but on a different scale.
For the New Zealand growers, strategically it makes a lot of sense for us to make sure the brand is constantly connecting with consumers and customers, making sure we’re getting as much leverage out of the brand as we can throughout the year, and also it has an impact on our business overall.
It means the volumes are much greater of course and the opportunities for shareholders flow out of that. It's exciting stuff across the board.
In the briefing about the MoU it talks about complementary strengths on both sides, and that there's a lot of smallholder production in China. What do you think Zespri can bring to the Chinese landscape where production is so fragmented amongst individual growers?
Chinese agriculture is quite a different landscape to what we’re used to certainly in New Zealand, but we’re seeing various different organizations spring up. There are very big corporate growers who are probably moving into areas which are outside of their core businesses, but food production has been important from an opportunity perspective.
Also, we are seeing of course much smaller growers who have existed there for many decades still chipping away, but more and more we're seeing local leaders consolidate land and organize growers into almost cooperative-type organizations. Those are the ones for us that seem to be the most interesting with leadership coming from a few key people, management processes being put in place, some economies of scale achieved, but at the end of the day they remain growers and that’s really important to us.
It's not easy to replicate the knowledge that growers have through corporate or commercial structures, so we are seeing changes, we're seeing the aggregation of land, and we're seeing reform as to how land's being used. Of course, there's a greater focus on safety and quality, and management systems to take product through to the market.
It's moving very quickly but there's still a long way to go.
From the corporate angle, I guess Joyvio would be an important example of that?
Joyvio, having sprung out of Legend Holdings, have obvious expertise and resources when it comes to IT [Information Technology] and big business, and they have clearly identified that fruit production is an area of growth they want to be a part of. In their corporate models and management systems it's a matter for them finding a mix between that culture, the right varieties, the right management systems, and the realization that when you deal with a biological product there are a lot of things that are outside of your control.
It takes a while to adapt and implement some of the learning. I think they're having mixed successes, but certainly we talk to them and watch them closely, and we'll see more and more of that emerging.
In terms of the trials themselves, will they have a commercial element too to sell fruit with the Zespri brand within a couple of years?
It's too early for us to actually put a timeframe on it. We are learning as we go – of course for us to brand anything as Zespri coming out of China it's got to jump through a number of hurdles; food safety, food quality, and consumer acceptance for China as the country of origin. These are all really important considerations for us, but we know we need to be in there alongside the Chinese building relationships with Chinese partners.
We've probably got two or three years ahead of us as we work through those processes and get to understand what the growing environment is all about, and work towards standards we would consider to be acceptable from a Zespri perspective.
Will there be an equal focus on green and gold kiwifruit, or maybe one more than the other?
Certainly in New Zealand the reemergence of Gold3 and SunGold’s performance in the market has been a great success story for us over the last year or two, and we’ve got big volumes coming out of New Zealand. So we certainly want to be focusing on Gold but green has been the cornerstone for our industry just as it has for all other kiwifruit producers around the world – it's what we know and it’s a good starting point so we’ll be looking at that, particularly in Shaanxi province where there's predominantly green being grown.
There are some local varieties being grown that are also of interest, but this is probably not a one-off type of agreement. We'll be looking to replicate what we'’re doing in Shaanxi elsewhere and understand what other regions have to offer when it comes to golds or reds or other varieties.
And from what you've seen, how would you describe the Shaanxi growing conditions?
Everywhere is a little bit different. Nothing is quite like New Zealand, and that’s both good and bad I guess. In Shaanxi horticulture is one of their core economic drivers, but we’re seeing quite varied conditions. There are a number of quite mountainous areas and some nice valleys around, but there are a few regions like Xi'an, Wugong, Hanzhong and Zhouzhi which have really significant kiwifruit production around 75,000 hectares.
Soil, climatic, rainfall, sunshine hour conditions do vary, and we’re looking for the best combination of what we can find.
What is the situation like there with vine disease Psa?
My understanding is there is the same Psa in China as we’ve been encountering elsewhere around the world, and that it does seem to have different impacts depending on location and the variety, just as you get with the old Zespri Gold variety which is particularly susceptible to Psa.
We are seeing some varieties which aren't performing terribly well in China, and others which are managing quite well – the climatic conditions, the management practices, the variety that’s being grown, all of those things do make a difference.
Psa is certainly not neutral in China and some areas are affected quite significantly.
Moving on to the final topic, would there be some kind of overlap between European Zespri kiwifruit growers trying to enter the Chinese market, and the Zespri projects going on in Shaanxi and potentially elsewhere?
There probably are. Currently we’re moving European kiwifruit with the Zespri brand into Asia and into China – that makes perfect sense. There’s a lot of opportunity there, there’s a lot of competing kiwifruit exporters doing the same thing as the China market is an exciting place.
The exciting thing from our perspective is we do see global demand for our kiwifruit products and gold in particular continuing to grow, so driving demand ahead of supply and opening up new production regions that are closer to the consumer makes a lot of sense to us in the Northern Hemisphere.
It's a bit of a puzzle we’ll have to piece together as we move down the pathway, but we believe that the opportunity is still quite significant. We're seeing big green kiwifruit volumes emerging out of Europe, and of course out of China.
The only word of warning is they need to have a pretty clear market strategy as to how they’re going to build it, how they’re going to develop it along with their brand because it’s pretty hard to come and go in some of these markets without a long-term approach to be successful.
And how is the European Zespri season going?
We harvest in October-November, and there are containers of European Zespri SunGold and Zespri Green on the water to China as we speak, and of course the European market is starting to see the first emerge at the end of the New Zealand season which is coming to a close.
And how do you think your European-grown volumes are going to grow?
We see pretty steady growth actually. It'll probably represent about 25% of our total volume for China as a market out of our European locations over the next three or four years.
Matching supply and demand, particularly when the lead time from a production perspective is quite so long - four years before you come up to full production - is quite a challenge. But we’re seeing our gold European kiwifruit production starting to come back on-stream on the back of the Psa transition, so we’ll see good volumes of gold starting to come out of Europe in 2016, 2017, 2018.