Thursday, May 19, 2022

SunGold tender delivers debatable results

The 2022 licence release for SunGold and RubyRed kiwifruit produced some variable results that may make Zespri change the closed tender process in future.

The 2022 licence release for SunGold and RubyRed kiwifruit produced some variable results that may make Zespri change the closed tender process in future.

After years of strong investment demand and oversubscriptions, this year a mixed set of results sent conflicting signals.

The median price for SunGold licence rose from $550,000/ha last year to $801,000.

But the minimum price paid actually fell, from $525,000 to $451,950/ha.

The spread between median and minimum, historically only 5%, blew out to 55%.

In addition, the total area successfully allocated was 324ha, less than the 350ha Zespri offered.

In previous tenders, applications for SunGold and RubyRed were substantially oversubscribed, exceeding by as much as four times..

The price movements for RubyRed this year were similar in direction to SunGold, but at lower levels.

The median price was $147,000 and the minimum price $44,217.

Industry analysts think that very high prices for SunGold, of perhaps $1 million a hectare or more, were paid by orchard developers who must have licences.

But the reduced minimums and the undersubscription indicate that demand had limits.

Changed conditions on the tenders also caused uncertainties and planting deferments, orchard developers say.

Zespri put restrictions on the tender process to spread the available hectares over as many bidders as possible.

“I think bidders at prices towards the minimum would have been surprised to be successful.”

Dominic Jones
Origin Captial

There was a 10ha per grower limit and a maximum bid area of 50% of the plantable area on a KPIN.

A use-it-or-lose-it two-year rule means that planting or grafting must occur by January 31, 2024, so orchards have to be ready to plant next year.

The amount of SunGold licence on offer was halved this year, down from 700h to 350ha.

Yet it was not fully subscribed, with a total allocated area of 324ha, 255 successful bids and an average size of successful bid at 1.27ha.

These numbers contrast with the 2021 SunGold release: 700ha allocated, 267 successful bids out of 485 bidders who entered seeking 1500ha, and an average successful size of 2.61ha.

Dominic Jones, managing director of the kiwifruit equity fund Origin Capital Partners, said the halving of SunGold allocation clearly drove up the median price.

The effects of the other changes to the rules were harder to fathom, but they were factors contributing towards the spread of prices.

“I think bidders at prices towards the minimum would have been surprised to be successful and certainly wouldn’t have been bidding because they had to achieve an allocation.

“That would not necessarily show a lack of demand but reflect the uncertainties of the new rules.”

Jones hopes that the tender rules will be amended for next year and fixed in place, because the wide spread was not evidence of a well-informed market.

He presumed two groups of dissatisfied participants; those who paid very high prices and saw others buy with only half the outlay, and those who held off thinking that $800,000 or $900,000 was going to be needed.

“Whatever the rules, they need to be in place early and persist for a number of years for certainty.”

Orchard syndicator MyFarm’s head of investment Con Williams said the higher median price and unfilled allocation indicated a developing resistance to paying high prices.

“We appear to be at the peak of SunGold licence buying.

“The industry is performing well with good operating margins, but cost increases have put limits on what developers are prepared to pay.”

MyFarm had one gold orchard under development and the restricted licence allocation was a risk that investors were warned about.

Williams wanted a more transparent and predictable bidding process, perhaps an auction that would be fair to all participants.

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