Happy New Year and Welcome Back!

For centuries, a Spanish folk tradition called “Cabañuelas” has extrapolated the weather during the month of January to prognosticate the rest of the year.  It was pretty accurate last year, as we returned from our holiday break to a full month of bizarrely warm, sunny and dry days that turned out to be an accurate preview of the next 11 months.  Even the last week of December 2015, although quite cold, was sunny and dry.  By New Years Day on our farm, we had received only 40% of normal rainfall, both for the year and for the wet season.

But it’s a new year, and 2016 already feels different.   We haven’t had a wet January in Northern California since 2009.  El Niño seems to have arrived.  By the time you are reading this newsletter, it will already have rained more than it did the entire first month of last year.

I’ve spent more time talking and writing about water than I can ever remember in the last two years.  Even during vacation it’s been impossible to escape being questioned by just about everyone I met:  “Oh, you’re a farmer in California?  Do you have enough water?”.  So when I went to go see “The Big Short”, the new film that dramatizes how a handful of investors made a giant bet against the housing boom of the last decade, I wasn’t expecting to hear about water.

The movie was, amazingly, both extremely entertaining and informative.  I think it would make a big difference for our country if everyone who went to see Star Wars last week had gone to see The Big Short instead, but that’s a topic for a different post.

When the dust settles, the film’s “hero” walks away with $700 million dollars (that’s not a spoiler since it’s a true story).  He had been the first person to see the housing bust coming, and the first one to design a financial instrument to bet against it (Credit Default Swaps).  Everyone watching the film is wondering, “What did he do with the money?”.  So they tell you.

Water.  Yep.  He invested in water.   Or that’s what they tell you anyway.

I got out of the theatre and immediately searched his name, Dr. Michael Burry.  Because I know there isn’t any way — yet — to invest directly in water.  Instead, he spent $700 million on bought the next best thing:  Almond Orchards in California.  In 2008.  The man who accurately bet on the housing crash five years before it happened turned around and made an equally accurate bet on the California drought, five years prior.

Since then, the drought — along with increased consumption here and abroad — has driven the price of almonds to historic highs.  And hedge funds, private equity firms and public employee pension funds have piled into the business, paying high prices for land to plant tens of thousands of acres of new orchards.  It’s a classic bubble, as housing was in 2007.  The crash could come as early as this year, with China’s economy slowing, or it may take ten years.  But it will come.

After the housing crash, taxpayers ended up bailing out the bankers who caused the damage.  In this case, pension fund managers with no clue about agriculture are becoming farmers.  What could possibly go wrong?j

The ancient Spanish ritual of cabañuelas has no basis in fact or science.  According to its methodology, if it rains here tomorrow, July will be a wet month.  That makes about as much sense as believing that the price of houses or almond orchards can only go up.  It doesn’t take a genius to know that it isn’t likely to happen.