WENATCHEE, Wash. — Economic deterioration of the Washington tree fruit industry is accelerating because of low apple prices over the past year, and company consolidations, on hold because of COVID-19, will soon start happening, a Seattle investment banker says.
“Balance sheets are getting weaker and profits are disappearing and banks are getting much tougher regarding lending money and calling in debt payments,” said Michael Butler, chairman and CEO of Cascadia Capital in Seattle.
“You’ve got a situation in the industry where a lot of companies are looking for capital because they have to,” Butler said. "Distressed companies are out looking for capital. A number of stronger companies are looking for capital to pick up assets of weaker ones."
Well-managed companies with good assets and that have embraced new technology will be able to get capital, but “those with bad assets or bad management will be very challenged,” he said. “It’s really a case of the haves and have nots right now. In the fall, the ax will come down for some of these companies.”
Economic uncertainty and travel barriers due to the COVID-19 outbreak put investor activity on hold, said Jeff Fagg, owner of Columbia Business Consultants in Moses Lake.
“Investors seem to be getting active again, although with the lower fruit pricing that we’ve seen from the large 2019 crop price points on orchard properties have softened a bit,” he said.
If an orchard or a vertically integrated company — with orchards, packing and sales operations — doesn’t have a good mix of varieties it is likely under pressure from past market conditions, he said.
One bright spot, Butler said, was this year’s short cherry crop brought “unbelievably” good prices. It helped companies that had lots of cherries, he said.
Last January, Butler said a major Yakima tree fruit company, representing probably close to 10% of industry fruit sales, likely would be sold late in the second quarter of 2020 for “hundreds and hundreds and hundreds of millions of dollars.”
That acquisition and other deals have been on hold because of the economic and travel conditions of the coronavirus, he said.
Now travel restrictions are lessening, enabling potential foreign investors to visit and deals are likely to be struck this fall, he said.
“We are preparing for a robust fall,” he said.
Cascadia Capital helps companies prepare to sell themselves and find the right investors. It has been reaching out to the Middle East to find investors who tend to be minority owners and don't want to actively run businesses.
The industry’s financial crunch has been building for years. Butler talked about it at the industry’s annual meeting three years ago, and since then several transactions have occurred. One of the largest was Ontario Teachers’ Pension Plan buying Broetje Orchards, of Prescott, for more than $288 million at the end of 2018.
The problem, as Butler has explained it, is that Washington tree fruit companies, in efforts to remain competitive, have spent more on new proprietary apple varieties, new orchards and new packing lines in recent years than many of them can afford.
A large 2019 apple crop brought lower apple prices while labor and chemical costs increased. Compliance with state COVID-19 rules added to costs this year.
Beside acquisitions and infusions of outside capital, there have been mergers of marketing organizations, commonly called sales desks, in the last three years.
The most recent, this year, has been the three partner packer-shippers leaving Yakima Fresh marketing, said Scott Porter, a Cascadia Capital senior vice president.
Yakima Fruit & Cold Storage Co., of Wapato, joined CMI Orchards, of Wenatchee, for marketing, he said. Roche Fruit began marketing through Washington Fruit & Produce Co. Both are in Yakima. Stadelman Fruit, of Zillah, is marketing with Oneonta Starr Ranch Growers in Wenatchee.
Congdon Orchards switched from First Fruits Marketing of Washington to Sage Fruit Co., he said. All three are in Yakima.
The Washington Apple Commission website lists 57 apple packer-shippers in the state and 21 marketing companies. Those numbers are likely outdated. Porter said the 11 to 12 marketing companies need to shrink to 4 to 6 to gain leverage in pricing with retailers.
“It should end up at three or four of the size and scale that matter,” Porter said. “We know of a few of them in talks to merge and that should happen soon, this fall or next spring.”