The resilient almond

When it comes to investing in agriculture, everything is not always as straightforward as it seems.

Take, for example, California’s almond orchards, which supply more than 80 percent of the world’s almonds. Investing into those at the moment – when the Golden State’s drought has been declared a state of emergency, and local, state and federal politics over access to irrigation complicate the matter – may seem like madness. A farmer that would usually pay around $10 an acre for additional water has been paying as much as $2,000 an acre, according to local real estate agents. So to say that some of them are struggling is an understatement.

But it’s not so simple, says the chairman of one European family office. Earlier this week he told me the family office was considering selling its investments in Californian almond orchards due to uncertainty about the drought situation. “Is this is a short term effect or related to global warming? We just don’t know and it is difficult to take a position on that,” he said.

In the same breath, he told me that the office’s 10-year investment into the orchards had to date produced a 20 percent internal rate of return, thanks to land values increasing 2.5 times over the period (which has included dry spells) and 6.5 percent annual production returns. The orchards have also produced a full harvest recently despite the drought.

Even if Californian almonds are getting more expensive to cultivate, prices are generally expected to rise in parallel due to the region’s near monopoly in production, making the Californian almond market seem relatively resilient to the impact of drought. Especially when you consider that land values continue to grow sharply. Demand for the state’s prime agricultural land is so strong that one asset manager focusing on the region told me he conducts most of his business secretly to ensure no one else gets wind of assets in play.

“For every one person wanting to sell – there’s 100 wanting to buy,” Phil Christensen, founder at Agri Globe, the Californian agriculture asset manager told me.

So drought is not really deterring investors, although water access is of course affecting land prices. Tom Lindemann of Lindemann Properties, which specialises in the sale of California ranches and farmland, noted that he’s brokering the sale of one parcel at $22,000 an acre with two acre feet of surface water already purchased for the 2014 harvest; whereas another parcel with access to more water in dry years is going for $30,000 an acre.

California’s current water challenges – and its almond crops in particular – serve as a reminder that with proper due diligence, some very smart agri investments can still be made in the face of – and perhaps even profit from – adverse agricultural conditions. Drought doesn’t necessarily mean disaster.