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That's Nuts: Almond Boom Strains California Water Supply

June 13, 2014

Asia’s love of nuts is draining California dry.

Amid one of the worst droughts in the state’s history, farmers are scrambling to find enough water to irrigate lucrative almond trees they planted after abandoning other, less thirsty crops.

Why’s there such a market for California nuts? As incomes in countries such as China, South Korea, and India have risen, so has demand for nuts that formerly were out of reach for many Asians. Added to the mix are Wall Street firms who, smelling a quick buck, are paying top dollar for vegetable farms and converting them to orchards.

"It is completely changing the face of agriculture that America has known," said Anuradha Mittal, the executive director of the Oakland Institute, a California based environmental think tank. A recent report from the institute illustrates how investment bankers are quickly becoming the face of modern farming — one driven by the potential for big returns growing high-value food for China.

Ten years ago, almonds covered 570,000 acres and produced just over 1 billion pounds of nuts. Now, almond orchards produce nearly 2 billion pounds of nuts a year on about 860,000 acres of California farmland, said Richard Waycott, the president and chief executive officer of the California Almond Board, an industry trade group based in Modesto. The board valued the 2013 crop at nearly $5 billion, up from $1.2 billion a decade earlier.

The demand for almonds is on the upswing in the U.S. and all over the world, he said, with a particularly strong push from Asia. Exports across the Pacific reached 449 million pounds in 2013, climbing from 280 million pounds in 2009, according to the board's statistics. Shipments to China alone have grown nearly 1,000 percent since 2001, noted the Oakland Institute.

In 2011, almonds surpassed grapes as California’s second largest agricultural product, and the crop “now attracts more money per acre than any other type of parcel in California's Central Valley," Heather Davis, the senior managing director for global private markets at financial services firm TIAA-CREF, explained in an August 2013 investment note.

The firm, which has $569 billion under management, did not own a single farm before 2007. Today it owns more than 500, including 35,000 acres in California as of 2012, and is one of the top five almond producers in the world. The nuts, Davis wrote, are an "attractive long-term investment theme."

Shriveled nuts and profits

It is not just bankers racing to plant more acreage of almonds. Most of the industry's 6,500 growers are "multi-generational family farmers that have just continued to increase the size of their operations," Waycott said.

The reason comes down to the economics of water, which is a scarce and increasingly more expensive resource, said Mechel Paggi, who directs the Center for Agricultural Business at California State University in Fresno. Farmers across the state are first and foremost business people. "They are just doing the rational thing, saying 'You know, I've got a little bit of water, I want to make it the best I can so let's put in these permanent crops that have a future,'" Paggi said.

Tim Pellissier who runs Pellissier Farms near Merced, for example, has been transitioning much of his 1,000 acres of farmland to almonds over the past decade. "We are speeding that process up now," he said. "As we get more acreage into production, we are able to afford to put more acreage in." The trend, he noted, is common. "The nut market is hot and that is where everyone seems to be shifting."

But the shift comes with consequences. The return on investment in an almond orchard is about 15 years, according to Dexter Long, the vice president and general manager of Hilltop Ranch in Ballico, which maintains orchards and processes about 30,000 tons of almonds a year from a network of growers. "They need to protect their investment," he said.

Almond trees require about four feet of water a year to produce a profitable crop, according to Dave Long, president of Hilltop Ranch and a board member of the Merced Irrigation District. Three years into the drought, the water demand is even more acute, he said. Given the hot, dry conditions, almond trees need more water than usual, overtaxing the already parched soil.

Indeed, as surface water allocations slow to a trickle, farmers throughout California are deploying a raft of strategies to find water to protect their investments. Many, including Pellissier, have laid fallow hundreds of acres of row crops such as corn, cotton, and alfalfa to free up water for orchards. Others are taping deep wells — but some of those are already going dry, and more are expected to not last the summer.

Observers of the almond industry believe most almond growers will get through this year largely unscathed, but if the drought persists the industry could get crushed.

"Another year of drought to compound (what is essentially already) a five-year drought would be catastrophic," David Doll, an almond expert with the University of California in Merced, said. "I don't know where we would get the water."

Surviving, and still expanding

For now, most almond growers continue to find enough water to turn a profit and expand their acreage to supply the growing worldwide demand for nuts. When water resources are available, the expansion makes perfect economic sense, Doll said. Almond orchards require less labor than row crops and provide a greater return on investment.

Some of these investors are indeed firms such as TIAA-CREFF and the Hancock Agricultural Investment Group in Boston, which the Oakland Institute's report noted went so far as to bulldoze wine grapes on one property it acquired and "replanted with pistachios and almonds after the revenues from wine grapes were deemed too disappointing."