Investing in Agriculture / The Opportunity in Almonds
Less land – Need more food = Higher prices
The reduction of farm land is a global trend due to urbanization, water scarcity and environmental factors. We need to produce more food on less land. Some estimates state that food production needs to double by the year 2050 from current levels. Each acre of farmland needs to be more productive and produce higher yields.
With the increase in world population, rising per capita incomes and a trend to Western diets, demand for food will increase and will push food prices higher.
Agricultural land is emerging as a compelling investment that offers opportunity for stable returns with a low correlation to other, traditional asset classes and provides inflation protection.
Why the AG tech boom
The “supply side” of land is a function of yield times the number of acres. Going forward there will be a limited ability to increase the supply of land. The need for increased productivity on an ever diminishing supply of land has triggered the Ag Tech boom. Money has been pouring in to Ag Tech. In 2015, agricultural sector investments were greater than $4.6 billion.
Hard to Invest
Finding investment farm land is a hard process. There are a few public companies. Most agriculture investments are by large institutions. For example; TIAA CREF has over $5 billion invested in agriculture. TIAA CREFF’s agriculture investments produced returns in the range of 12% of both cash flow and appreciation over the last 20 years.
Consolidation /High Barrier of Entry
Major trends are shaping agriculture today, demographic, capital requirements, increasing government regulations and changing technology.
96% of farms are held by farming families. But the changing demographics will affect these family’s as the famer’s age is averaging 55 years +. Many of the children or close relatives do not want to farm or the farming child cannot buy out the other siblings/relative’s interest in the farm. Farming today is a much different business than farming families are familiar with, larger capital requirements, increased government regulations and new and ever evolving technologies. These changes result in farm properties coming to market that previously would have been inherited.
This new environment promotes a consolidation and reduction in the number of family farms. This also results in an increase of professional farm management which is well capitalized and uses the most advanced technology and practices for sustainable agriculture.
The acquisition of farm land is a very difficult process. For best results, one needs to find the right soil, climate and location. In California today, the challenge of long term water availability adds another element to an already difficult farm acquisition environment.
Direct Farmland investment
There are two main ways to make a direct investment in farmland.
- Row crops:
Planted and harvested annually, such as corn, grains and vegetables. These properties are usually rented for “cash rent” to a farm operator.
- Permanent crops:
Planted once every several years, such as grapes, nuts, fruit and citrus. These deliver higher average income and returns than row crops, but can experience a higher price volatility.
The Opportunity in Almonds
Almonds don’t grow just anywhere. Almonds require the right mix of climate, soil type, water and infrastructure of harvesters, packers and shippers. California supplies more than 80% of the worlds almonds. The risk to invest in Almonds is low because finding appropriate land with water, climate, soils etc. is difficult.
Almonds are not just a snack nut. They are also an ingredient in today’s health conscious life style and diet changes. According to the California Almond Board, the average person eats 2 pounds of nuts each year up from 1.3 pounds in 2008. The trend to less processed food promotes almond use in a variety of ways, including protein snacks, baking flours, milk alternatives, beverages and oils. All of which are good for the body. Almonds are used as healthy alternatives for many nutritional programs like diabetes, gluten free diets and weight management. See The California Almond Board at www.almonds.com.
Irrigation Water in California is the major AG issue going forward. Our investment criteria is to have two sources of water such as an irrigation district and on-site water wells. Several new laws and regulations have been enacted recently that will make properties with quality water resources much more valuable.
As water becomes more scarce, farmland with a sustainable water supply becomes an exporter of water. Farmland is a way to invest in water. Arable land with good water will become more valuable.
The growth in demand for almonds over the last 10 years has driven shipments of California almonds to more than double to keep up with demand. In the 2005/2006 growing season, shipments were 914 million pounds. In the 2014/2015 growing season, shipments were 2,100 million pounds. Revenue growth in almonds surpasses grapes as California’s biggest agriculture commodity and number one crop export.
In 2014, the price per pound of almonds was $2.90 to the grower. In 2015, it was $2.84 and the estimate for 2016 is in the low $2.00 range per pound. That price decline represents a buying opportunity for investing in almond orchards. Orchard prices have declined from over $40,000 +/- per acres to $30,000 +/- per acre during the past year.
Record almond prices for the last couple of years promoted an increase in the total bearing acreage of almonds to 890,000 and non-bearing acres at 220,000 for 2014/15 as reported by the California Almond Board. By definition, non-bearing is a new Almond planting which has yet to bear a crop, typically 3 years.
Will these new plantings provide enough supply to keep up with demand?
Over the last 20 years, supply has been driven by abundant water and readily availability land conversions from lower dollars per acre uses such as pastures to higher dollar per acres uses such as almonds.
Supply is facing strong headwinds to keep up with increasing demand growth of 152 million pounds per year over that last 10 years. For new orchards, will growers have enough water and land availability? For existing orchards, lack of adequate water supply and urbanization challenges use as cropland. Additionally, an increasing hostile regulatory environment and larger capital requirements affect farm operator decisions to grow crops.
If demand of an extra 152 million pounds per year continues, at an average yield of 2,000 pounds per acre, 76,000 acres of new Almonds need to be planted annually. The California Almond Board reports that total acreage was 640,000 in 2005/2006 and 940,000 acres in 2013/2014 which represents an increase of 300,000 in total acreage or just 30,000 net growth per year. 76,000 additional acreages are needed annually.
Current low Almond prices are probably a short term issue. Increasing demand and a shortage of new plantings forecasts better prices in the future to keep up with a growing consumption/demand.
Today, we are investing in 2-3-year-old almond orchards. It takes 3 years for the trees to mature to produce a first crop of almonds that is profitable. We believe these young orchards offer an opportunity to acquire a stable asset that’s in a position to cash flow in the first year or two of our ownership. Additionally, we believe that buying farm land with a reliable water supply will be a value add for the future.
The properties will be managed by local, professional farm managers that farm almonds in the area.
Growing demand for food, limited supply of land, limited availability of land and water for new plantings should produce higher long term returns for both the almonds and the farm land. Today’s lower land prices are an opportunity to buy.