From avocados to zucchini, the diversity of California farmers is apparent in their production of more than 250 commercial crops. The state has 81,500 farms, with a combined annual revenue of $33.9 billion. The majority of California’s abundant agricultural output comes from the Central Valley. Most of the fruits, nuts, melons and vegetables feeding the U.S. today are produced on highly productive farmland in this region.
A weak dollar has increased demand for commodities like almonds, pistachios and walnuts to Pacific Rim countries. According to USDA statistics, revenue for walnuts and almonds grew by roughly 30 percent between 2010 and 2011. These numbers are an indication of the dramatic increases taking place.
Most agricultural sectors in California, with the exception of dairies, have been profitable for the last few years. As a result of the rise in commodity prices, there has been a significant increase in farmland values. The visible change has been a dramatic shift of open farmland to permanent plantings, like walnuts, almonds and pistachios. There were also increases in plantings of olives, wine grapes, pomegranates and mandarin oranges.
Large outside investors, such as pension funds and insurance companies, have been the driving force behind the conversion. Investors are looking to diversify their portfolio outside their traditional investments in stocks, bonds and commercial real estate.
According to the “2012 Trends in Agricultural Land and Lease Values,” published by the California Chapter of the American Society of Farm Managers and Rural Appraisers, land values in the state vary widely. Almond orchards in Fresno County, in the heart of the Central Valley, sold for $12,000 to $18,000 per acre and pistachio orchards sold in the range of $18,000 to $25,000 per acre.
Vegetable land in the highly productive area of the Central Coast sells for $40,000 to $55,000 per acre. Premium wine grape land in the Napa Valley can fetch anywhere from $225,000 to $300,000 per acre and open land was $25,000 to $175,000 per acre. On the other end of the spectrum in the northeast corner of the state, rangeland for cattle grazing sold for $175 to $950 per acre.
The rapid increase in values can be attributed to profitable grower returns, general optimism, low interest rates and limited farmland inventory. With profitable operations, landowners are not in the market to sell. Much of the current market activity involves property owners that were approached directly by buyers and enticed to sell with premium offers.
The largest land value increases were in open farmland, with ample irrigation water that could be planted to permanent plantings. With the decline in the housing market, there have been instances where undeveloped rural housing subdivision lots have been purchased in bulk and planted to permanent plantings.
Does the rapid increase in land values indicate the danger in a crash in the market? The market is still strong and the economic outlook is still good, however, the largest concern is the future of foreign demand. A strong dollar and reduced Chinese demand for products could significantly impact grower’s profitability. Lower profitability in the agricultural sector, combined with higher profitability in stocks and bonds could result in a rapid exit by investors from the agricultural land market. In the early 1980’s, a modest increase in the land on the market, along with low commodity prices, resulted in a nearly 50 percent drop in agricultural land values. Let’s hope that history doesn’t repeat itself.