When people talk about the housing issue in California, they mention a combination of high prices, lack of supply, low interest rates, and an influx of money from investors seeking better returns on their money.  These same four factors, as well as a critical fifth one — water supply — have played a very similar role in the price and availability of farmland in our state.

For ten years, the price of agricultural land has been driven almost entirely by the skyrocketing worldwide demand for nuts, primarily almonds — which can only be grown in a few areas of the world.  With almond prices rising every year and water supplies shrinking, farmers followed the money, and hundreds of thousands of acres were planted.  Much of this land had previously been used for growing crops such as hay, tomatoes, wheat and other annuals.  Pistachio and walnut prices also rose, and more acres of those went in as well.  The price of farmland went up with them.

Large investment firms — including hedge funds, public employment retirement funds, and insurance companies — saw these trends and piled in.  To them it was a unique combination of “guaranteed income” and rising equity.  They purchased land for cheap that had never even grown crops before, spent millions drilling wells on it, and planted miles and miles of almond trees.  In the process, they increased the value of that land dramatically, making their investors very happy.

Then the pandemic hit, and with it, the massive disruptions of the supply chain.  With fewer cargo ships to transport nuts around the world, they began to pile up in warehouses.  Then came a record crop in fall of 2020, and another in 2021.  There are currently almost two years’ crops worth of unsold almonds and walnuts in storage.  Inflation and slow economic growth in Asia has dramatically reduced demand there, while the cost to grow the nuts has increased.  With most Nut growers still waiting for payment for last year’s crop and financing this year’s operations entirely on loans — with rapidly rising interest rates — many are facing a very bleak situation.

Meanwhile, prices and demand for non-orchard crops have gone up dramatically thanks to the war in Ukraine and overall inflation.  With the continuing drought, there isn’t enough irrigated land to meet teh demand for crops like hay, grains and tomatoes because so much land has gone into orchards.  And removing a mature orchard is a huge expense, one which growers are loath to do even when they can afford to.  Many nut farmers will be forced to sell some land, especially small farms with older orchards.  Another option is to sign a long-term lease with a non-orchard farmer, who may pay for removal of an orchard in lieu of rent.  That option generally involves getting a different job.

It may not be true to say that California farmland values were in a classic “bubble” before Covid hit.  But everything is different now.  Even with inflated prices for non-orchard commodities, land values are now higher than almost any farmer can afford to pay  — and that is before taking high mortgage rates into account.  There is a classic “crash” coming, where nut farmers run out of money and are forced by their banks to sell their land into what will certainly be a falling market.  The banks will also see big losses, as will the private equity firms and pension funds that played such an important role in inflating the land prices.

With so many other big issues happening, coverage of this subject is nowhere to be found in the media — which is a little surprising given the amount of attention that has been paid to the water usage of almond orchards.  And with a new recession looming on the horizon for the overall economy, very few people will care about big farmers and investment banks taking big losses.  Unfortunately, thousands of small growers will be impacted as well as possibly the teachers and other government employees whose pension funds will take a hit.

Overall, though, the coming correction will be necessary.  As I have mentioned in previous newsletters, California doesn’t just grow the majority of the nation’s nut crops.  We also are an important source of tomatoes, onions, garlic, melons, lettuce, grapes and a dozen other crops that Californians and other Americans eat every day.  We have the most diversified agricultural landscape in the country, and keeping that diversity is critical to our future.