Agri fund managers philosophical about California drought

Agriculture fund managers are taking a relatively positive stance on California’s drought and see it as an exercise in cautious farm management despite the raft of recent legislation aimed at conserving water at home and on farms.

Agriculture fund managers are taking a relatively positive stance on California’s drought where the situation has resulted in a raft of legislation aimed at conserving water at home and on farms.

Most recently, the State Water Resources Control Board started giving curtailment notices to junior water-right holders in the San Joaquin River watershed and on the Scott River last week, two of the worst-hit areas.

The notices advise the recipients to stop diverting water from the watersheds and allow it to flow to more senior water-right holders, as required by state law, according to a government press release. The vast majority of the water rights receiving notices are used for agricultural purposes in both watersheds, according to the release.

But a farmland investment manager with some assets in the most affected areas is philosophical about the crisis.

“We do have some farms that have limited supplies of water so we try to purchase water on the open market at very high prices when we are able to find it,” the investment manager based in Fresno, California, told Agri Investor.

The firm is hoping it can keep farming for one more year in these conditions before they approve. “It will rain again, we just don’t know when,” he said adding that he is focusing on investing in farmland in the Delta region of California where water is more abundant through ground- and surface water. “There is always water in California; it’s just the resources are not necessarily equitably distributed,” he said.

Other fund managers see the crisis as an exercise in cautious farm management.

“It’s certainly a subject that is very much on everybody’s mind,” Rob Hurlbut, a principal at Equilibrium Capital, which recently closed a Californian permanent crops fund on $250 million, told Agri Investor. “But we continue to exercise a lot of caution and understand the nature of water resources as we approach any particular farm and certainly in the management of the farms that we are operating.”

Hurlbut said the firm’s properties in California haven’t experienced any water issues so far. “The principal reason why we selected these properties was the nature of the water access,” he said. “One of the first screenings we do on any assets in California is understanding the water resources and making sure we have a high level of confidence in the availability of it,” he said.

Water shortages have not impacted the portfolio of Gladstone Land, the Nasdaq-listed real estate investment trust, which owns strawberry and vegetable farmland in California, either, according to its chief executive David Gladstone.

“We don’t have problems with water because we have fairly good wells and they seem to be efficiently irrigating our farms,” he said. “We do have one small farm in the central valley but it has wells so it’s not impacted at all.”

Gladstone told Agri Investor that the REIT owns strawberry and vegetable land on the coast next to Santa Cruz, which is over the mountain from Silicon Valley. It also owns land an hour north from Los Angeles near the Oxnard Plain.

Gladstone is not without some reservations, however. “Everybody still worries because you can lose a well,” he said, adding that a well on one of the REIT’s properties had become too salty meaning they had to drill a new one.

Like Hurlbut, Gladstone also emphasised the importance of testing a land’s water availability before buying it. In February, Gladstone acquired about 100 acres in Salinas, California near the coast for $13 million. The REIT currently owns 2,391 acres of land in California, and employs drip irrigation across much of it which is a more efficient use of water than sprinklers, said Gladstone.

For many farmers in the state, the drought has meant that farmers are planting less crops, especially of large trees that produce nuts.

“I think the state has a real problem,” Hurlbut said. “There is obviously an unpleasant record of droughts in recent history so the problem is putting in place strategies that help mitigate your exposure to the risk of the continue drought.”

But ever-resilient, Gladstone argued that the situation will not drive his firm, and other farmers, away from the area. “If it continues for 10 years then it will really be a problem. But that’s not likely to happen.”