Improving the competitiveness of the South African fresh apple export value chain.

Thesis (M.Sc.Agric.)-University of Natal, Pietermaritzburg, 2002.

Since 1996, South African (SA) apple producers have faced major structural changes following the deregulation of SA apple marketing and the declining profitability of apple exports as world prices have fallen in real terms. Global retail consolidation has also shifted market power in fresh fruit value chains towards downstream firms (retailers, category managers, and import receivers), and put pressure on upstream (exporter, packer and producer) margins. Retailers have become more demanding about which apple cultivars they will stock, and more sensitive about non-product terms of sale, such as fruit handling methods, social and ethical issues and consumer sensitivities. With competition from other apple exporting countries (such as France and Chile) likely to increase, players in the SA fresh apple export value chain must implement appropriate strategies to try and improve its competitiveness. This study investigates aspects of cooperation between SA apple producers, packers and exporters in the Western Cape and Langkloof East areas during 2001, in order to show where these players need to commit more resources to make the SA fresh apple export value chain more competitive. Fresh apple exports are the focus of the study as about 58 per cent of annual gross income on SA apple farms is derived from export sales. A recursive Ordinary Least Squares model shows that higher levels of trust led to more cooperation (joint problem-solving and communication) between these players. Higher levels of joint problem-solving and communication, in turn, encouraged producers to commit more human resources to working with packers and exporters to find ways ofmaking the chain more competitive. Results also suggest that the players need to particularly improve cooperation in production planning, delivery scheduling and quality control. Packers and exporters ranked climatic conditions as the top constraint currently facing the SA fresh apple industry, probably reflecting their concerns over the annual "pack-out" (quality distribution) of the apple crop. Other factors affecting competitiveness include the recent withdrawal of government export incentives, restrictive labour policy, high real interest rates, a lack of market information, and the growing and marketing of inappropriate apple cultivars. Key industry players suggest that SA fresh apple producers need to consider whether or not to invest in new apple cultivars, like the Pink Lady, in order to meet the changing demands of international fresh apple consumers. This study, therefore, also compares the relative potential profitability of investing in orchards to produce the Pink Lady and the Golden Delicious - a traditional SA fresh apple export cultivar. Given uncertainty about the yields, costs and prices, and that apple orchard investment costs are irreversible (cannot be fully recovered in the short tenn), an ex ante version of the Dixit-Pindyck investment model is used to assess the viability of these investment alternatives under uncertainty and irreversibility. This model accounts for uncertainty and irreversibility by raising the orthodox hurdle rate that must be met to justifY the orchard investment by an amount that reflects the value of the option to postpone the investment. Typical Pink Lady apple orchards in the Western Cape and Langkloof East areas have higher orchard establishment, crop harvesting and crop spraying costs than do Golden Delicious apple orchards, but retailers will currently pay R493 per ton (25.3 per cent) more, on average, for Class I apples of the Pink Lady brand. Results show that a potential Pink Lady orchard investment is relatively more profitable than a potential Golden Delicious orchard investment. In addition, SA apple producers taking into account uncertainty and irreversibility should only invest in a 35-year Pink Lady or Golden Delicious apple orchard if the expected annual real rate-of-return is above 11.41 per cent or 9.45 per cent, respectively. These modified hurdle rates are about two times the orthodox real rate of five per cent that is commonly used in capital budgeting analyses. Such differences between orthodox and modified hurdle rates have also been reported in recent studies on the adoption of dairy technology and grapefruit orchard investments in the United States.

Missing pages 7, 10 and 37.