New Zealand’s economy is in trouble. It is not just inflation and the cost of living. It is something much more fundamental.
New Zealand has for a long time imported more than it exports. Ministry for Primary Industries data shows that 80% of the exports come from food and fibre industries. There is no easy solution to the problem of too many imports and too few exports.
We also have the problem that NZ is running big deficits on international services payments. This means that the income we receive from tourists, overseas students and interest payments from overseas is considerably less than what we currently pay out for international services.
The big ticket service expenditure items are our own international holidays, plus interest and dividend payments to overseas investors for all those previous investments they have made.
The overall foreign exchange balance on trade in the combined categories of goods and services is called the current account balance. If we earn more than what we spend then there is a surplus. If we earn less than what we spend there is a current account deficit.
In NZ, we have tended to run current account deficits for many years. However, in the post-covid world those deficits have increased greatly, with the ratio of current-account deficit to national GDP now higher than any other country in the OECD.
In an open economy, any current account deficit has to be balanced by an equal inflow of overseas capital. For many years we achieved this by encouraging overseas investors to send their funds to NZ.
To a large extent, that was to buy our manufacturing companies, develop our tourist industries, buy our retirement villages and also buy forests. We also encouraged foreigners to fund internal government deficits by the purchase of Treasury bonds.
The problem right now is that the current account deficits have become much bigger in the past four years, and are currently bouncing around from about $25 billion to over $30bn per annum.
Can we continue to suck in more and more capital to balance those deficits? How much of NZ’s future productive capacity will we ourselves own?
The answer is that something has to give. And that is why NZ’s medium- and long-term future is now grim. We have got ourselves into a pickle for which there is no painless answer.
Speaking in general terms, we have to export more and import less, but that is easier said than done. My own judgment is that in the medium term our NZ dollar must fall in value. That will make imports more expensive and exports more valuable.
As to when the dollar might fall, that is harder to estimate. Ironically, it will come when foreign investors get scared that it is going to happen. Then, by their actions of declining to invest in NZ, they will collectively make it happen.
It might be in six months or a year, or perhaps in two years. It may even take longer, but it will happen.
Now, I come to the issue of how kiwifruit enters into the story. The reason is that kiwifruit is one of the few export categories with significant potential to increase in scale. A focus on increased exports is the only way we can reduce the pain that lies ahead.
Right now, the 2024 kiwifruit harvest season is just beginning. In my household, the fruit bowl contains some of the new Zespri RubyRed variety. The flavour is good if the fruit is eaten at the right stage of softness. This is the third year of limited RubyRed sales, but at this stage they are less than 1% of total kiwifruit volume.
Within days, the SunGold kiwifruit should be in the local market with exports already underway. Then will come the new season Zespri Green.
The last two seasons have been very difficult for Zespri, which, with the exception of Australian destinations, has a global monopoly licence to export all NZ kiwifruit. In 2022 it was serious post-harvest quality issues, which led to fruit of unacceptable quality arriving in export markets. Then, the 2023 season was disrupted by a series of storms including Gabrielle just before and during harvest.
However, the future in coming years is promising. Zespri expects NZ production of kiwifruit to increase 50% by 2028. China has become the biggest growth market with 26% of sales being made there in the June 2023 year. This is likely to increase further. Japan is the second biggest market. Then come the European Union, Korea and the United States.
Most of the growth will be in the SunGold variety, but RubyRed could become increasingly important once Zespri develops experience in the logistics and storage requirements. This is because RubyRed requires different post-harvest management than either SunGold or green kiwifruit. There is more to learn.
The production of the less profitable green varieties will further decrease as existing growers seek licences to convert across to SunGold.
The most challenging issue for Zespri to manage is provision of SunGold licences for northern hemisphere countries. This is needed to get a 12-month supply of Zespri product. This is essential to maintain continuity of shelf space in supermarkets and avoid the need to crank-up consumer marketing each year, with consumers having become used to not eating kiwifruit for about five months.
There is another key reason why continuous market supply of SunGold is essential. Greece and possibly other countries now have their own varieties of gold kiwifruit. Hence, a lack of SunGold from NZ in the northern autumn and winter creates space that others will start to fill.
Zespri has already sold nearly 5000 hectares of grower licences in France, Italy, Japan and Korea for growers there to produce SunGold, which Zespri will then market under the Zespri brand. Within a few years this will produce about 48 million trays of SunGold per annum but more will be needed.
The most controversial issue is what to do in China. Back in 2021, Zespri sought approval from NZ growers for SunGold kiwifruit licences to be sold to approved Chinese growers but just failed to get the necessary 75% support. That failure was a great pity.
Given that China is the largest market for SunGold, there is a need for off-season production in that country. This is much more efficient than having to transport expensive product from Europe.
The problem is that China apparently already has over 8000ha of SunGold kiwifruit vines – whose growers have no licences for this variety. Zespri holds the international plant variety rights, meaning the growers currently have no legal right to grow or market the fruit.
The first challenge is that this has to be dealt with in the civil courts and not the criminal courts. So, it is not up to the Chinese government to prosecute these farmers, some of whom have very large-scale operations, probably bigger than those of any NZ grower. There are also some thousands of other growers with very small operations. It is up to Zespri to take the court cases across China.
Zespri is in the process of litigation, but even if Zespri wins, and it probably will, it does not have the resources to ensure follow-up across China. It would be much more feasible if Zespri had Chinese partners to keep non-licensed competitors of scale at bay.
Rumour has it that Zespri will soon go again to its growers to obtain support for a China operation that should be a win-win for both sides, with the big Chinese growers already having the capacity to grow quality fruit and manage associated logistics.
If NZ fails to develop a local Chinese industry in partnership with the locals, then China always has the option of breeding its own gold kiwifruit from the native varieties that are already there. I am a little surprised this has not already happened. Perhaps it is happening but away from the glare of publicity.
One thing for sure is that China has all of the necessary breeding expertise to achieve this, just as NZ did.
Of course, kiwifruit alone is not going to solve the economic problems that NZ faces. Even if the kiwifruit industry doubled its export earnings, these earnings would only be 20% of the dairy industry export earnings.
And those additional earnings would cover less than 10% of the current-account deficits we have been running in the most recent years. But we have to start somewhere.
Coming back to those greater problems, and with the NZ population growing rapidly – at the highest rate in the OECD – there has to be a much greater focus on exports.
What are some other export industries for which NZ can claim a comparative advantage and which have capacity to grow here in NZ? It is going to be a huge challenge.
