The winners and losers of California’s water crackdown

With a boom in almond orchards contributing to depleting the state’s aquifers, investors should be aware that ‘the party is going to be contained,’ an insider tells us.

Nut growers who can afford to dig holes can make a lot of money in California. As we explored in a recent article, investors ready to deploy their dollars into irrigated orchards can hope to double their money in about five years.

Mark Crawford, president and managing partner of Beverly Hills-based Crawford Park Financial, agrees it is an interesting time to invest in the crop – after the price nearly halved in a matter of years and sales skyrocketed in response. “Consumption is running ahead of supply. They are digging in the inventory at a very prominent rate,” Crawford tells Agri Investor. “It’s a rosy picture for performance.”

But there are caveats – and pretty big ones. The usual pattern, when investors rush into a bubble, is for that bubble to burst once they realize they got carried away – sending prices crashing down. That’s not likely to be the case in California, Crawford reckons. “There are still a lot of trees coming online, but almonds seem to be selling very well.”

Dry powder

What worries Crawford, rather, is the inescapable water crisis California is headed towards.

For many years, he explains, farmers have been pumping more out of the state’s aquifers each year than these have been taking in, leading to a reduction in reserves. In California, the law allows them to get a permit to drill for more (which is not so easy in many other states).

When the drought hit California earlier this decade, alarm bells rang that such practices were not sustainable. But some argued there was still plenty of water if you were willing to dig deeper. And sure enough, they’re acting on their word.

“They’re having to get West Texas well-drilling rigs out to drill down the water,” Crawford says. But that creates a couple of issues.

For one, the further down you go, the lower quality the water is: it starts getting much saltier, among other things. So growers have to treat the water. The whole operation ends up being rather costly; it’s not clear the water’s always to the right standards.

“If you’re sitting on the ground, it’s very interesting. You see the water going on to the crops but it doesn’t go into the ground, it kind of sits on top of it. That’s the result of years of bad quality,” Crawford observes.

Drill breaker

The second risk is the regulatory backlash it may soon help trigger. “The state of California is going to put the kibosh on that whole thing. And it’s not going to happen today, or tomorrow, but over the next five years we know that they will limit the amount of water that you can pump,” Crawford notes.

The consequence of this is a continuation of constrained supply, he reckons. “The almond trees that are in those neighborhoods that are not getting such good water have a shorter lifespan,” he observes. Add to that the effect of rampant urbanization and it appears demand will long continue to outstrip supply.

The opportunity for investors is to adopt a long-term outlook on where water resources will lie. “The focus is not on where almonds were before. It’s on where almonds are going to be going for the next 60 or 100 years. So we’re focusing on trying to take advantage of this changing water dynamic here.”

Which is why, he argues, partnering a farmer or farm manager in a particular neighborhood may not always be the most astute solution. “He’s very neighborhood-centric,” he says. “But you need to figure out where the water is going to be – and that’s not necessarily where it has been.”