California remains the top-producing agricultural state in the U.S. with over $55.9 billion in annual cash receipts for agricultural products representing just over 10% of the total U.S. agricultural production (USDA, 2022). In total, USDA recognizes over 400 different commercially grown commodities in California. Dairy leads the list with $10.4 billion in annual production value followed by grapes at $5.5 billion. California also holds dominant positions (99% or more) in almonds, artichokes, celery, figs, garlic, grapes/raisins, kiwifruit, melons/honeydew, nectarines, olives, pistachios, peaches, other stonefruit, plums/prunes, walnuts, and many nursery crops and seed production. In addition to being the top milk-producing state, California is of course renowned for its wine production, with the Napa and Sonoma wine-growing regions known worldwide. The agricultural sector is heavily dependent on export markets with nearly 40% of the total production going abroad, representing 12% of all U.S. agricultural exports. The top export destinations are Canada, the EU, China, Mexico, Japan, S. Korea and India
California agriculture continues to face several significant challenges that will impact the productivity and economic profitability of the state’s agricultural sector. The most obvious issue relates to water usage and competition between agricultural use and usage within high-population centers in the downstate region. California had been suffering through a prolonged drought and got welcomed relief through a record seasonal snowpack and snowmelt in 2023. NOAA indicated that nearly 100% of the state was in a drought status at the beginning of the year, but by the end of November, less than 1% remained under excessively dry or drought conditions. The abundant precipitation significantly recharged reservoirs and also resulted in the state making it easier for farmers to capture excess flows as well as fast-tracking water storage and infrastructure projects like the Sites Reservoir so less water is lost to runoff in the future.
California’s Sustainable Groundwater Management Act (SGMA) still holds substantial potential to rearrange agricultural production in the primary nut-producing regions in particular, and in major Central Valley vegetable production areas as well. Forecasts continue to predict that substantial additional acreage will need to be idled with water diverted to more valuable production areas, and crops that can be grown elsewhere or are more water-price sensitive may be driven to other regions of the state or country as SGMA is fully implemented. To do so, some almond orchards are being “recycled” on a shorter timeline, and water rights are consolidated on highest-valued parcels. In addition to water challenges, California also relies on the largest number of hired and migrant workers with well over half a million per year. While agricultural labor has always represented an important management issue, scrutiny over labor treatment, initiatives surrounding minimum wage and overtime requirements, and increased attention on all things related to immigration have heightened the concern in continuing reliance on the ag-labor pool and such high levels. Additional headwinds remain for almonds and wine grapes in particular through pricing pressures from oversupply and efforts to continue to consolidate production units.
The land transaction market has seen wide variation throughout 2023, with activity shifting from large-scale transactions at the start of the year to mostly smaller farms toward the year’s end. Many investors and institutional funds have paid more attention to capital expenditures and value enhancement projects than to new acquisitions, and they have been slower to deploy funds due to increased debt costs and uncertainty about the pace of recovery of some specific commodity prices. The industry is currently in a phase of “right sizing and resizing” permanent crop acreages and there is some optimism for near-term price stabilization for some commodities, such as almonds. As was the case in prior years, land with strong water rights and lower-cost access to ground and surface water occupies a distinctly different class than land without strong water rights. “Farming the water” remains a descriptive phrase for selling water usage like any other commodity as a component of a parcel value.
In terms of financial performance, overall appreciation in land values has remained fairly strong across the lower volumes and has resulted in recent returns in particular remaining competitive with other regions.
Variation across crops has increased and the headwinds for some tree-nut regions, winegrapes, and certain citrus varieties remain but have perhaps receded from a year ago. The table below shows the total returns and components for selected periods including the most recent three-year period. The lower section of the table shows inflation (CPI) and 10-year Treasury yields for comparison (CMT-10).
SUMMARY
The California farmland market is the most massive and diverse in the country with unique climactic delineations, unique soils and growing conditions, and proximity to consumers and export channels. Water-related access and cost differences are emerging that will continue to create both stresses and opportunities as SGMA reaches full force and as the state’s own investments in water-related infrastructure mature. Still, the sheer magnitude and diversity of its agricultural production guarantee that California will remain a critical player in not only its own, but also in the future prosperity of the U.S. Institutional investors have historically focused on California due to access to large-scale operations with little production competition, but have been relatively less active as interest rates have increased and pricing uncertainty remains elevated. As coined by Schumpeter, “creative destruction” is a necessary part of the movement toward increased longer-term efficiency, and the next few years will be critical in determining and shaping the production system realignments that will occur.
ALL REGIONS
