KENNEWICK, Wash. — Lenders are bullish on the Washington tree fruit industry for the long term but in the short term they see consolidation pain as the industry sorts through too many apples and cherries and too many packing houses.
More consolidation of companies is very likely within the next six to 24 months because new, expensive packing lines are running too far below capacity, Michael Butler, CEO of the Seattle investment bank Cascadia Capital LLC, told more than 1,000 growers at the Washington State Tree Fruit Association annual meeting in Kennewick, Dec. 4.
Apple crops likely will approach 175 million boxes in the next five years and cherries 35 million, jeopardizing profitability, Dennis Bigness, Northwest Farm Credit Services relationship manager, told growers.
“How much can we profitably market and get picked. We might be constrained to do it well, beyond 150 million boxes (of apples),” Bigness said.
This year’s record crop of 27 million, 20-pound boxes of cherries was profitable on the front end but wasn’t after the Fourth of July, he said.
The hope in apples lies with newer, managed varieties, the upcoming new state apple Cosmic Crisp and Honeycrisp, but older strains of Red Delicious, Gala and Fuji won’t be reduced fast enough, Bigness said.
Yet, Northwest Farm Credit Services remains bullish on the industry and the $1.5 billion it has invested in it will grow to more than $2 billion in the next few years, he said.
“The industry is at an inflection point. Very powerful buyers like Kroeger, Trader Joe’s and Whole Foods dictate to fruit companies what they want and companies need to consolidate to match the power,” Butler said.
Mid-size tree fruit companies of less than 1,500 acres of orchard, running at or under 30 percent packing capacity and who are not vertically integrated — meaning they don’t grow, pack and sell their own fruit — are at most risk, Butler said.
The better managed ones better suited to generate the most revenue and who have the most capital to invest will end up with assets of others, he said. The industry will come through the pain better positioned, he said.
In recent years, many companies have invested millions of dollars in upgrades and new, high-tech apple and cherry defect sorting and sizing on packing lines. Many companies have substantial debt, Butler said.
They need more fruit to service that debt if they are running at 30 percent capacity so six to seven of them have approached Cascade Capital looking to borrow so they can replant into more high-density orchard, he said.
Individual companies need more fruit but collectively the industry has too much fruit and too many packing facilities, Butler said, adding not all will survive.
He said he knows of six mid-size companies that are vertically integrated, well managed and only need more acreage and volume.
“They all have potential but there’s not room for all of them,” he said.
Right now those companies and others are looking to borrow money to acquire more acreage, but in six months those that haven’t been able to do so will start going away, he said.
Companies in a position to buy will be able to acquire assets at bargain prices, he said.
Already, Blue Road Capital, a private equity firm in New York that specializes in acquiring agricultural-focused businesses, was involved in Vanguard International’s purchase last spring of 3,000-acre Pride Packing in Wapato and is looking for more acquisitions, Butler said.
Foreman Fruit Co., Wenatchee, bought Earl Brown & Sons, in Milton-Freewater, Oregon’s largest grower and packer of apples. Chelan Fresh Marketing, Chelan, Wash., gained marketing agreements with Borton Fruit, Yakima, and Columbia Valley Fruit, Union Gap.
All of that is part of the consolidation and, for Chelan Fresh, gaining more fruit for bargaining power with retailers, Butler said.
“You have to control 10 percent of the sales market to be a long-term competitor,” he said.
Chelan Fresh Marketing, Stemilt Growers of Wenatchee, Washington Fruit & Produce of Yakima and Zirkle-Rainier, Selah, are all in that top tier.
Investors looking to invest in tree fruit companies need to evaluate their investments on a rolling average over time, not year-to-year, Butler said. Family and pension fund investors make the best investors in tree fruit because they have the long-term view and are willing to be minority, not controlling, investors, he said.
In considering what company to invest in, Butler said, his top criteria is quality of management that is efficient, looks ahead and is open to new technology. Secondly, he said, is quality of assets of packing houses and orchards.