California Farmland To Plunge "20% Or More" As Returns Sink To Lowest Level Since 1992

Tyler Durden's picture

Last August we questioned whether California farmland was overvalued by $70 billion (see our aptly named post: "Is California Farmland Overvalued By $70 Billion?").  Our reasoning was fairly simple, as we argued such a draconian outcome was the inevitable result of large institutional buyers scooping up 1,000s of acres of Cali farmland and massively overplanting almonds because, at least at the time, it was the hottest crop earning the highest returns...and that's what NYC hot money likes. 

Unfortunately, chasing short-term returns by massively overplanting a permanent crop with a 25 year useful life and creating a huge supply bubble in the process rarely works out all that well.  Here's what we said 9 months ago:

But the Midwest is not the only place where farmland has bubbled over.  California farmland has been bubbling up for years now with unplanted farm ground with "decent" access to water currently selling for $20,000 - $30,000 per acreLand with mature almonds, California's cash crop, is more likely to trade at $30,000 - $40,000 per acre.  This bubble, like so many others, has been caused in large part by institutional capital "reaching for yield" in a low interest rate environment...yet another Fed bubble lurking under the surface.


The plan was relatively simple, in the absence of attractive fixed income yields, large asset managers (like TIAA mentioned above with $850BN of AUM) decided to purchase hard assets like farmland instead.  Farmland could then be planted with the highest value crop, which just happens to be almonds in California, to drive attractive ROICs on invested capital.  A few simple charts illustrate perfectly how the story played out. 

And, right on cue, almond prices crashed leaving land owners with a ~4% ROIC, down from 16%, on land they likely purchased for north of $35,000 per acre.

Almond P&L


And, as we noted at the time, we would be a bit reluctant to underwrite California farmland to a 4% return.  We would be looking for ROICs closer to 8% - 10%, at a bare minimum, which, at current almond prices, implies that acreage needs to come down around 45%-55% from the $35,000 per acre level. 



Now, fast forward just 9 months and indeed it looks as though developed California farmland has already dropped from ~$35,000-$40,000 per acre to ~$25,000 and, at least according to one prominent appraiser in the heart of the Central Valley, we're just getting started.  As Michael Ming of Alliance Ag Services told the Bakersfield Californian, he sees California farmland shedding another 20% of it's value in 2017 which would put it squarely at the top end of our previously forecasted range.

A new report on the outlook for Kern County ag land values shows water emerging as a major deciding factor in what land is worth, according to Michael Ming, a broker for Alliance Ag Services LLC.


His report shows that, depending on a piece of land’s water source, the value could decline this year by up to 20 percent — or more.


Such as almond acreage, which shot into the stratosphere in 2015, selling for between $40,000 and $28,000 an acre and have now settled back to between $28,000 and $20,000 an acre, according to Ming’s report.

Ironically, despite record rain in recent months, the next leg down in California farmland will be driven by a lack of water for farmers.  In addition to most of the record rainfall in California, what farmers refer to as 'surface water', being washed out to sea and/or reserved for "environmental" purposes the state is also getting ready to restrict farmers' access to groundwater as well...which means land in certain areas will basically be un-farmable.

Meanwhile, as the National Council of Real Estate Investment Fiduciaries (NCREIF) pointed out recently, returns on California farmland actually turned negative in 1Q 2017 for the first time in years. 


Of course, while California farmland declines are the most pronounced they're certainly not an anomaly as returns for farmland owners all across the country posted their lowest Q1 returns since 1992. 


And, given that large pension funds, like TIAA mentioned above, have been among the largest buyers of farm land, pensioners should brace themselves for the next leg down in the funding levels on their quarterly pension statements.

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jcaz's picture

TIAA- On The Forefront of Stupid Investing Since 1918.........

ShrNfr's picture

"Best place on the net to grab your nuts." Present end price to the consumer after roasting and everything else is ~$4.88

LongWalkHome's picture

Great prices!  Thank you for the link!

knukles's picture

Hobby Farming (Tax deductons)

SafelyGraze's picture

the problem is easily solved, simply by requiring almonds to be sold at $5 per pound or higher.

an alternative that is equally effective is to add to tax of $5 per pound on almonds, and then share the tax proceeds with the almond farmers

or -- even more efficient -- share the tax proceeds directly with tiaa


cheka's picture

another hypefest dies a cruel death -- no food!  no water!  buy canned foods!  buy jim rickards books about currency war and using sdr!

peak oil!  globalist warming!


GooseShtepping Moron's picture


Have the nut merchants seen Kyle?

Houses Depreciate's picture

If you're paid more than $500/acre, you got robbed blind.

HRH Feant's picture
HRH Feant (not verified) Houses Depreciate Apr 26, 2017 4:13 PM

So you say you love my avatar and then you steal it? Fuck off troll.

Houses Depreciate's picture

Cheer up my friend. Cheer up because prices are falling.

Stuck on Zero's picture

I checked the price of Iowa farmland recently.  Unbelievable. $30K and acre and leasing it out would net less money than the taxes.

Never One Roach's picture

Prices are dropping of raw land in many places of texas as developers realize the boom has slowed quite a bit. Land I was looking at and could not touch was going for $15k and up per acre. Now, it's fallen to $7,500 and lower and my realtor said not to jump on it cause it will slowly revert to it's true valus of $2k to $3k per acre.

Who knows?

It depends on 1) foreign money and 2) fed's ZIRP imo.

ScratInTheHat's picture

Hard to find an honest realtor!

localsavage's picture

Maybe not $500 but those farmers aren't selling because they want to give away an awsome money maker.  They are selling because CA is openly hostile to farmers and is stacking up costly regulations by the day.  The Democrats in Sacramento now have their eyes on water runoff and will use it to find the limit of what the can extort before the farmers just give up.  

Rubicon727's picture

"They are selling because CA is openly hostile to farmers and is stacking up costly regulations by the day."


Unless all the billionaire farmers in California's Central Valley  have gone bankrupt, or have stopped lobbying in Sacramento and in D.C., I'm thinkin' your observation is phony. I remember all the Lear Jets these million/billionaires used to jettison around the state, and they were making incredible profits.

Don't think that's about to change anytime soon.


The small farmer? That's a different story.

Never One Roach's picture

Are these the Fuki-infused farms...or Fuki-free farms?

Parabolic Sine's picture

I hope the prices drop considerably. Id certainly like to live outside of Sacramento. It would be bad ass to have Tahoe and the Pacific within driving range with Napa in between. I wouldnt care about the dumb ass politics, Id just live my life fishing, snowboarding, 4wheeling, going to bad ass festivals, and packing every day with enough land to bury anyone whom fucks with me.

Let those land prices drop considerably and I'd sell my houses where I reside now and start a new.

Entourage's picture

Let us hope California continues to sink until it is under the ocean.

WTFUD's picture

Why upset that eco-system?

MAAAHM's picture

We need food from the bread basket. Not caring about almonds, though. How about the damn smelt and paying for water!!

knukles's picture

Making smelt pay for water is fishacist

MAAAHM's picture

We need food from the bread basket. Not caring about almonds, though. How about the damn smelt and paying for water!!

Your Good Friend's picture

Remember my good friends.... Nothing accelerates the economy, creates jobs and raises the standard of living like falling prices to dramatically lower and more affordable levels. Nothing.

DEMIZEN's picture

but a good moderate inflation.

DelusionsCrowded's picture

Sorry but Automation AI cybernetics has completely changed this economic idea . Over Supply is the root of current 1St world economic problems and won't be fixed by classic economic theory .

When machines do everything , how will people get 'money' to by things . This is the question.

WTFUD's picture

I was in Niamey, Niger, when the President pleaded with the farmers to quit growing onions and diversify. Fell on deaf ears, though! Much of a muchness here!

HRH Feant's picture
HRH Feant (not verified) WTFUD Apr 26, 2017 4:08 PM

If you could explicate further, that would be appreciated. I am not familiar with Niger. What was the outcome? Thank you.

WTFUD's picture

Niger, a land locked West African country with 70% desertification, unable to feed itself, transported their staple food products 1000-2000km overland from neighbouring African ports ( such as Ivory Coast ) at further greater expense. By the time a bag of rice made its way from , say , Vietnam, it cost the locals 2/3 times market price.

For the 5th poorest country in the world at that time, ludicrous.

It didn't help that what Agricultural land there was in the north, Agadez, Irlit a rascally French company, the 2nd biggest uranium miner in the world, Areva, added insult to injury by polluting it; also contaminated what little clean drinking water was available, resulting in severe malnutrition and terrible medical issues ( stillborn's , deformities etc ).

The President called together the Onion Farmers and asked them to bring samples of their crops. He now asked them to take a bite, in the hope that they'd realise, that in order to have any chance of turning around their citizen's plight, they needed to diversify their crops to combat the price of expensive food imports.

Try telling farmers who's great great great grandfathers grew onions, to change; his pleas fell on deaf ears.

Fortunately , le French who had a complete monopoly on the uranium resources for 60 years, paying the government $2 per pound since that time ( even though Uranium went up to as much as $16 per pound ) were now joined in competition by the Chinese, russians, Indians, Canadians etc etc; with the resulting better terms & conditions from new contracts.

Further the Chinese built an oil refinery after discovery and so expensive imports from neighbouring Nigeria have ceased. Moreover, the country who depended on Electricity Supplies from the same country, built a DAM and are now selling electricity, power, to Nigeria.

The dam irrigates their land allowing them to grow staples like rice, cassava, etc ; providing them an independence as such.

All this said the French have had to step up security to protect their 3 producing Uranium Mines; one was blown up by al-queda (bandits). Gaddafi who shared a border, looked after these people ( Toureg's ) with container after container of Medicines etc etc, until they murdered him ( the usual suspects, the filthy French elites ).

Things are looking up for these people, although with Gadaffi gone, the trafficking of humans and drugs in the region is rampant.

Marine Le Pen i believe will cut these colonies a better deal and not allow the French Elite to plunder the country's resources, like they plunder poor Mali's gold, leaving a trail of misery.

DelusionsCrowded's picture

And the Pop growth is some horrible number without a solution . None of these countries were ready of decolonization / self rule or running a first world society .

And the reality  if we look at Sth Africa,  is that IQ means they will never be .Only leftist nonesense keeps the dream proped even at terminal stage .

Jus7tme's picture

There must be a way to blame Mexican illegal immigrants for this. It could not be Wall Street's fault, could it?

Miffed Microbiologist's picture

Can't think of anything in Cali that isn't overvalued. And there are other places with good weather.


WTFUD's picture

Pelosi gets a good deal on her hemorrhoid treatment, apparently.

HRH Feant's picture
HRH Feant (not verified) Apr 26, 2017 4:07 PM

My Dutch foster-father was a dairy farmer and also had 2000 acres in the San Joaquin valley where he raised Brangus, oats, soybeans, and prime alfalfa. One of the neighboring farms was an almond orchard and I remember riding the old farm QH under the trees in the spring and summer.

If anything is going to kill California agriculture it is the environmentalists.

Your Good Friend's picture

No my friend. What drove CA into it's current imporverished state is grossly inflated prices.


Remember..... Nothing accelerates the economy like falling prices to dramatically lower and more affordable levels. Nothing.

daveO's picture

True. Parasitic environmentalists are a sign of gross inflation.

Mikeyy's picture

You know, there's a lot of stupid shit on the Web everyday.  Particularly here on ZH.

But this comment wins the stupidest post on the Internet today,  California is impoverished because prices are too high?  You really can't be that stupid, can you?  And four up votes?


Jeez, no wonder this country's in trouble.

Houses Depreciate's picture

Data my friend.... stick with the data.

"California Remains The Nations Poorest State"

ejmoosa's picture

That is the way capitalism works.  And when the land falls, some of that land will find new and better uses.

SmittyinLA's picture

Actually there's not a lack of water, water has been artificially restricted to spur water bonds, for instance LADWP dumps 350,000 acre feet of water a year in the mono basin to keep a dry lake bed wet that's been dry for 3000 years....

350,000 acre feet a year to keep a dry lake wet, and that's just 1 of many CA's "environmental water diversions"

The Almond thing was abused by the HB-WHATEVA visa bribery program, I have a sneaky suspicion many foreigners have US politician "partners" that supplied state water for a cut of the equity.

Your Good Friend's picture

Funny.... Go into Costco and grab a bag of anything grown in CA. It's rotten and tasteless. Try Florida oranges, Italian pistachios and almonds instead. And cheaper too.

decon's picture

Florida oranges are crap, mostly used for juice.  If you want fine table citrus AZ is the place.

Farmerz's picture

Your kidding right? I'll match my Calif oranges against anyones.  Anything we grow here is as good as Florida's or better.

Bad Goy's picture

Anyone remember Jojoba?

decon's picture

Very few commercial jojoba farms remain in the US.

JoeTurner's picture

Is it just me or do things feel alot like March 2008 ?

how_this_stuff_works's picture

Even March 2008 was unlike what we're now experiencing. The anger, the fear of war, the unmitigated hatred and disregard people seem to have for each other, the total disrespect and disregard for the rule of law.


Krungle's picture

So what's going to happen when they start planting cannabis on every free acre?