TWEED VALLEY PACK HOUSE FEASIBILITY STUDYrdanorthernrivers.org.au/download/food_and_fibre/horticulture/Tweed...tweed valley pack house feasibility study report prepared by: australia

TWEED VALLEY PACK HOUSE FEASIBILITY STUDY

REPORT

PREPARED BY:

AUSTRALIA CORPORATION CONSULTING PTY LTD ABN 24 091 812 574

JANUARY 2003

__________________________________________________________________________ Australia Corporation Consulting Pty Ltd Ph: 61 7 3878 1177 ABN 24 091 812 574 Fax: 61 7 3378 2087 PO Box 1536, Kenmore Village, Qld 4069 Email: [email protected]

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EXECUTIVE SUMMARY Purpose and Background Australia Corporation Consulting Pty Ltd (ACC) has undertaken this study to ascertain the feasibility of establishing a central horticultural pack house in the Tweed Valley region of northern New South Wales. This Report is addressed to the Northern Rivers Regional Development Board Inc. (NRRDB). The evaluation has sought to address grower acceptance, product assessment, competitor influence, site location, infrastructure needs and financial viability. The task is conceived in terms of the ability of a pack house to create value in the chain between producer and consumer. Evidence suggests that for growers to become and remain competitive, they must become players in competitive value chains. A central pack house is not a pre-requisite to growers forming competitive value chains. Research Approach and Methodology The research approach involved qualitative and quantitative methodologies, including desktop research and face-to-face interviews with selected growers, including members of the Steering Committee and associated parties including industry association representatives and transport entities. Following two meetings with the Tweed Valley Pack House Steering Committee a number of key growers were identified for specific interviews. These represented the range of major products grown in the Tweed Valley: bananas, sweet potatoes, passionfruit, avocados, small crop vegetables, Asian vegetables and coffee. Evaluation of the Existing Situation A diverse range of crops is produced over a wide geographic area. Bananas, sweet potato and passionfruit are the major crops, available 12 months of the year. Bananas are grown on the steeper slopes of the region. The major sweet potato production area is the Cudgen-Duranbah plateau. Between these three crops, the volume potentially available to a central pack house is estimated at just fewer than one million cartons. Most produce from the Tweed region is consigned to fresh markets in either capital cities or locally. The proportion of product that is processed is low, though processing offers an

A project of Invest Northern Rivers, the NSW Banana Growers Federation, the NSW Department of State and Regional Development, the Northern Rivers Area Consultative Committee and the local industry. This project is supported by funding from the Commonwealth Government under its Regional Assistance Programme, administered by the Department of Transport and Regional Services and from the NSW State Government under its Regional Development Scheme, administered by the NSW Department of State and Regional Development. Copyright - Commonwealth of Australia


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important alternative in the passionfruit and sweet potato industries. The Passionfruit Marketing Group, an alliance of about 50 growers, collaborates to value-add passionfruit products. Growers perceive present marketing arrangements to have the following characteristics:

It is difficult to get reliable information on product performance It is difficult to know where product goes after it is consigned to a wholesaler, or

how much it is sold for Markets pay the price on the day depending on quality, but the relationship

between price and quality is not constant The average grower cannot approach supermarkets or food service operators to

deal directly with them It is difficult to find realistic marketing alternatives It is better to concentrate on production and let someone else sell the product

In general, these perceptions reflect feelings among producers of being less than satisfied about, and perhaps even trapped by, their present marketing arrangements. They also reflect a clear lack of information about alternative marketing approaches or how to implement them.

An examination of potential sources of competitive advantage identifies the most likely driver as superior quality and value. This strongly indicates that continuing the present production and marketing practices into the future is not going to serve most growers well. Financial Analysis A financial model is developed to identify the capital and operating cost structures for a pack house that meets the requirements of the Consultancy Brief. The capital outlay for a 1,500m2 building, 1,300m2 concrete surround and complete fit-out is estimated to be $3.05 million. Operating costs, including administration, for such a facility are estimated at $1.7 million. Spreading these costs over the estimated maximum annual throughput for the facility of 1.06 million cartons, as identified in Peasley Horticultural Services and Produce Marketing Australia (2000) Report, resulted in a break even average cost of $1.60 per carton. Allowing for only 40% of this estimate to go through the facility would result in a break even average cost of $3.95 per carton. These costs do not include transport or marketing costs, or any allowance for a return on the $3.05 million investment. Whether growers, institutions or other private investors make this investment, the return requirement is an essential test to identify the project’s commercial viability. As a consequence of the range of recommendations that have been provided in this Report we have prepared a second financial model that relates to Recommendation 2. This model has been developed utilising data provided by both BGF and PMG. Its purpose is to indicate the level of capital required and the reduced operating costs.


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Unfortunately it is not possible in this model to extrapolate the figures into a rate per unit as this Recommendation allows for the handling of both fresh and processed product. The capital requirement from Recommendation 2 would be an estimated $0.717m with a significant component having the capability of being leased. This would result in further reduction in capital need. This financial model does not provide for the purchase of the building as it is proposed that it would be leased from a developer. The operating costs are forecast to be $1.072m pa a significant saving compared to the Base Model. Conclusions Conclusions identify four factors that impact on the feasibility of this proposal.

The diverse range and volume of products available present significant technical challenges to a central pack house, further compounded by a general lack of commitment among growers at this time to support such a facility

The geographical spread of production, combined with difficult access presents significant logistical and quality-related challenges for a central pack house.

Break-even costs of handling the likely volumes passing through a central pack house favour on-farm grading and packing.

Opportunities for value adding do exist, but they can be captured without investment in a central pack house.

It is not possible to make recommendations that paint a complete picture of the future opportunities for horticulturists in the Tweed Region without going beyond the boundaries of the Consultancy Brief. While at face value the primary recommendation seems unsupportive, a number of positive alternatives emerged during the research process. Thus we consider it prudent and necessary to present additional recommendations that go beyond the Brief so that readers of this Report are not left with a partial understanding of the current position and its implications for the future. There are definite pathways forward for those growers and their chain partners who are prepared to explore new ways of doing business. In particular, there will be rewards for those:

Who focus on working collaboratively; Who can respond more flexibly and reliably to their customers; Who seek new markets; and Who have the ability to add value to their products.

Strategies to achieve such outcomes are outside the scope of this brief, but even a cursory examination of other horticultural regions and industries reveal relevant examples of such strategies in action.


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RECOMMENDATION 1 The primary recommendation to the Steering Committee and the NRRDB is not to develop a central pack house facility capable of accommodating a full range of crops grown in the Tweed region. Research shows that lack of available volume of core products, combined with lack of commitment by growers to support a central pack house, does not make this proposal logistically and economically feasible. This recommendation applies to the current situation, and to the likely medium term outlook for horticultural products grown in the Tweed Region. RECOMMENDATION 2 The BGF considers it advisable to develop a specialised banana pack house at Murwillumbah in the near future. The Passionfruit Marketing Group needs to invest in new facilities to accommodate its expansion. We recommend that BGF and the Passionfruit Marketing Group explore the possibility of co-location of these facilities. Should co-location prove feasible in practice, it may then be possible to expand the facility to accommodate the needs of a wider range of crops in the future, including a number of coffee growers who are currently considering the development of an additional roasting facility. RECOMMENDATION 3 Should co-location (Recommendation 2) prove feasible, the Steering Committee should consider how, on a case-by-case basis, it could facilitate the evaluation of investment in smaller scale, specialised pack house and/or processing facilities for specified industries. It is further recommended that specific industries should have to make a case to be considered eligible to benefit from Recommendation 3. RECOMMENDATION 4 The steering Committee should consider evaluating each significant industry to ascertain whether there is scope for the kind of opportunity outlined in section 6.5 in this Report. Evidence of feasibility would be found in grower willingness to engage in the development of whole-of-chain approaches to improving competitiveness that do not involve investment in a central pack house facility. RECOMMENDATION 5 For groups of growers wishing to pursue whole-of-chain strategies, the Steering Committee should consider how it might support them to explore funding opportunities that would underwrite new approaches to doing business that do not involve investment in central pack house facilities. The intent of this recommendation is to identify the key strategic benefits that growers in this region have for addressing niche markets and value adding opportunities.


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TABLE OF CONTENTS Executive Summary 2

1.0 Consultancy Brief Overview…………………………………….. 7

2.0 Task Appreciation………………………………………………… 7

3.0 Research Methodology………………………………………….. 8

4.0 The Opportunity………………………………………………….. 9

4.1 Characteristics of the Tweed Valley for

Horticulture and the Main Products Grown…………… 9

4.2 Requirements for the Handling and

Processing the Main Products…………………………. 13

4.3 Market Performance and Demand for the

Main Products……………………………………………. 15

4.4 Competing in the Future………………………………… 16

5.0 Financial Evaluation……………………………………………… 18

5.1 Base Model………………………………………………. 18

5.2 Recommendation 2 Financial Model…………………… 22

6.0 Conclusions……………………………………………………….. 23

6.1 Range and Volume of Products Available……………. 23

6.2 Geographical Constraints………………………………. 24

6.3 Cost Constraints………………………………………… 24

6.4 Value Adding Constraints………………………………. 25

6.5 A Way Forward………………………………………….. 25

7.0 Recommendations………………………………………………. 26

8.0 References……………………………………………………….. 28


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1.0 CONSULTANCY BRIEF OVERVIEW

Australia Corporation Consulting Pty Ltd (ACC) has undertaken a feasibility study to ascertain the commercial viability of establishing a horticultural packing shed in the Tweed Valley region of Northern New South Wales to accommodate the needs of the growers in the region. This report is addressed to the Northern Rivers Regional Development Board Inc.

The initial approach has been to identify key issues that can be addressed

within the confines of the Consultancy Brief. Components of the June 2000 Report by Produce Marketing Australia and Peasley Horticultural Services (referred to herein as the Peasley Report) have been evaluated and incorporated in our findings.

The second phase has involved a comprehensive evaluation of the overall

proposal and has sought to address: o Grower acceptance o Product assessment o Competitor influence o Site location o Infrastructure o Financial viability o Ways forward

2.0 TASK APPRECIATION

Our team has conceived this task as an exercise in value chain creation. Any pack house that is not part of a competitive value chain becomes an opportunistic, price-based trader – the very situation that growers are presently trying to escape. Evidence from around the world supports the view that for growers to become and remain competitive, they must become players in competitive value chains. In this way the chain becomes the basis of competition, not individual growers. Note that a central pack house is not a pre-requisite to growers forming competitive value chains.

Our approach has been to evaluate whether a value chain can be created using the pack house as the ‘chain driver’. A pack house is ideally placed to drive chain performance if it is set up to strategically manage the grower/market interface.


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In particular, it is able to oversight, manage and reward the critical competitive issues that drive fresh food industries: Value for money delivery of services and products to chain members; Food safety; Reliability and consistency of supply; Accredited quality management systems, including compliance with

environmental management systems where appropriate; Responsiveness to market signals through improved information

management; Convenience for retailers and consumers (including the possibility of future

vendor management of inventories); and The ability to develop and sustain close personal relationships, trust and

commitment within the chain.

The ‘value chain’ view of the role, structure and management of a pack house is diametrically opposed to the ‘logistics’ view of a pack house as a grader, packager and dispatcher of products. From the outset we concluded that a strong level of grower support would be essential to ensure the commercial viability of the project. The Consultancy Brief required the development of an Information Memorandum that would be utilised to seek equity funds to assist in financing the proposal, should it prove commercially feasible.

3.0 RESEARCH METHODOLOGY

Our research approach involved both qualitative and quantitative methodologies. We undertook desktop research and face-to-face interviews with selected growers and associated parties to establish an understanding of the potential success of the project. Following two meetings with the Tweed Valley Pack House Steering Committee a number of key growers were identified for specific interviews. These represented the range of products grown in the Tweed Valley, namely Bananas Sweet Potatoes Passionfruit Avocados Small crop vegetables Asian vegetables Coffee


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We used the data collected in relation to the June 2000 Report by Produce Marketing Australia and Peasley Horticultural Services as the benchmark for the commencement of the due diligence process. This data was then balanced against information collected from a number of current sources including: Steering Committee Members Industry association representatives Transport representatives NSW Government (State Development and Agriculture) Queensland Government (Primary Industries) University of Queensland Growers Domestic and international market sources

4.0 THE OPPORTUNITY

4.1 Characteristics of the Tweed Valley for Horticulture and Main Products Grown

The Tweed Rural Land Use Study, commissioned by the Tweed Economic Development Corporation in 2002, states “the Tweed Shire has been an agricultural area, with sugar cane, dairy cattle, bananas and vegetable growing being the traditional productive activities. This association with agriculture has had a significant effect on the communities and land use patterns within the Shire. At the same time, however, the coastal areas have been experiencing residential growth, helped by proximity to the Gold Coast and Brisbane.” “The economy of the Tweed Shire is dominated by service sector industries and not agriculture. The current picture of the Tweed economy is characterised by progressive growth, a declining agricultural sector, a diminishing manufacturing sector and an expanding services sector.” “Agricultural contributions are decreasing in terms of total output, income and employment. Within agriculture, sugarcane, fruit growing and vegetable farming are the most important in terms of relative value of output and employment.” “Shire-wide rural statistics suggest some limitations for future agricultural development. Issues for on-going rural land use include: The average age of farmers in the Tweed shire is 58 years, reflecting an

issue common to much of regional Australia; A lack of supporting succession planning in farm management; and Competing land uses, particularly residential and rural living, largely

eliminating the value of land for productive agricultural purposes.”


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“Achieving the outcomes described in the preferred future will require substantial and decisive actions to be undertaken. A prescriptive set of actions cannot be reliably recommended. Instead a number of “interventions” were suggested. These interventions are possibly within the current situation in the Shire leading to consequences more in keeping with the preferred future.” The study recommended an action plan for pursuing interventions likely to contribute towards desirable outcomes. One of these actions involves the local community investigating ways of developing strategic alliances where these further the implementation of intervention outcomes. These actions involve active support for groups within the Shire who are attempting to build particular areas of business (for example, branding, specialised agricultural products for export) or with other external groups, both regionally and cross state. The Shire’s rural resources and activities extend from boundary to boundary, south to north, east to west. This wide scope for rural development has created a highly diversified cropping sector. In general there are bananas grown on the steep slopes to the south and west, sugarcane in the mid regions and vegetables and other fruits to the east. However, in any one part of the Tweed region it is usual to find a range of different horticultural enterprises. The current main crops include: Bananas Sweet Potatoes Passionfruit Avocados Custard Apples Zucchini Tomatoes Coffee

Bananas In the early 1960’s the NSW banana industry had over 12,000 hectares under crop and this produced in excess of two thirds of the nation’s banana supply. The area growing bananas in NSW in the last 10 years has slowly declined. The varieties being grown in the Tweed Valley region have focused on Lady Fingers. More recently this species has been subject to Panama Disease, a soil based organism that will prevent the re-establishment of Lady Finger plantations once soil is infected. As a consequence, there are doubts about the long-term future of growing Lady Finger bananas in the Tweed Valley. Our research indicates that virtually all growers have the disease at some stage of advancement, and many of them are seeking alternatives. This is proving difficult as bananas are grown on steep slopes that do not easily lend themselves to alternative crops that could be grown competitively. Some growers are moving back to growing the Cavendish variety (which is reported to taste sweeter when grown in the Tweed


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region), but they then have to compete with the major broad acre producers of North Queensland, the Northern Territory and Western Australia. The number of banana growers in the Tweed region has declined from approximately 350 in 1997 to approximately 230 in 2002, with production declining from just over 60,000 tonnes in 1997 to about 42,000 tonnes in 2002. The area under cultivation has declined from approximately 1,400 hectares in 1997 to 900 hectares in 2002.1 Sweet Potatoes The most intensive area for vegetable production in the Tweed region is located on the Cudgen-Duranbah plateau. The Peasley Report in 2000 indicated that the Cudgen region produced in excess of 270,000 cartons of sweet potatoes. It has been difficult to obtain details of current total production, however our review and site visits indicate that there has not been any decline in production and in fact there has been some increase in the area under cultivation. Some product is currently being bulk packaged for supply to Kettle who process into sweet potato crisps. A major grower in the Cudgen area, Peter Lowe, has a contract to supply this market. There are currently an estimated 25 growers of sweet potatoes in the Cudgen/Duranbah plateau.

Passionfruit

The passionfruit industry traditionally has been very volatile, characterised by “boom and bust” cycles over the past 20 years. However, the industry in northern NSW in recent times has remained fairly stable.2

Passionfruit is a labour intensive crop requiring significant inputs for disease control, harvesting and packing. Most producers operate as family farms. Production is estimated by the Department of Agriculture (2000) at approximately 1,000 tonnes per annum, of which 70% is directed to the fresh market. The farm gate price for product averaged across twelve months is approximately $2/kg. The Australian Passionfruit Growers Association was formed in 2000 and it has introduced a national levy to fund research, development and promotion. Its growers identify the needs for better disease control and Integrated Pest Management programs. The Passionfruit Marketing Group has been established to value-add passionfruit products and they are successfully achieving this with a need to expand to meet customer demand that is currently being met from imports.

1 NSW Department of Agriculture 2 North Coast Agriculture 2000 p22 – NSW Department of Agriculture


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Avocados The avocado industry in the Tweed region expanded rapidly during the 1960s and 1970s. There are now 140 growers producing an estimated 1,800 tonnes from 65,370 trees. The farm gate value for avocados produced by Tweed Valley growers is estimated at $3.4m. Harvesting occurs from March to November, with prices varying from $8 to $24 per 6kg box. Only 2% of the crop is exported, though markets could be further developed (Dunne, et al., 2002). Market surveys show that the demand for fresh avocados is steadily increasing yet there is a decline in production in the Tweed with trees being removed and not replaced. Asian Vegetables Production of Asian vegetables is in its infancy, but could have the potential to develop into a significant small industry. Crops such as taro and fresh bamboo shoots are being trialled successfully in the region Coffee The coffee industry is also in a developmental stage, with plantations first established in the 1980s. The frost-free climate of the Tweed Valley enables high quality coffee to be produced without the use of pesticides. Farms historically tended to be small and provide for multi cropping. However during the last 5 years there has been significant growth from 80 hectares under cultivation to the current area of 320 hectares. There are now approximately 19 major growers with one having 80 hectares under cultivation. According to a report prepared in 1999 there were 12 Roasters in Northern NSW with Mountain Top Coffee being a significant participant. Mountain Top Coffee is one of the processors for the coffee produced by a number of major growers and they are currently undertaking studies to ascertain the most appropriate commercial approach to roasting and marketing. There are indications that they could be interested in co-locating their proposed roasting facility to a site that was shared with other processors (eg the Passionfruit Marketing Group) Farm gate value of production in 2000 was estimated at $1m (green bean) but is forecast to be capable of growth to $20m by 2010.


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Other Crops Other crops grown in the Tweed valley include:

Zucchinis Peas Beans Tomatoes Citrus Custard apples Stone fruit Mangoes Lychees Asian vegetables While each of these products may provide an attractive income to individual growers, their volumes are insufficient to consider them as a core product for a centralised pack house.

4.2 Requirements for Handling and Processing the Main Products Each of the crops currently grown in the Tweed Valley has specific handling requirements, some more stringent than others. Bananas Bananas are subject to severe bruising from too much handling or unsatisfactory handling conditions. Lady Fingers bananas have a thin skin and are particularly sensitive to marking and bruising, significantly reducing their market value. Specific handling procedures have been developed to minimise post harvest handling losses. In the Tweed Valley most plantations are located on steep slopes, leading to difficult conditions for picking, handling and transport. As the product does not lend itself to prolonged transport in bulk form, Tweed growers presently pack on farm to minimise post harvest losses. Growers in the Coffs Harbour region have developed a bulk bin system for transport to a centralised packing shed run by BGF and in fact there are selected growers in the Tweed region who are utilising these bins. However the general consensus from growers interviewed was negative. In North Queensland, the Northern Territory and Western Australia, growers use an A-frame for the transport of bunches to a central pack house. Apart from washing, there is no other farm activity required in these regions. Neither the bulk bin approach of Coffs Harbour growers nor the A-frame of Northern Australia were judged by growers as suitable under Tweed Valley conditions. On the Tweed’s steep and narrow roads using an A frame for


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transport to a relatively distant central pack house is considered by growers to be impractical. The bulk bin concept is also unsupported by growers at this time, as it is perceived as requiring almost the same level of on farm effort as at present, then additional transport to and grading at the pack house. In essence, with growers dispersed over a wide geographical area in the Tweed Valley, plus the need to traverse narrow, steep and sometimes rough access roads, the risks of post harvest damage to fruit consigned to a central pack house is perceived by growers, at this time, as too great. Other regions of Australia are either more accessible, grow on a larger scale, grow in more concentrated areas, or grow the Cavendish variety, which is not as susceptible to damage as the Lady Finger variety. An alternative view of handling bananas in bulk and packing at a central facility is provided from the experience of BGF at Coffs Harbour. In the Tweed Valley, growers who at first were resistant to the idea are now slowly adopting the bulk bin system. It is reported that this is because retailers are moving towards bulk handling systems for bananas, BGF can do a more consistent job on quality, and a central pack house handling a large volume can source cartons cheaper than growers can. It should be noted, however, that in spite of these advantages, adoption of bulk handling by growers has still been quite slow. Sweet Potatoes The handling and processing facilities required for centrally packaging sweet potatoes are the same as currently being used on farm; washing equipment combined with a grading table, conveyor and packaging table. On farm facilities are basic, but perceived by growers as effective in terms of costs, labour utilisation and producing a quality product. For processing, sweet potatoes are packed in bulk bags and trucked direct to the factory. Passionfruit Post harvest handling of passionfruit for the fresh market, like most fruit, essentially involves grading, packaging and palletising. Fruit for processing through the Passionfruit Marketing Group is consigned to the group’s facility where it is made into juice or pulp. Low temperature storage facilities are also necessary. Processed product is shipped in drums or frozen packs to customers such as Golden Circle, Ardmona and Weis Ice Cream. Other Products Many other products require some level of specialised equipment that is often custom built for the needs of individual producers. Such equipment is designed for short line processing and packaging of relatively small volumes of product.


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4.3 Market Performance and Demand for the Main Products

Data It was not possible to acquire objective, reliable data on the marketing performance of existing fruit and vegetable production from the Tweed region. Attempts to acquire data through transport companies, market reporting services and market agents were largely unsuccessful. Feedback from individual growers was used to identify the various marketing channels used for different products, but such data could not identify the total volumes, average returns or overall performance of individual products. This low level of visibility of information is typical of Australian fruit and vegetable markets, where objective data on volumes and prices is difficult to acquire. Poor access to such important management information is one reason why producers find themselves operating under commodity conditions for their products. Markets for Fresh Products Most produce from the Tweed region is consigned to fresh markets. The single biggest market is the Sydney wholesale market, but significant quantities also go to the Brisbane and Melbourne wholesale markets. Some product is marketed locally, and some goes direct to specialist fruit and vegetable retailers in major centres. Although some examples could exist, no evidence was found of growers marketing directly into food service channels. Growers tend to specialise in that they either consign to wholesalers or deal more directly with local markets or specialist retailers. Costs of transport, lack of feedback from wholesalers and uncertainty of returns are quoted as the ‘downside’ of dealing with capital city central wholesale markets. Lack of ability to take significant volumes of any one product and the need to deal with multiple buyers are the disadvantages of dealing more directly and/or locally. Although a range of marketing channels for fresh produce are currently being used, most growers see these channels as essentially a choice of where to place their product for sale. That is, there is moderate to low awareness of marketing as a value-adding opportunity, and limited evidence that growers are taking advantage of opportunities to form horizontal alliances, promote their product, target specific market niches or find other ways to add value to fresh produce. This issue is addressed further in the conclusions and recommendations of this report. Markets for Processed Products The overall proportion of product that is processed is low, though processing offers an important alternative in the passionfruit industry (see below) and some sweet potatoes are also grown under contract for processing into crisps. One attraction of processed products is that they are grown and sold to agreed


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specifications at known prices, but the requirement for grower commitment is high and opportunities are generally limited. The Passionfruit Marketing Group is an alliance of about 50 growers in the Tweed region who have demonstrated the benefits of collaboration. They aim to value-add passionfruit products by reducing costs (eg. mechanical harvesting), ensuring reliability, traceability and safety (eg. quality accreditation) and engaging in further processing (eg. juice concentrates). Their main customer is Golden Circle. Perceived Performance Based largely on feedback from growers, present marketing arrangements are perceived to have the following characteristics:

It is difficult to get reliable information on product performance; It is difficult to know where product goes after it is consigned to a

wholesaler, or how much it was sold for; Markets pay the price on the day depending on quality, but the

relationship between price and quality is not constant; The average grower cannot approach supermarkets or food service

operators to deal directly with them; It is difficult to find realistic marketing alternatives; and It is better to concentrate on production and let someone else sell the

product. In general, these perceptions reflect feelings among producers of being less than satisfied about, and perhaps even trapped by, their present marketing arrangements. They also reflect a clear lack of information about alternative marketing approaches or how to implement them. 4.4 Competing in the Future Growers have a choice between continuing their present marketing practices, with their relative advantages and disadvantages, or adopting improved practices that are more challenging, but potentially more rewarding. The objective of improving present practices is to improve competitiveness. Possible sources of competitive advantage for horticulturists in the Tweed region are outlined below. Sources of Competitive Advantage Competitive advantage stems from resources, knowledge or capabilities that are not easily copied or adopted by competitors. Competitive advantage on paper delivers its full potential in practice when these resources, capabilities and knowledge become integrated into the business systems of all the players in the chain that links producers with consumers.


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Sources of competitive advantage for horticultural producers include:

Lower Cost of Production Unique Seasonality Improved Varieties Superior Quality/Value for Money

Each is dealt with below in the context of horticulture in the Tweed region. Lower Cost of Production In agriculture, as in most industries, costs of production are related to scale of production, ie. per unit cost reduces as total number of units produced increases. Thus lower production costs are achieved on larger properties. For most crops, properties in the Tweed region are considered medium to small scale. It would be unrealistic to expect that they could sustain competitiveness against larger (sometimes broad acre) properties in other regions, such as Bundaberg or North Queensland, on the basis of lower costs of production per tonne or per carton. Unique Seasonality Across the board, fruits and vegetables grown in the Tweed region occupy relatively small niches in the markets they serve. They compete either with other regions in a similar position to the Tweed, or much larger regions whose production tends to dominate the markets in which Tweed producers operate. This is particularly true of the main crops from the Tweed region, bananas, sweet potatoes and passionfruit, whose production is reasonably constant throughout the year (Peasley Report, 2000) and at most times is competing against product from other regions. Minor crops grown in the Tweed, such as avocados, tomatoes, stone fruit and lychees, may have an advantage during certain market windows when product from other regions is in limited supply or unavailable. However, these windows are short and new varieties and/or expanding production in other regions is tending to shorten them even further. For the main crops grown in the Tweed region, there is little competitive advantage in unique seasonality. Better Varieties Improved varieties do not give geographical regions a sustainable advantage. In today’s international market for plant genetics, most new varieties are either accessible by purchasing the rights to them, or are substitutable by similar varieties from other breeders. With the possible exception of some Asian vegetables presently grown on a small scale, varieties of fruits and vegetables grown in the Tweed are similar to those grown in other regions. If certain Asian vegetables were to prove profitable, sustaining that advantage in the medium term would have to be on the basis of factors other than simply having access to the plant material.


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Superior Quality/Value for Money The concepts of quality and value for money balance costs of production against aspects of quality such as food safety, consumer acceptability (internal and external quality) and the ability of a supplier to meet these targets consistently, reliably and in sufficient volume. This does not mean that price is not important, but that price is judged against the benefits delivered by improved and/or guaranteed quality. This source of competitiveness is available to every producer, but producers on their own cannot fully capitalise on it, as the benefits are delivered through the whole supply chain. This means that growers who wish to capture the benefits of improved competitiveness through producing better quality and value for money need to work collaboratively with their supply chain partners. For many growers, this requires adopting an attitude of co-operation instead of competition, and learning new practices. There is no reason why groups of producers in the Tweed region could not set superior quality and value for money as a strategic target for improving their competitiveness. Summary Taken collectively, these factors suggest that the single most likely source of future competitive advantage in the market for products grown in the Tweed region lies in superior quality and value. This strongly indicates that continuing the present production and marketing practices into the future is not going to serve most growers well. The role model provided by the Passionfruit Marketing Group contains many of the lessons yet to be learned by other industries. Most significant among them is the potential to add significant value to their supply chain by working collaboratively among themselves and with their customers.

5.0 FINANCIAL EVALUATION 5.1 Base Model A financial model is developed to identify the overall cost structures for the pack house. This model is predicated on the requirements for the multi-product facility required under the Consultancy Brief The model includes both capital expenditure requirements and operating costs.


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Capital required to build and fit-out an insulated panel 1,500m2 pack house with 1,300m2 concrete surround:

$m Site preparation 0.500 Building 1.432 Plant & Equipment Washing Equipment 0.025

Conveyors 0.150 Grading Tables 0.100 Electronic Grading 0.050 Bins 0.200 Refrigeration 0.400 Forklifts 0.075 Racking 0.100

Furniture & Fittings 0.019 3.051

It is assumed that there is no land purchase component in the model, as it will be sought under a lease arrangement. The lease rental for the land is forecast to be $100,000 per annum.

Funding for the above cost would likely be through equity raising, although some debt funding may be possible. As a consequence of the nature of the business and its level of uncertainty an investor would be seeking a return of in excess of 25%.

The operating costs detailed below would be expected to be funded from bank finance and working capital surpluses.


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The base total operating cost including labour is forecast to be $1.265m with administration costs adding a further $0.418m. The following table identifies these costs:

Operating Costs Direct labour 317,408Superannuation 28,567Depreciation 261,500Motor Vehicle Lease- Mgr ($) 9,000Insurance 75,000Motor Vehicle running costs 5,400Payroll Tax 0Workers Compensation Insurance 36,165Water Supply 240,000Power 120,000Land Lease Rental 100,000Chemicals 12,000Repairs & Maintenance 60,000Total Operating Costs 1,265,039 Administration Expenses Salaries 210,072Superannuation 18,906Audit & Accounting 8,000Bank Charges 2,000Computer Supplies 2,400Courier Services 1,200Directors' fees 50,000Entertainment 15,000General Expenses 25,000Legal Fees 10,000Licence Fees-General 25,000Newspapers & periodicals 1,000Postage, Printing & Stationery 10,000Security Services 1,000Staff Amenities 12,000Telephone 24,000Travel & Accommodation 3,000Total Administration Costs 418,578 Total Costs 1,683,618

Note that the financial model has not made any provision for working capital needs to fund costs associated with acquiring product from growers, sale of product to either the fresh or processed markets, or transport of product to


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markets. The costs that have been modelled above are the bare operating costs of the pack house facility itself.

At start-up there would also be a need for additional funding to cover short-term cash flow deficits. It is realistic to allow for an interest cost on these funds of approximately $0.1m per annum.

Total annual operating costs of the pack house, once fully operational, are therefore approximately $1.7m.

If the pack house option attracted 100% of the product likely to be available (a very optimistic expectation) a total of 1.06 million cartons would be its estimated throughput, based on the Peasley Report (2000), as follows:

Bananas 588,000 cartons Sweet potatoes 277,500 cartons Passionfruit 100,000 cartons Other 100,000 cartons

1,065,500 cartons

Spreading the $1.7 million total operating costs of the pack house over 1.06 million cartons, identified in the Peasley Report, equates to an approximate average cost of $1.60 per carton, net of all marketing costs. In the event of the pack house attracting only 40% of the available production, the average cost of operating the pack house rises to $3.99 per carton. It is reasonable to assume that in a start-up venture the optimum volume is unlikely to be achieved.

These calculations do not take into account transport costs from grower to pack house, or pack house to markets. It is likely that savings on freight rates could be achieved through volume and timing efficiencies associated with the central pack house. These savings would be relatively insignificant in comparison with the additional costs of operating the pack house.

The construction costs and infrastructure are such that a staged approach to handle a lower start-up capacity would be complex, and would in fact involve higher costs than the optimum production model.

The costs in this model have included salary and on-costs for a Marketing Manager but no other marketing costs. Marketing costs would have to be met by deductions from grower returns. The costs of special promotions or other marketing initiatives would have to be met by additional contributions from growers and other supply chain members. In addition to these costs, if an investor were to require 25% return on capital invested in this venture (25% of $3.05m), an additional $762,000 per annum would have to be generated. Achieving this by charging extra per carton handled


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through the pack house would raise the break even per carton cost to more than $2.30 if 100% of available production were sold through the pack house, and $5.75 if 40% of available production were handled through the pack house. In the event that the Tweed growers were to adopt marketing processes outlined in Section 6.5 there could be a revenue benefit of an estimated $450,000. Our analysis indicates that this benefit could be significantly higher depending on the volumes and product mix. This approach would not completely offset the cost of the Pack House but could contribute significantly. It needs to be understood that there would need to be major grower participation and it would take a period before such benefits were to flow. It needs to be identified that these revenue benefits are real and have been achieved in other jurisdictions.

5.2 Recommendation 2 Financial Model As Recommendation 2 identifies an alternative process to accommodate a lesser “start-up” scenario we have developed another Financial Model that reflects the assumptions provided by both BGF and PMG. It is assumed that there is no land purchase or building construction component in this model, as it would be intended that these would be developed under a lease arrangement. The building rental is forecast at $62,000pa. This is predicated on the building being reduced to 1,200m2. The following identifies the capital costs associated with this Recommendation: $m Building Fit out 0.180 Washing Equipment ) Conveyors ) Grading Tables ) 0.263 Electronics ) Bins 0.030 Refrigeration 0.200 Racking 0.025 Furniture and Fittings 0.019 0.717 It is evident that a component of this capital expenditure is capable of being leased. In the event that $0.5m were able to be lease the capital requirement would reduce to $0.217m BGF and PMG have indicated that based upon their forecast operations the forecast Annual Operating Costs would be $0.75m with a further $0.32m for Administration. In the event that a significant component of the capital


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requirement were to be funded through either a Finance or Operating Lease there would be an additional $0.156m for lease payments. These costs would appear to be supportable should this Recommendation be considered by the interested entities.

6.0 CONCLUSIONS Conclusions are based on four main factors that impact on the feasibility of this proposal: the range and volume of products available to support a central pack

house; geographical considerations and their effect on logistical efficiency of a

central pack house; costs of a central pack house operation; and opportunities for value adding.

6.1 Range and Volume of Products Available As noted in the Peasley Report (2000), the diverse range of products that can be grown in the Tweed region is both an advantage and a disadvantage. In terms of a regional pack house facility, in balance, this diversity is a negative influence. Apart from three core crops, bananas, passionfruit and sweet potatoes, there is a range of more than 20 other crops, none of sufficient volume now or in the foreseeable future to contribute substantially to the economics of a central pack house. There are some minor crops with possible individual opportunities in the near future. These include coffee and Asian vegetables. However, a multi-product central pack house may not be the most beneficial way to capitalise on these opportunities, and in any case, their addition to the volume of throughput of such a facility would be insignificant in terms of improving the scale of operation. In essence, there are too many small-scale crops and not enough core crops to efficiently provide a critical volume for a central pack house. Compounding the issue of too many products and insufficient volume is a current lack of commitment from growers to supply such a facility. The strong message received through this research was that growers were reluctant to commit product to a facility that was, in their minds, unlikely to add value to their individual businesses. Growers perceived that such a facility was more likely to add cost than value.


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6.2 Geographical Constraints The Tweed is neither too big nor too small a region to support a central pack house facility. However, it does present some geographical challenges and constraints. Narrow valleys dissect much of the region with relatively poor and/or difficult access. Bananas are grown on steep hillsides and do not lend themselves to being handled over steep rough roads unless they are already packed into cartons destined for market. Transporting bananas to a central pack house is deemed too big a geographical and technical hurdle to overcome in the Tweed region. Sweet potatoes are grown on some of the best agricultural land in the region, but this land is also close to the coast and already subject to residential encroachment. Development of this land for real estate is not an option under current planning regulations. Some sweet potato growers have already relocated part of their production to more broad scale areas such as Bundaberg and treat the two areas as a single integrated business. On the other hand, the region will always be climatically and geographically attractive to a wide range of horticultural enterprises. Many of these will be professional but small scale; some will provide secondary support to rural lifestyles; others will be no more than a hobby. In the future, horticultural production will remain geographically widespread and diverse. While these factors are positive in terms of the future of horticulture in the Tweed, they present significant challenges to the concept of establishing a central pack house facility in the region.

6.3 Cost Constraints The vast majority of Tweed growers across all crops currently grade, pack and market their own produce. While many are not happy about having to do this, they realise that it is necessary in order to keep their enterprise competitive by minimising costs and at least having some freedom to make marketing decisions. For many crops, volumes on any one farm are relatively small, and grading and packing systems are quite basic. There is minimal investment in infrastructure and an on-farm pack house is seen as a way to fully utilise both hired and family labour. This ensures that post-harvest costs are kept as low as possible, particularly as the value of family labour is generally not accounted for.

In terms of a central pack house, if the likely production from all three major crops (about one million cartons) were channelled through one pack house, the average direct operating costs of the facility would still be in the order of $1.60 per carton. However, if only 40% of this estimate were consigned to a central pack house, the average cost would be more than $3.99 per carton. Given the prevailing attitude to on-farm grading and packing, in combination with the high operating costs of a central pack house, there would seem to be


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insufficient motive and insufficient volume of Core Products to make a central pack house feasible.

6.4 Value Adding Constraints At the moment, the only example of significant value adding to a core product being considered in this proposal is by the Passionfruit Marketing Group. This group provides a useful model of the advantages in an alliance of growers working in collaboration to meet the specific needs of their customers. It is entirely feasible for growers of other crops to improve their competitiveness by following the lead of the Passionfruit Marketing Group. However, a central pack house is not a pre-requisite to achieving such an improvement. This is supported by findings from this study, in that many growers interviewed expressed a strong desire to become more involved with other producers and more involved in their value chain. Growers were quick to point out the deficiencies in their present marketing arrangements, but many were also quick to add that they would like to learn how to address those deficiencies. This learning opportunity may be the highest value-adding option in the short term. Groups of growers who engage in the above learning activities may identify value-adding opportunities for individual crops, and may develop a case for centralised packing and/or processing facility for that crop. Given the present situation in the Tweed this is considered quite a likely outcome. But specialised, small-scale centralised facilities become the funding responsibility of the grower/supply chain group. There are government programs that may support such initiatives if they are innovative and commercially viable, eg. the New Industries Development Program, and programs under the National Food Industry Strategy.

6.5 A Way Forward Taking the above conclusions into consideration, there is an opportunity for Tweed growers to improve their situation by rethinking the ways they distribute their product to end markets. This opportunity is centered on growers working together to better manage the flow of volume to the market and in doing so negotiate better trading arrangements with wholesalers and/or direct arrangements with retailers or food service buyers. This approach reflects prevailing trends in the fruit and vegetable markets, where increasing proportions of product are being traded directly between producer and reseller in brokerage type arrangements. The scope for this opportunity can be gauged from the current fee charged by wholesalers of 12-15% ($3.6 to $4.5m) of the $30 million in farm gate sales in the Tweed region. If some kind of co-operative action could save only 10% of these fees, there would be $360,000-$450,000 available to help fund co-operative activity. Note that this total wholesale fee does not include the margins earned by


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product being re-traded in central markets or growers being paid less than the true selling price of their product. There are clear indications that as central market wholesalers have lost market share to direct dealing; they have also been pressured into making increased margins on the business they have maintained. Therefore the wholesale selling costs could be higher than farm gate values plus 12-15%. The business case for this option is that it allows growers to increase their returns by reducing the wholesale cost of marketing their produce. Using fewer wholesalers at lower margins generates these cost reductions. The wholesalers who are used potentially earn more income, but at a lower percentage rate, at the same time increasing returns to individual growers. To take this opportunity, Tweed growers will need to resolve the same challenges as if they were marketing through a central pack house. In many ways this opportunity can be likened to marketing the crops produced in the Tweed through one pack house, but without the pack house. The most significant challenges are: Securing a commitment from growers to work together and developing the

processes to manage volumes and bring transparency to prices. Identifying methods to explore and negotiate directly with retail and or food

service buyers. Selecting wholesalers to obtain better trading arrangements, in particular the

framing of service standards and trading terms. Exploring and establishing some direct customers and programming a

proportion of product to them at seasonal prices.

7.0 RECOMMENDATIONS

It is not possible to make recommendations that paint a complete picture of the future opportunities for horticulturists in the Tweed Region without going beyond the boundaries of the Consultancy Brief. While at face value the primary recommendation seems unsupportive, a number of positive alternatives emerged during the research process. This we consider it prudent and necessary to present additional recommendations that go beyond the brief so that readers of this Report are not left with a partial understanding of the current position and its implications for the future.


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There are definite pathways forward for those growers and their chain partners who are prepared to explore new ways of doing business. In particular, there will be rewards for those:

Who focus on working collaboratively; Who can respond more flexibly and reliably to their customers; Who seek new markets; and Who have the ability to add value to their products.

Strategies to achieve such outcomes are outside the scope of this brief, but even a cursory examination of other horticultural regions and industries reveal relevant examples of such strategies in action.

RECOMMENDATION 1

The primary recommendation to the Steering Committee and the NRRDB is not to develop a central pack house facility capable of accommodating a full range of crops grown in the Tweed region. Research shows that lack of available volume of core products, combined with lack of commitment by growers to support a central pack house, does not make this proposal logistically and economically feasible. This recommendation applies to the current situation, and to the likely medium term outlook for horticultural products grown in the Tweed region. RECOMMENDATION 2 The BGF considers it advisable to develop a specialised banana pack house at Murwillumbah in the near future. The Passionfruit Marketing Group needs to invest in new facilities to accommodate its expansion. We recommend that BGF and The Passionfruit Marketing Group explore the possibility of co-location of these facilities. Should co-location prove feasible in practice, it may then be possible to expand the facility and accommodate the needs of a wider range of crops in the future, including coffee, whose growers are currently considering the development of a new roasting facility. RECOMMENDATION 3 Should co-location (recommendation 2) prove feasible, the Steering Committee should consider how, on a case-by-case basis, it could facilitate the evaluation of investment in smaller scale, specialised pack house and/or processing facilities for specified industries. It is further recommended that specific industries should have to make a case to be considered eligible to benefit from Recommendation 3.


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RECOMMENDATION 4 The Steering Committee should consider evaluating each significant industry to ascertain whether there is scope for the kind of opportunity outlined in section 6.5 in this Report. Evidence of feasibility would be found in grower willingness to engage in the development of whole-of-chain approaches to improving competitiveness that do not involve investment in a central pack house facility. RECOMMENDATION 5 For groups of growers wishing to pursue whole-of-chain strategies, the Steering Committee should consider how it might support them to explore funding opportunities that would underwrite new approaches to doing business that do not involve investment in central pack house facilities. The intent of this recommendation is to identify the key strategic benefits that growers in this region have for addressing niche markets and value adding opportunities.

8.0 REFERENCES Peasley Horticultural Services and Produce Marketing Australia (2000) Tweed Valley Pack House Study. Final Report. Dunne, A., Dessert, K., Molenaar, A., Penberthy. A., Edwards, A. and Bristow, M. (2002) The Performance of Australian Avocados in the Hong Kong Market. Horticulture Australia Limited, Sydney. Ian L Hutcheson Managing Director Australia Corporation Consulting Pty Ltd

Documents

TWEED VALLEY PACK HOUSE FEASIBILITY STUDYrdanorthernrivers.org.au/download/food_and_fibre/horticulture/Tweed...tweed valley pack house feasibility study report prepared by: australia