How good a job is Zespri actually doing?

Transcription

1 Turners & Growers presentation to Kiwifruit Growers NZ Kiwifruit Industry Reform How good a job is Zespri actually doing? 23 September 2009

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3 Zespri s claims Zespri claims that: Zespri s monopoly is the best model for the New Zealand kiwifruit industry Zespri is doing a great job for New Zealand growers Growers receive more for their fruit than they would if other exporters could compete with Zespri to buy it New Zealand kiwifruit gets higher prices in overseas markets because Zespri has a monopoly 3

4 Turners & Growers Questions Where is the proof? Whose interests is Zespri looking after: yours or Zespri s? How good a job is Zespri actually doing? 4

5 Where is the proof that growers are better off with a monopoly? Zespri has never given growers any evidence to support Zespri s claim that growers are better off with a monopoly. Turners & Growers asked Zespri for the evidence. Zespri replied that it has no reports, surveys or analyses regarding the costs or benefits flowing from Zespri s monopoly. Zespri refuses to provide a copy of an October 2008 report by Mark Roxburgh and Geoff Sinclair, titled Market Power and the NZ Kiwifruit Industry, because its disclosure could commercially prejudice ZESPRI. Letter from Zespri to T&G Horticultural 14 September

6 Zespri s monopoly is bad for growers Zespri can pay growers whatever price Zespri chooses, because no-one is allowed to offer a higher price. Monopoly eliminates the discipline of competitive purchase markets. Regulatory Design Task Group report 14 May 1999 p 18 As a single buyer for fruit to be exported to markets other than Australia, the company s would be free to set its price for fruit it buys. Ministry of Agriculture and Forestry Briefing Note No April 1999 p 3 6

7 Zespri s monopoly is bad for growers Zespri has an incentive to keep its fruit payments to growers low, to maximise profits for shareholders. The company s obligation to its shareholders would be to maximise its profit and thus to minimise costs, including the fruit price to sellers. Ministry of Agriculture and Forestry Briefing Note No April 1999 p 3 On the face of it, this implies that the [Single Desk Company s] shareholders will have strong incentives to exercise fully their monopsony power through low offer prices for all fruit. The lower the price paid, the higher the SDC net income and shareholder value. Regulatory Design Task Group report 14 May 1999 p 50 7

8 Zespri s monopoly is bad for growers and shareholders Zespri does not have the same incentive to keep its other costs low as it would if it had competitors. Growers bear any increases in selling costs, because Zespri charges its margin on net sales before costs are deducted. Growers don t have the option of switching to an exporter with lower costs, because Zespri is a monopoly. Any other cost increases come off Zespri s profit. Zespri doesn t have to produce a competitive profit because it has a monopoly. There are no other kiwifruit exporters for shareholders to invest in. The weakening of profit-seeking incentives raises the potential for cost inefficiencies. This may take the form of inadvertent wastage or excessive risk aversion by management. Regulatory Design Task Group report 14 May 1999 p 18 8

9 Zespri s monopoly is bad for growers and shareholders Zespri s board and management can perform as badly as they like. There is no competitor to measure their performance against. No matter how much Zespri underperforms or how little it returns on shareholders capital, no-one can take Zespri over. Absence of take-over mechanisms eliminates the discipline of the corporate control market. Regulatory Design Task Group report 14 May 1999 p 18 9

10 Zespri s monopoly is bad for the industry Everyone agrees that the way to prosper in the face of a global oversupply is to innovate. Zespri s monopoly discourages innovation. Over time, the continuation of a single marketing channel will become less consistent with the increasingly competitive nature of the international fruit market. The principal reason for this is that innovation is driven out of research and development. Where an industry relies on one research programme, the outcomes of research are likely to be less innovative than where research is conducted in a competitive environment. Producer Board Project Team report to Ministerial Oversight Group 21 April 1999 p 5 Zespri trumpets how much it spends on innovation each year. But if other exporters could compete with Zespri, the total spend on innovation would be higher and the innovation would be more effective. 10

11 Zespri s monopoly was supposed to be temporary When the current regime was introduced in 1999, the Government s unanimous advice was that competition, not a single desk, would produce the best returns for the industry. Like any monopoly, the single desk powers create significant risks, in particular higher costs, inefficient use of capital, distortions in other markets and loss of innovation. All officials consider the disadvantages are likely to outweigh any advantages of a monopsony or single desk regime. All officials agree that the Government s first-best option is to corporatise and deregulate simultaneously at a defined date, as soon as possible. Letter Producer Board Project Team to Ministerial Oversight Group 1 April

12 Zespri s monopoly was supposed to be temporary Zespri and NZKGI would like you to think that: competition caused prices to collapse in the 1980s; and the introduction of the single desk saved the industry. The Government and its advisers had a very different view. They said: prices fell due to a world oversupply; and competition, not the single desk, was the answer. Recourse to regulation first to partial central control (by licensing in 1977), then to complete central control (under a single desk in 1988) was seen as the remedy to avoid or alleviate falling prices to New Zealand producers. The industry expected that central coordination of production and marketing, combined with compulsory shared funding of industry costs, would protect New Zealand producers. Prices plunged despite the controls. Real prices have declined significantly and almost continuously until 1992, after which prices stabilised. It is reasonable to surmise, however, that if open competition had continued in 1977, successful producers would have become closer and more responsive to the challenges and opportunities of the changing international market earlier than has been the case. Letter from Hon. John Luxton to Kiwifruit New Zealand, 21 April

13 Zespri s monopoly was supposed to be temporary Zespri was allowed to retain the monopoly temporarily, in preparation for open competition. The first best option is to separate the KMB s commercial and non-commercial functions, corporatise the commercial operations as a company, allocate the shares to producers and end the monopsony soon (say April 2000 or 2001) all officials agree with this proposal. Ministry of Agriculture and Forestry Briefing Note No April 1999 p 1 It is increasingly accepted among key players that deregulation is an inevitable commercial progression. Letter from Hon. John Luxton to Kiwifruit New Zealand, 21 April

14 Whose interests is Zespri looking after? The old Kiwifruit Marketing Board had to buy all the fruit that growers produced, had to act in the best interests of growers, and held its assets on trust for growers. Zespri is not subject to the same requirements. Zespri is an ordinary company, not a growers co-operative. Zespri is obliged to prefer the interests of Zespri s shareholders to the interests of growers or the industry as a whole. Zespri s board of directors is legally obliged to act in the interests of its shareholders, not growers Zespri can take as much or as little fruit as it likes, to maximise the profit for its shareholders Zespri is under no obligation to maximise returns to New Zealand growers Zespri is under no obligation to act in the best interests of the kiwifruit industry 14

15 Whose interests is Zespri looking after? Preferring shareholders interests means keeping payments to growers as low as reasonably possible, to maximise shareholder profits. The Kiwifruit Export Regulations 1999 leave Zespri free: to pool kiwifruit sales as it chooses to charge growers whatever margin it likes to allocate costs to growers rather than shareholders therefore, to allocate fruit returns between shareholders and growers as Zespri sees fit For example, Zespri charges the whole of the promotion cost for New Zealand-grown fruit (other than staff salaries) to growers, even though Zespri shareholders own the Zespri brands and profit from the marketing of those brands. 15

16 Whose interests is Zespri looking after? Grant Samuel prepared a draft report in January 2007 criticising the way Zespri set its margin and allocated costs between growers and shareholders. Zespri, Kiwifruit New Zealand and NZKGI have all refused to release copies of the Grant Samuel report. 16

17 Whose interests is Zespri looking after? Zespri has developed substantial businesses on the back of its monopoly. The profits from those businesses are paid to shareholders, not growers. The profits from the sale of Zespri Gold licences, both in New Zealand and overseas, go to shareholders, not growers The profits from Zespri s sales of foreign-grown kiwifruit go to shareholders, not growers Any profits from Zespri s kiwifruit products business will go to shareholders, not growers Yet Zespri would not have any of these businesses if it weren t for New Zealand growers and Zespri s export monopoly. 17

18 Whose interests is Zespri looking after? Zespri s annual reports don t show precisely how Zespri allocates costs between its monopoly business (growers) and its other businesses (shareholders). The mix of non-contestable and contestable activities creates cross-subsidy risks. As discussed earlier in this report, an SDC [Single Desk Company] could use its statutory single desk status to subsidise other activities that it wants to be involved in (e.g. transport and storage of kiwifruit). Regulatory Design Task Group report 14 May 1999 p 51 18

19 Are shareholders protected? According to Zespri s 2009 Annual Report, at least 453 of Zespri s 2,710 New Zealand suppliers (17%) in 2008/2009 were not shareholders of Zespri at 31 March There must be Zespri shareholders who: no longer supply any fruit; or own a higher proportion of Zespri shares than they supply fruit. It is impossible to determine how much each shareholder supplies, because Zespri refuses to release this information. According to the 2009 annual report, Zespri director Craig Greenlees owned 431,692 shares at 31 March 2009, which was 1.78% of Zespri s total of 24,143,468 shares. Zespri won t tell us how much fruit Mr. Greenlees supplies. It seems unlikely that it is 1.78% of the New Zealand crop. Those shareholders who own a higher proportion of Zespri shares than the proportion of fruit they supply benefit each time Zespri allocates a dollar to shareholders rather than growers. Conversely, growers miss out if they do not own any Zespri shares or own less shares than the amount of fruit they supply. 19

20 Can shareholders control Zespri? Zespri s constitution provides that shareholders can only vote up to the lower of their shareholding or the quantity of fruit they supply. If you own 100,000 shares but supply no fruit, you get no votes If you own no shares but supply 100,000 trays, you get no votes The result is that there are thousands of shareholders but each of them only has a tiny portion of the votes. This makes it very difficult for shareholders to oppose the board and seek any change to how Zespri operates. Growers who do not own shares have no control over Zespri, no matter how much fruit they supply. 20

21 Can the regulator protect growers interests? You might expect the regulator to keep Zespri in line. However, Kiwifruit New Zealand only has very limited powers over Zespri, namely: to require information to stop Zespri discriminating between growers to stop Zespri diversifying its business without proper authority and to grant collaborative marketing approvals KNZ has no power to require Zespri to act in the best interests of growers and no control over how Zespri fixes orchard gate returns. KNZ will only exist for as long as Zespri has its monopoly. KNZ gets most of its funding from Zespri. Therefore, KNZ has no real incentive to attack Zespri s monopoly. 21

22 Collaborative marketing doesn t work Kiwifruit New Zealand was supposed to allocate a proportion of the New Zealand crop for collaborative marketing arrangements. This was supposed to act as a check on Zespri. However: the proportion of the crop allocated to collaborative marketing is small and has decreased over time since 2001/2002, on average 41.6% of the fruit exported under collaborative marketing arrangements was actually exported by Zespri, collaborating with itself by contrast, Turners & Growers was only allowed 0.5% of the 2007/2008 collaborative marketing fruit and 1.3% of the 2008/2009 collaborative marketing fruit Zespri refuses to release any information about its own applications for collaborative marketing approvals because this would cause commercial prejudice to Zespri. Letter from Zespri to T&G Horticultural 14 September

23 Collaborative marketing doesn t work Collaborative Marketing Volumes as Percent of NZ Export Crop Note: On average over this period Zespri themselves have accounted for over 41.6% of the annual Collaborative Marketing volume. 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% 2001/2 2002/3 2003/4 2004/5 2005/6 2006/7 2007/8 2008/9 23

24 How good a job is Zespri actually doing? Zespri keeps telling you that it is doing a great job for growers. Kiwifruit grower-owned ZESPRI Group Limited is forecasting record returns for the 2008/2009 season. ZESPRI continues to earn prices in its markets that are between 40 and 100% ahead of its next best competitors. ZESPRI now invests over $8 million annually on research and development. ZESPRI s programme with HortResearch is now the world s biggest, with over 50,000 seedlings currently under evaluation. It is anticipated that further exciting new cultivars will be released into commercial grower trials over the coming years. Zespri Update October

25 How good a job is Zespri actually doing? It s easy to talk a good game when you have no competitors. What Zespri cannot tell you is: what returns growers would be getting for their fruit if other exporters were allowed to compete with Zespri to buy it whether competing exporters could get the same or better prices in export markets, because the premium is being paid for New Zealand fruit rather than Zespri-branded fruit what would be spent on research and development if exports were opened to competition what new, exciting cultivars other companies might develop if they were given the chance to export their fruit If Zespri is as good as it says, why is Zespri afraid of competition? 25

26 How good a job is Zespri actually doing? Zespri s performance is unimpressive. Production has increased but orchard gate returns and profit have fallen. Hayward orchard gate returns per tray have fallen substantially over time. The decrease has been partially masked by increasing production per hectare. Production per hectare cannot increase forever. Orchard gate returns are falling as a proportion of net revenue, i.e. costs are increasing. Zespri has propped up returns by cutting its margin progressively. Zespri cannot go on cutting its margin forever. Zespri s profit is falling as a proportion of turnover. 26

27 How good a job is Zespri actually doing? Hayward orchard gate returns per tray are falling in both nominal and real terms. The fall is being partially masked by an increase in production per hectare. NZ-grown OGR per tray GREEN NZ-grown OGR per tray GREEN adjusted to 2009 Q1 dollars 8 Average TE supplied per hectare - Zespri GREEN 8,000 7 Dollars ,000 6,000 Tray Equivalents per Hectare (projected) Zespri s Annual Reports and Financial Reports for the years ending 31 March 2004 through 2009 plus Zespri projections for the 2009/2010 season. 5,000 27

28 How good a job is Zespri actually doing? Zespri GREEN ORGANIC orchard gate returns per tray have remained flat in nominal terms and have fallen in real terms. 12 NZ-grown OGR per tray GREEN ORGANIC adjusted to 2009 Q1 dollars Average TE supplied per hectare - Zespri GREEN ORGANIC NZ-grown OGR per tray GREEN ORGANIC 8,000 Dollars ,000 6,000 5,000 Tray Equivalents per Hectare 0 4, (projected) Zespri s Annual Reports and Financial Reports for the years ending 31 March 2004 through 2009 plus Zespri projections for the 2009/2010 season. 28

29 How good a job is Zespri actually doing? Zespri GOLD orchard gate returns have declined in real terms, although Zespri predicts a better result next year. The higher returns for GOLD are not shared with Hayward growers. NZ-grown OGR per tray GOLD Average TE supplied per hectare - Zespri GOLD 10 NZ-grown OGR per tray GOLD adjusted to 2009 Q1 dollars 12,000 Dollars ,000 8,000 6,000 Tray Equivalents per Hectare 2 0 4, (projected) Zespri s Annual Reports and Financial Reports for the years ending 31 March 2004 through 2009 plus Zespri projections for the 2009/2010 season. 29

30 How good a job is Zespri actually doing? Net profit is falling as a proportion of group revenue, as Zespri cuts its margin to prop up returns. Net profit after tax ($000) Net profit after tax as percentage of revenue 1,500,000 Group operating revenue ($000) Zespri margin (net of loyalty premium) as percentage of pool revenue 12 1,200, Dollars 900, ,000 6 Percentage 4 300, Zespri s Annual Reports and Financial Reports for the years ending 31 March 2004 through 2009 plus Zespri projections for the 2009/2010 season. 0 30

31 How good a job is Zespri actually doing? Orchard gate returns are falling as a proportion of net revenue, as costs rise. 1,500 OGR ($m) Net revenue ($m) Percentage OGR/net revenue 50 1,200 Dollars Percentage Zespri s Annual Reports and Financial Reports for the years ending 31 March 2004 through 2009 plus Zespri projections for the 2009/2010 season. 31

32 How good a job is Zespri actually doing? Even Zespri admits that many New Zealand Hayward growers are losing money. In its 3-year outlook produced in March 2009, Zespri said: Approximately 34 percent of GREEN growers are anticipated to have a Net Orchard Return below zero for the 2008/09 season. When Turners & Growers pointed this out to growers, Zespri recalculated the figures but still found that: Approximately 27 percent of GREEN growers numbers are unprofitable (based on 08 returns and average on-orchard costs). Zespri Kiwifruit Information Clarification 3 July 2009 Three weeks later, Zespri recalculated again, excluding what it deemed to be young orchards, drought-affected orchards and hail-affected orchards, and still found that 17.8% of Hayward growers were losing money: Based on 2008 returns, negative net orchard return GREEN growers, after removing young plantings, drought affected and hail affected orchards represent 9.7% of tray volume and 17.8% of grower numbers. Zespri Fact File 1 on 32

33 How well is Zespri actually doing? It is going to get worse. Turners & Growers expects an oversupply of Hayward, causing prices to plummet. There will be challenges, with Chile forecasting an increase in production of their low-cost commodity green offering by up to 100 percent in the next five years. Zespri Annual Review 2008/2009 p 2 As Hayward prices fall, more New Zealand kiwifruit orchards will become uneconomic. 33

34 How well is Zespri actually doing? Zespri s March 2009 accounts show that Zespri incurred $50,385,000 in realised losses from derivatives. Those losses came out of grower returns in the 2008/2009 seasons. 34

35 How well is Zespri actually doing? Zespri s own 2007 research, conducted by Colmar Brunton, showed that: 46% of growers were either somewhat concerned or extremely concerned about the future of the kiwifruit industry 23% of growers planned to sell their orchards 22% of growers planned to decrease their involvement in kiwifruit growing However, Zespri refuses to release this research because it would be... commercially prejudicial to Zespri. Zespri letter 20 July 2009 to Turners & Growers Horticulture Limited 35

36 What do growers actually say about Zespri s monopoly? Turners & Growers asked Zespri for any reports, surveys or analyses Zespri had concerning industry support for Zespri s monopoly or opposition to the monopoly. Zespri refused to release the reports it has on support for the SPE, because they may cause commercial prejudice if released. Letter from Zespri to T&G Horticultural 14 September

37 Turners & Growers should not be forced to deal with Zespri Turners & Growers disagrees with the way Zespri is run: Zespri charges the bulk of promotional costs to growers even though those costs add value to brands owned by Zespri Zespri refuses to export new varieties developed by other producers unless it gets control of the rights Zespri spends growers funds lobbying politicians to maintain its monopoly over kiwifruit exports Zespri spends growers funds on loyalty payments, to secure ongoing control of exports after deregulation Zespri spends c.$0.5 million of growers funds each year funding NZKGI and deducts that from grower returns as a direct cost Turners & Growers should not be forced to deal with a company it disagrees with. 37

38 Growers have the right to choose New Zealand is a free society. New Zealanders have a fundamental right to choose who they do business with. Everyone has the right to freedom of association. NZ Bill of Rights Act 1990 s 17 No-one should be forced to contract with Zespri. Growers who want to stay with Zespri can. Those who don t should be allowed to deal with someone else. 38

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