Tony Gibbs : kiwifruit crusader

Tony Gibbs. Photo / Brett Phibbs.

Richard Procter, chief executive of Kiwifruit NZ, the regulator charged with ensuring that kiwifruit marketer Zespri plays by the rules, has no regrets. Whether the regulator's marketing committees should have granted Turners & Growers' applications to export kiwifruit to Japan, Mexico and the US is, to Procter's mind, irrelevant.

The regulator applied the rules in rejecting collaborative marketing licences sought by the fruit grower and exporter, he says. The decisions were appealed but upheld in a written determination this year. The system is "open and fair and it has integrity", he says, adding that Turners & Growers' applications did not meet the criteria.

Yet the regulator's decisions, says Turners & Growers chairman Tony Gibbs, were "the spark that lit the match, that lit this war".

He is now spending "big-boy money" to force deregulation of the industry and end Zespri's statutorily imposed dominance of kiwifruit exports.

Now aged 62, the corporate raider who led the campaign to dismember the old Apple and Pear Board, merging its Enza marketing arm with T&G, says this is probably his last "crusade".

And Gibbs seriously believes his actions constitute a crusade, not just a commercial strategy. His email address is "Aeneid", the title of Virgil's tale about the legendary Trojan who founded Rome, suggesting Gibbs sees his own corporate journey as an epic quest. "I'm coming out of this with clean hands," he growls.

Gibbs' plan of attack is three-pronged: persuade growers that an open border is better than the single-desk method of selling fruit; try to convince the Government that Zespri's legally privileged position is an anachronism and its founding legislation should be repealed; and finally, persuade the High Court that Zespri has been guilty of breaching its own rules and acting unlawfully.

The matter has even come to the attention of the World Trade Organisation. The US delegation has issued a "please explain" note to the New Zealand Government.

It wants to know "why it is that a key player in the New Zealand kiwifruit industry had to file legal proceedings in relation to collaborative marketing arrangements" and urges the Government to "expand on the court documents alleging anti-competitive behaviour and abuse of Zespri's dominant position".

Trade Minister Tim Groser has all but endorsed Zespri's accusation that Gibbs is colluding with "foreign powers" to the detriment of the national interest.

"Basically, what is going on here is, having failed to persuade the growers, having failed to persuade the Government - the allegation is they are attempting to persuade other governments," says Groser.

Gibbs' attack raises two connected but separate issues. First, is an open border approach better than a single desk? Second, even if you accept the need for restricting exports, is Zespri, aided and abetted by the regulator and grower body, abusing its privileged position to the detriment of other market players?

A court will decide on issues relating to alleged abusive conduct, but even some growers who support the single-desk approach are critical of the industry's structure. For them, Zespri is indistinguishable from the regulator, Kiwifruit NZ, and the growers' representative, NZ Kiwifruit Growers Inc.

They say the industry structure is opaque, information is restricted, meaningful performance measures difficult to obtain and there is no accountability for mistakes made. They don't support Gibbs' deregulation agenda, but they do share his concerns.

For Gibbs, the reason why growers should support him is obvious: "Freedom."

"The farms in the Ukraine have more freedom and choice than New Zealand kiwifruit growers."

Asked how freedom, in itself, will generate a higher return to growers and benefit New Zealand Inc, Gibbs visibly bridles. "It's not rhetoric, it's a fact. No competition stifles innovation. This company is stagnating our innovation."

The contention that T&G would be better off without Zespri is clear cut. Gibbs' intention is to boost his company's exports to as much as 30 million trays a year. Total sector production for last year was a record 106 million trays. Turners & Growers grow and sell a little over 1 per cent of that, to Australia, the Pacific Islands and domestically. The three applications the regulator knocked back were for an extra 325,000 trays, which, at this year's return to growers of $3.68 per tray, represents nearly $1.2 million in denied revenue.

"We aren't getting a fair go from the regulator," Gibbs contends.

Even Zespri chairman John Loughlin admits the frustrated exporter would be better off with an open border. "They would unquestionably have a different opportunity to participate in the industry."

But, Loughlin adds, "the question is whether that would give a better return to growers".

While Gibbs believes deregulation will benefit growers, Loughlin can list reasons why the industry should remain regulated.

"Your classic free market approach suggests it will give the best economically sustainable answer," he says, "but that doesn't mean the industry will succeed or that growers will make money - it just means the market will determine the outcome."

Agricultural producers face a global problem: disparate and fragmented supply and narrow buying channels. "Market power tends to accrue to the controllers of the channel and they tend to use that market power in favour of global consumers and against fragmented producers," explains Loughlin, citing the 2710 New Zealand kiwifruit growers and Britain's "eight major supermarket chains" as an example of the David-and-Goliath market dynamic.

A single desk, by contrast, can mitigate price-destroyers such as oversupply and the divide-and-rule strategies of international retail chains that lead to wild fluctuations in prices, he argues.

In recent years kiwifruit prices have ranged from as high as $4.09 a tray in 2007 to this year's $3.68. That, says Loughlin, represents stability compared with meat prices.

Venison "has gone from $3.50 a kilo to $10 and back to $3.50; enormous boom-bust cycles".

The Kiwifruit industry structure, says Mike Peterson, Meat and Wool Board chairman, is the envy of his sector. Fragmentation and the lack of an overall marketing strategy is the bane of beef, lamb and venison farmers, he says.

"We shouldn't be competing against each other," he continues. "We want strong competition for inputs; competition selling outputs, however, isn't good as a rule of thumb.

"I'm a capitalist like everyone else but I'd rather limit rights to market - to give that away would be a huge step backwards."

Peter Ombler, chief executive of grower body NZ Kiwifruit Growers, points to the efficiencies achieved in concentrated spending on marketing and infrastructure under the present structure as two reasons for keeping a single export desk.

"When you go to negotiate with the shipping companies, for example, you're going with 100 million-odd trays - you've got clout because you've got critical mass."

Similarly, Ombler says more research and development is conducted under a single entity, pointing to the recent $35 million deal struck with the Government to develop new cultivars. Its domestic heft allowed the industry to "leverage money at government level", in this instance $15.2 million from Plant & Food Research.

The deal, spread over seven years, is a bit of a sore point with Gibbs, who claims the announcement is "spin" and the total figure incorporates existing commitments. Loughlin insists it's new expenditure, over and above the $8 million to $10 million a year spent in the past three years.

You can understand Gibbs' sense of outrage. Turners & Growers has been pushing its early-developing green kiwifruit, which will assist 365-day-a-year servicing of the global market, and new red variety - two types which are targets of the investment programme.

Ombler, much criticised by Gibbs' supporters in the industry, says varieties developed by competitors can, if proven to be the best, be adopted by the industry. "The ones I've seen on offer from other people, I, as a grower, wouldn't plant. When I make a choice to make a new cultivar, I take all the risk and I want to know it's got a commercial future or has a good chance of having one."

Some in the industry saw the announcement as a backroom deal to rebut claims by T&G that Zespri was stifling innovation and investment. It certainly suggests Zespri has serious political clout. For his part, Gibbs has made his arguments to the Prime Minister, Finance Minister, the ministers for agriculture and commerce, David Carter and Simon Power, and representatives from the Act and Maori parties.

But Zespri can also cite Government support. For the record, Carter says deregulation is not on the agenda at present and the Government will be guided by what growers want.

If Gibbs can't count on the Government, what about the growers? Ombler cites a Colmar Brunton survey of members showing 84 per cent support for the existing industry structure. "You're never going to get 100 per cent support from growers," he says, adding that dissent is inevitable for a large organisation making decisions in the interests of growers but which negatively affect some individual orchardists.

Yet some Zespri initiatives belie their confidence in grower support. The company has introduced "loyalty contracts", locking up supply for several years in return for a premium paid to those "loyal" orchards.

Loughlin admits the contracts are a holding tactic, should Gibbs succeed in forcing deregulation. "It's not about insurance, it's about having time to make an adjustment. We want the ability to change sensibly, rather than go cold turkey."

Gibbs supplies the names of several growers who back his campaign but, annoyingly for him, these men - Ross Hart of Katikati and Te Puke's Tod Rutter - actually oppose deregulation. A single-desk approach is the best for growers, they say.

"I'm not a supporter of Turners & Growers," Hart says. "I am a supporter of integrity, honesty, transparency, fairness and efficiency." Both he and Rutter say Zespri, the regulator and the growers' representative body all lack these qualities.

A good example of how the warring parties interpret common facts differently is this year's issue of fruit-dumping and the buying of Chilean kiwifruit, sold under the Zespri imprimatur.

Gibbs and some growers are outraged that Zespri is forcing its growers to dump more than two million trays and at the same time buying a foreign competitor's fruit for sale in Europe.

Except it wasn't at the same time, explains Carol Ward, Zespri's director of corporate and grower services. Chilean fruit was bought to ensure year-round supply, meeting demand when New Zealand fruit was unavailable.

It dumped more than two million trays because of a global oversupply which threatened to depress prices. "Zespri could sell the whole crop but we didn't believe that was a decision that would maximise grower returns," Ward says.

It was a decision that illustrated the benefits of a single desk, Loughlin adds, in the face of a global financial crisis, falling demand, lower prices and oversupply. "We sat down and did the math and our statistics are now confirming that fruit consumption is down 8 per cent." The dumping was a one-off and kiwifruit held its own, Loughlin contends, while prices for peaches, nectarines and apricots "are down anywhere between 10 per cent and 40 per cent".

But accusations of mismanagement hit a little closer to home. Zespri bought Chilean fruit because it believed it matured earlier, filling a two-week supply window it could not meet. But embarrassingly, Loughlin admits, "the way they get it early is to pick it too soon. As we started to apply our rules to get our quality standards, it wasn't viable anymore. It was a strategy that didn't work and is being discontinued."

Even so, the bottom line is that Gibbs lacks grower support for deregulation, meaning the political will for change is also absent, something the old campaigner concedes: "The end game is total deregulation - it should happen by government decree; it could happen by court order."

Mark Williamson, a competition specialist at law firm DLA Phillips Fox, says T&G's statement of claim relates to the "interaction between the Commerce Act and the industry's regulations". Basically, Gibbs is arguing that the export regulations are inconsistent with the act and wants the court to declare the Zespri structure unlawful.

The court will look at the "likely state of competition 'with' and 'without' the relevant agreements and arrangements," says Williamson, and make a decision whether the difference between the two scenarios were "real or of substance".

He is troubled, however, by the accusations of misuse of market power: "This is an area which is tricky to analyse at the best of times and, in light of the regulatory overlay, a court would need to carefully consider whether any steps alleged to have been taken amounted to taking advantage of a position of substantial market power for an anti-competitive purpose."

Back in Katikati, grower Hart believes Gibbs will win his case. That victory, he hopes, will force the Government to address grower concerns about Zespri, and reform the industry.