He believes the sector is fast reaching the top end of its valuation peak, following record sale prices with some orchards fetching more than $1m a hectare.
Only three years ago planted land was fetching $525,000-$625,000 a hectare for SunGold and $350,000-$375,000/ha for Green orchards.
Williams has compared three scenarios – outright purchase of a SunGold orchard for $1.2m a hectare, conversion of a Green to SunGold orchard by grafting at $863,000/ha and bare land development at $720,000/ha.
“There is an availability of land for conversion there and that is helped by SunGold being quite capable of being grown beyond the traditional areas around Te Puke where Green is favoured.”
The growth in knowledge gained about growing gold fruit in recent years has also expanded the ability of growers to push into newer cropping areas.
They can include more eastern parts of Bay of Plenty, Gisborne and some parts of the upper South Island.
Williams’ calculations found the bare land conversion can deliver an after-tax return of 8.8% compared to 6.4% from buying an existing SunGold orchard and 7.7% for a Green to SunGold conversion.
The analysis was based on developing and selling the orchard after 10 years.
He cautioned the calculations are based on the development margin being tax-free. No allowance for a capital gains tax was made.
“And the devil would be in the detail about this and not knowing that means you cannot factor it in but it is something to be aware of.”
It is likely a capital gains tax would nullify the tax advantages of a bare land conversion.
The calculations for conversion include the cost of the SunGold licence, valued at about $250,000, but that might go up if enough growers are short of licensed area in a short time.
He also believes the licence cost is fast approaching its maximum realistic value.
“The orchards are close to their peak in terms of their risk and return relationship.”
He believes much of the value comes back to where growers see the medium-term price prospects for SunGold fruit, which he put at $9 a tray in years 1-5, moving to $8.50 a tray in years 6-10.
“I think it is a case that it will not move any higher. It is just a case of how much it may move down.”
Williams acknowledged the bird in the hand worth two in the bush argument, where an operating orchard generates income straight away.
“But the differential in returns in this case starts to look much more attractive and would account for the additional risks faced with bare land development.”
Kiwifruit represents a viable land use change in an environment where regional council constraints on intensification can make other options less likely.
“But you do still tend to be somewhat limited in terms of where you can grow the crop.”
He acknowledged the potential exists for the likes of dairy farmers to use some land for kiwifruit conversion.
Bayleys Te Puke agent Snow Williams agreed bare land conversion to SunGold kiwifruit holds appeal but the challenge is finding the bare land to begin with.
“Not a lot of bare land comes up.
“A lot of the bigger players have gone to Gisborne or Hawke’s Bay, even Edgecumbe here in Bay of Plenty is proving to have pockets of good land.”
Bare land conversion could also hold appeal for existing landowners wanting to convert part of their property to kiwifruit.
