The following is written by guest contributor Mark Crawford, President of Crawford Park Farming Company.
With the increase in world population, rising per capita incomes and a trend toward Western diets, demand for food will increase and 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.
The reduction of farmland is a global trend due to urbanization, water scarcity and environmental factors. More food needs to be produced 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.
A Changing Landscape
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 families as the farmer’s age averages 55 years and older, according to the USDA's latest Census of Agriculture. Many of the children or close relatives do not want to farm; or the farming child cannot buy out the other sibling's/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 as well as 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 farmland 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.
An Agtech 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 an Agricultural Technology boom. Money has been pouring in to Agtech. According to AgFunder, in 2015, agricultural sector investments were greater than $4.6 billion.
Investing in Farmland
Finding investment farmland can be a difficult process. There are only a few public companies. Most agriculture investments are made 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.
However, more opportunities for investment can be seen in the private market. 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. According to the California Almond Board, California supplies more than 80% of the world's almonds. The risk to invest in almonds is low because finding appropriate land with water, climate, soils, among other factors, is difficult.
Almonds are not just a snack nut. They are also an ingredient in today’s heath conscience lifestyles 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 heathy alternatives for many nutritional programs like diabetes, gluten-free diets and weight management.
Irrigation water in California is currently a major agriculture issue. For example, the investment criteria at CPFAG 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.
Demand and Price
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. According to the California Almond Board, 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 2014-2015 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 available land conversions from lower dollar per acre uses such as pastures to higher dollar per acre 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.
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 farmland. Today’s lower land prices are an opportunity to buy.
If you would like more information on CPFAG investments, please email Mark at firstname.lastname@example.org or visit CPFAG.com.
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