The Kiwifruit Regulatory Model

Performance / The Kiwifruit Regulatory Model

The Kiwifruit Regulatory Model

1. Overview

New Zealand’s kiwifruit industry is a regulated industry. The Kiwifruit Industry Restructuring Act 1999 (the ‘’Act’’) and the Kiwifruit Export Regulations 1999 (the “Regulations’’) set the current industry structure. The Act and the Regulations establish Zespri as the primary exporter of New Zealand-grown kiwifruit to all countries other than Australia. This arrangement is commonly referred to as the Single Point of Entry (SPE) or ‘single desk’.

The Regulations make some provision for other marketers to export kiwifruit through collaborative marketing arrangements with Zespri, although this is a relatively small proportion of New Zealand’s overall kiwifruit exports. The Regulations also specify the role and functions of Kiwifruit New Zealand (KNZ), the industry regulator.

Growers voted in the Kiwifruit Industry Strategy Project referendum in 2015 and over 97 percent voted in support of the industry structure. This referendum resulted in the Kiwifruit Export Amendment Regulations 2017.

2. Why the Regulations were established

The real commercial beginnings of kiwifruit sit in the 1960s. The growth of the export market during this time was composed of individual growers, grower cooperatives, exporters and distributors. An attempt to develop a joint marketing effort saw the establishment of the Kiwifruit Export Promotion Committee in 1970, followed by the Kiwifruit Marketing Licensing Authority (the “Authority’’) in 1977. The Authority had the rights to establish market standards such as fruit size, quality and packaging of kiwifruit for export markets, and also acted as an adviser to the government. This gave growers some control of licensing exporters.

In the 1980s other countries began to export kiwifruit, and New Zealand lost its first-mover advantage. The seven licensed exporters in New Zealand were in fierce competition, driving down prices. This reduced grower profitability and caused fluctuations in both supply and demand. Subsequently, a referendum was held in 1988 and growers voted in favour of moving from multiple exporters to a single desk system. The New Zealand Kiwifruit Marketing Board came into being and its first season of operation was 1989/90.

In the 1992/93 season, as a result of various governance and management factors, the Board got into serious difficulty. In response, the industry put in place a three-stage review that incorporated major structural change:

New Zealand Kiwifruit Growers Incorporated (NZKGI) – operational in July 1994.
Creation of the Zespri brand – launched in the 1996/97 season, including the creation of Zespri as a separate marketing and sales organisation.
Alteration of the industry structure – a referendum was held and the structure of the industry altered in 1996/97 that included the establishment of collaborative marketing, the NZKGI Forum and a more efficient on-shore operational structure.

This industry restructure resulted in the Act and Regulations (1999) being introduced, and on 1 April 2000 Zespri Group Ltd was launched. Zespri was officially corporatised, with the single desk status remaining.

3. Importance of the Regulations

The single desk arrangement has enabled the kiwifruit industry to improve the value of its exports by making use of economies of scale, setting standards for high fruit quality, developing markets and investing in research and development. This has assisted Zespri to compete effectively on the international stage, by developing a world leading fruit brand which commands a premium for its kiwifruit. Kiwifruit growers benefit from the price that Zespri pays for their fruit.

However, while the single desk supports the industry to achieve a premium for their fruit, it also creates a number of risks. Under the Regulations, all New Zealand growers of kiwifruit wishing to export to countries other than Australia must enter into a supply contract with Zespri, either directly or through a supply entity. This means that Zespri is effectively a monopsony buyer of New Zealand grown kiwifruit for export. The Regulations aim to balance the benefits of the structure with mitigating the risks it poses, as outlined below.

Impose three rules and requirements on aspects of Zespri’s operation

Non-discrimination rule

Requires that Zespri not discriminate between New Zealand kiwifruit suppliers and potential suppliers on the decision to purchase or the terms of the purchase contract, except on commercial grounds.

Non-diversification rule

Prohibits Zespri from undertaking activities that are not core business and do not support core business (i.e. the purchase, export, marketing and market development of New Zealand-grown kiwifruit as well as research and development relating to kiwifruit) unless producers have approved of the activity, and Zespri has minimised the risks arising from the activity, as far as is reasonably practicable, for producers who have not agreed.

Information disclosure requirements

Requires Zespri to publicly disclose its financial statements, which must be prepared in accordance with generally accepted accounting practice and the Kiwifruit Information Disclosure Handbook.

These operational rules and requirements aim to encourage innovation in the kiwifruit industry, manage risks associated with activities that are not core business, promote efficient pricing signals to shareholders and suppliers, provide appropriate protections for producers and Zespri’s shareholders and suppliers, and promote sustained downward pressure on Zespri’s costs.

Prescribe certain aspects of Zespri’s corporate form

The Regulations prescribe elements of Zespri’s corporate form, requiring that Zespri remain a company registered under the Companies Act 1993, and allows Zespri shareholders to agree restrictions on who can and cannot own Zespri shares, vote and receive dividends. The constitution allows shareholders to put restrictions on who can own shares – ie only NZ kiwifruit growers. Having Zespri remain a company under the Companies Act 1993 also provides protections for shareholders, such as the right to appoint or remove directors and to vote on major transactions.

Provide for collaborative marketing arrangements with Zespri

The Regulations provide for the approval of collaborative marketing applications for the purposes of increasing the overall wealth of New Zealand kiwifruit producers. The Regulations provide for KNZ to direct Zespri to make a certain volume of kiwifruit available for collaborative marketing arrangements in any season. Those wanting to enter into a collaborative marketing arrangement with Zespri must apply to KNZ for approval.

4. Kiwifruit Industry Strategy Project (KISP)

KISP was established in 2013. The aim was to develop a broadly supported industry strategy to maximise the industry’s long-term growth for the benefit of New Zealand kiwifruit growers.

A two-year review of industry institutions and operations, from orchard to export, was undertaken to determine what changes are required to ensure the industry’s continued performance. In 2015 the review culminated in a grower referendum in which every kiwifruit grower who supplies Zespri was entitled to vote on eight proposals for change. All eight proposals were strongly supported by growers who voted in the referendum, each receiving over 90 percent support in the final vote.

5. Amendments to the Regulations

As a result of the KISP referendum, the Regulations were subsequently amended on 1 August 2017 to help future-proof the industry and to enable Zespri to recommend changes to its constitution to align shareholding of the company more closely with production. Improving shareholder alignment and increasing the number of growers that own shares delivers more certainty for Zespri’s shareholders and growers.

In addition, the Government updated the definition of Zespri’s core business in the regulations. The change acknowledged that Zespri’s model has evolved, and recognised that research and development, market development and marketing are essential in leading the world in delivering quality kiwifruit and providing strong, sustainable returns to New Zealand growers.

These regulatory amendments are the Government’s response to the industry’s self-review of its performance through KISP.

6. Role of Kiwifruit New Zealand (KNZ)

KNZ was established on April 1, 2000 when the New Zealand Kiwifruit industry was restructured through the Act and Regulations.

The Act provided for the making of Regulations for the establishment, funding, and other matters relating to KNZ, which contain export related, monitoring and enforcement provisions.

The 2017 amendments to the Regulations also strengthened the capability, skills, and independence of KNZ as a regulator, and established greater public oversight and monitoring of KNZ’s performance.

6.1 Collaborative Marketing

Collaborative marketing involves a third party collaborating with Zespri in the marketing of kiwifruit to export markets other than for consumption in Australia. The collaborative marketing arrangements are approved and overseen by KNZ. The two key requirements for KNZ consideration when approving a collaborative marketing arrangement are:

The arrangement must increase the overall wealth of NZ kiwifruit producers; and
The arrangement must be carried out in collaboration with Zespri.

Collaborative marketing is intended to increase the overall wealth of NZ kiwifruit producers. Collaborative marketing arrangements are generally for one year but the Regulations do not prevent KNZ from approving multi-year arrangements, and do not prevent KNZ from renewing a collaborative marketing approval.

Since collaborative marketing provisions were introduced, approvals have covered approximately two percent of kiwifruit exports per year. There are no quantitative limits in the Regulations for collaborative marketing approvals.

KNZ is required by the Regulations to disclose the identities and volumes of kiwifruit marketed through each approved collaborative marketing arrangement within three months of the end of each season.

Financial information assessing whether net returns to suppliers are greater than would have been the case if the approval had not been given, must also be publicly disclosed by KNZ.

In addition, each year, KNZ publishes information about the kiwifruit applications received, approved or declined. Collaborative marketing statistics are available on their website.

6.2 KNZ Board

The KNZ Board consists of six members of which:

3 members elected by producers.
2 members fully independent of the kiwifruit industry appointed by the Minister responsible for administering the Regulations.
1 member fully independent of the kiwifruit industry appointed as chairperson by the Minister responsible for administering the Regulations.

7. Conclusion

The Regulations include a number of protections to mitigate the potential risks to New Zealand growers and other industry stakeholders of the SPE. Ultimately, the Kiwifruit regulatory framework appropriately balances the interest of various stakeholders so that the kiwifruit industry can maximise its potential and deliver benefits to the New Zealand economy as a whole.