June 24, 2015

Australia’s increasingly erratic climate, marked by long dry spells interrupted by deluges, is driving the country’s vegetable production industry worth $3.5 billion per year under cover.

Although the bulk of the vegetables produced in the country are still done so in open fields, producers have taken note over the past five years of the water savings, the improved product quality, better yields, and lower input requirements that can be achieved in greenhouses or covered crop operations. In addition, growing consumer demand for fresh foods, and demand from supermarkets for uniform, high quality vegetables to be available year round have driven an expansion in covered vegetable production in the country.

Revenue in the space is expected to reach $512 million this financial year, with approximately $50 million being profit – a growth of 5.2% according to IBISWorld. Over the next five years, annual growth in the industry is forecast to be 2.6%, with the sector reaching a value of $583 million by 2020.

Although the covered horticulture industry is currently dominated by smaller family run operations (totaling about 750), the business model is proving to be well suited for scalability and large corporate investment. Indeed, both domestic and foreign private equity firms are expected to reap large benefits from the industry’s growth potential.

The largest player in the covered vegetable and greenhouse space is the vertically integrated Costa Group, which controls 27% of the sector, has been raising investor interest in the U.S., and is preparing for a float on the Australian Securities Exchange (ASX).

Victoria-based Costa Group is a key producer of berries, tomatoes, and mushrooms, with over 40 farms and wholesale businesses supplying local supermarket giants and produce markets. The company is also a fruit, vegetable, and grains exporter, and has interests in vineyards and avocado orchards.

The bulk of the company’s output is produced at its massive 20-hectare hydroponic greenhouse tomato operation in New South Wales – a business model being duplicated by the company, which is planning the addition of two more 10-hectare glasshouses to be built on a nearby property.

The group’s under-cover vegetable business has seen impressive annual growth of approximately 6.8%, and in 2014/15 is expected to see turnover of $138.1 million. It is this growth which has gone far to attract interest from private equity firms to under-cover horticultural businesses like Costa and Sydney-based Perfection Fresh Australia which earlier this year bought the Moraitis Group’s five hectares of tomato greenhouses according to IBISWorld.

While it is true that covered horticulture space has its definite advantages and has seen impressive growth, the sector’s rate of expansion will depend heavily on the availability of water for irrigation, and the ability of smaller farmers to form production and marketing cooperatives to dilute the high costs of production associated with the business model. The Australian industry body, Ausveg notes that while yields can be higher, covered horticulture can bring with it higher energy costs for cooling, heating, and water reticulation, capital expenditure for infrastructure and maintenance, higher labor costs for high-technology production staff, and costs associated with the maintenance of consistent water quality.

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