Central’s 4th boom

Press, 18 June 1986, Page 37

Central’s 4th boom

By

NEILL BIRSS

Tales of get-rich schemes in the old pubs in the rocky valleys of Central Otago have set generations of eyes glinting. The traveller now arrives sceptical as the small aircraft winds down to the Roxburgh airstrip, passing the debris of the fortune-seekers: dredge tailings and miners’ water races. The object of the visit last week of financial journalists was to look over the ground of the horticultural special partnership scheme, Cherry Corp Ltd and Company. Fruit has long been grown in Central Otago. Family orchards have found the best slopes and learnt by hardship which land the frost will drain around, like water. The market for the fruit has mostly been in the south, with some shipments of apricots to Auckland. In recent years, exporting has begun, and now large orchards to be run by professional managers and absentee capital are springing up in the region.

There are difficulties. Labour is not abundant. Water supplies are critical, and the irrigation sys-

terns are under threat ' after the axing of subsidies. But the climatic advantages are creating the region’s fourth gold rush — after mining, dredging, and the hydroelectric schemes, which have also seen environLmental vandalism. New Zealand’s success as a horticultural exporter is due to growing export skills, and to its off-season advantage because it is in the Southern Hemisphere. Central Otago fits into the national horticultural team as a niche producer growing fruit at the end of the Southern Hemisphere season. Peaches, cherries, apricots, apples, and some specialties such as Asian pear, are the main products. The principals of the Cherry Corp partnership have already played parts in setting up special partnerships at Roxburgh — Kerrimuir, Townview, and Awaklki. The articles of Cherry Corp leave the way open for all four partnerships to merge into a public, listed company in a few years. Work was under way at Cherry Corp last week: earth-moving machines were cutting roads for the 48.6 hectare orchard at Kinaston Road, Roxburgh East, and preparing embankments. The orchard will be planted over two years.

It Is planned eventually to have the cherries covered, which will protect them from rain damage just before harvesting. Frost protection will be by water sprays. Supplies of water are assured, visiting

financial journalists were told. Some of the other large horticultural developments may have difficulties. The free-market regime means new irrigation will be expensive — perhaps too expensive for the livestock farmers who make up most of the customers. As well, the winter cold and summer heat have

been disintegrating many of the old irrigation schemes, which must be repaired or even replaced soon. Plenty of practical orcharding expertise is available in the region, and skilled management and technical consultancy has been arranged. The key to Central Otago’s new horticulture will, apart from economic water, be in marketing. Cherry Corp has retained Kiwi Harvest, Ltd, of Auckland. Mr David Smith, one of the firm’s marketing directors, said Kiwi Harvest was set up with a caravan as an office in 1983. In its first year it handled exports worth only $2.5 million. The staff is now 23, and the firm expects to handle exports worth more than SSOM this year. Equus Holdings owns 25 per cent of Kiwi Harvest. One of the firm's customers Is Grocorp Pacific. Forty per cent of Kiwi Harvest's trade is with Japan, and Mr Smith has high hopes for cherry exports to the country, and for other niche markets such as peaches in February, when he estimates there is a market shortfall of as much as 40,000 tonnes. All fruit varieties being planted at Cherry Corp are those selected by the marketers to meet export demand. The market prospects are clearly good; the gold is flashing in the prospecting pan. What about the mining rights? The authorised capital of the partnership is 1000 units of $2350 each. Of these 748 are now being offered to the public, with $5BO payable on subscription, and the balance in various monthly instalments. Another 250 units have been reserved for the partners of the existing three nearby special-partnership orchards, on the same terms. Management will be contracted to Sunharvest Orchards, Ltd, with Mr Tony McPherson, the promoter of Cherry Corp, as the managing director. Mr Noel Paulin’s firm, Otago Central Orchard Management, Ltd, will be a consultant. Cherry Corp has a contract with Sunharvest Orchards to pay $25,000 a year for management services. The contract is for five years, with the right of renewal for a further five years. Mr Paulin’s firm will get $15,000 a year for the same term and renewal rights. Kiwi Harvest will get $15,000 a year for

three years for consultancy services, and will receive 10 per cent on fruit sales under a five-year marketing agreement. Preliminary and issue expenses seem fairly high at $290,250, including valuation fees, underwriting (by NZI), total brokerage of 5 per cent and various other fees. The partnership will be geared, with the issue providing 51.075 M over the first 12 months, with a loan of $615,000, and an expected $lO,OOO from fruit sales. The land (more than 95% of it suitable for orcharding, according to the prospectus) will cost $375,000. Bare land in the area has been selling for from $7OOO to $BOOO a hectare, with some sales to $lO,OOO, a valuer states in the prospectus. Development is budgeted to cost $420,000, plant and equipment $50,000, trees $165,000, and house renovations $30,000, leaving $369,750 for working capital. Revenue from the 35,000 trees in Cherry Corp (10,000 apple, 20,000 cherry, and 5000 apricot), is expected to be of $lO,OOO in each of the years 1987, 1988, and 1989. In 1990 this is projected to reach $57,353; in 1991, $350,857; in 1992, which is the first projected profit year, $874,839; and upwards until in 1996 revenue is calculated as being $2,553,640 with a net profit of SI.3M. In that year cherries are projected to return more than S2M to the partnership, apricots almost $175,000, apples $140,000, and sales to the local market about $223,000. The basis for the projections is an export price of $8 a kilogram for cherries, 25c for apples and $1.97 for apricots, with export pack-outs of 60% for cherries, 70% for apples, and 55% for apricots. The great attraction to the investor is, of course, the tax write-off against income. Under present legislation and regulations about 90 per cent of the investment would be deductible. The rush is now on to market the partnership in the South Island. For tax reasons, subscriptions need to be sold by the end of the month. It is likely to be fully subscribed as a small-unit stake in the promising horticulture industry, with the risks and possibilities of good returns of such a new venture. It deserves to be considered on its merits, with the tax aspects taken as an atrisk bonus.

Eventually, a listed company?