California farms and ranches provide half of the US’ fruit and vegetable supply, and nearly 100 percent of many crops including peaches, plums, artichokes, broccoli and even rice.
Thus the general public and agri investors are increasingly worried about the ramifications of the crippling drought the state has endured for more than four years. The California Department of Food and Agriculture estimates the losses to agriculture businesses will hit $2.7 billion in 2015. Earlier this year, Governor Jerry Brown issued mandatory water restrictions for the first time in California history, requiring state-wide savings to average 25 percent.
Agri-focused fund managers say farming in California “may never be the same” again, as some fields are forced to lay fallow, costs increase and access to water may change what crops are being grown.
Lloyd McAdams, chairman of PIA Farmland, a California-based Real Estate Investment Trust, believes that the current drought could well be more secular [long-term] than cyclical. “If this drought is secular as opposed to cyclical, and I haven’t experienced any cyclical droughts of this magnitude, farming in California will not be the same for a long time.”
He added the state gets most of its rain from the ocean and “if anything happening to the ocean currents or temperature is causing this [drought] then it could be secular and that, of course, is a major hit”.
“It’s a pretty stark picture,” said Mark Bishop, managing director of Aldwych Capital Partners, pointing to the dramatic reduction in California’s snowpack caused by the drought. “Compared to a year ago, the situation is not much different and virtually every major agricultural area is impacted. Effectively, sources of water that people historically have been able to draw [from], they have not been able to” during this drought.
“Paying for groundwater in California is just a matter of time,” Michael Underhill, chief investment officer of Capital Innovations, told Agri Investor. “Given California’s extended drought, I expect the state to follow Australia’s lead in the near term, and regulate groundwater.” He said digging deeper wells has already increased costs and paying for groundwater would drive costs higher for growers and packaged food companies alike.
PIA’s McAdams agreed that pumping water and drilling wells wouldn’t be a sustainable solution and sees certain types of crops in the region “dying”. He said that while senior water rights holders have not been badly affected yet, that’s likely to change, with the state expected to regulate water rights and usage even more aggressively.
Bishop added the industry was undergoing a series of changes as a result of the drought, with the production level of water-thirsty crops such as cotton likely to decrease over the long term. As for almonds, “because of the profitability of almonds and the rising demand from Asia, a lot of pastoral lands are now being planted with almonds”.
The situation is leading some to look outside California: PIA Farmland is currently exploring investment opportunities in Arizona. “We are studying Arizona because in California, if the snow pack is at 20 percent of what it’s supposed to be, it will take about 10 trillion gallons of water to bring back the water that got sucked from the earth by the drought.”
The drought is bad in historical terms, Bishop said, but the real problem is “no one has any real visibility about when it’s going to end”.