Acres of risk: The most viable option for investors might be to reduce their California ag exposure
- September 1, 2022: Vol. 9, Number 8

Acres of risk: The most viable option for investors might be to reduce their California ag exposure

by Paul Frankel and Jeff Steen

California agriculture — a reliable and star performer for institutional capital over the past 20 years — is facing a number of significant, acute and persistent challenges due to climate change.

Investors are at risk of more than just lower returns on those assets; there is even potential for capital impairment of their ample and growing farmland portfolios thanks to its impacts. Investors must look with a new lens at the geographies to which they allocate capital and should be actively pursuing more secure acquisitions in places other than the San Joaquin Valley.

There is a growing realization among investors that climate change is not some nebulous looming threat on the horizon but rather a dark cloud directly overhead — a daunting set of unpredictable elemental evolutions, any one of which alone could in the near term devastate portfolios, farms, livelihoods and communities.

For instance, in California, warmer winters and springs have reduced cold accumulation for crops that require high numbers of cold hours, such as pistachios; this has led to early blooms. Variable weather has caused frost damage in almond and citrus trees. And epic fires and persistent drought have famously been some of the most noticeable climatic changes.

In 2015, the last time California was nearly as parched as it is today, 540,000 farmland acres were fallowed, land that could have grown 54 million tons of grapes or 27 million tons of tomatoes. According to the organization California Farm Water Coalition, as of May 2022, 594,000 to 691,000 productive acres are estimated to now sit idle. This year, because of prolonged drought, agencies and districts downstream of the State Water Project, which supplies surface water to 750,000 acres of farmland, received just 5 percent of their requested allocation, while those served by the Central Valley project, which supplies surface water to 3 million acres of farmland, received effectively a 0 percent allocation.


Any single one of these stressors poses an existential risk to vast swaths of planted acres in California from negative consequences such as decreased yields, increased and novel pests and disease, reduced crop production, and lower quality and utilization. All of which lead to increased operating costs, lower crop prices, or both.

This has resulted in a rapidly changing risk profile for those investments, not only due to new and unusual weather patterns, but also as a result of the regulatory and economic reactions to “global weirding,” as Hunter Lovins, founder of the nonprofit Natural Capitalism Solutions, refers to it.

Mitigation is and will be achieved by adaptation, such as through the development of new infrastructure, crop switching and novel genetics for resilience, and greater use of agtech by moving and/or repositioning investments into safer regions. Both are compatible, valid responses with unique trade-offs, but starting to shift now by relocating acres and crops most at risk positions investors for short-term capital preservation, business continuity and long-term advantage.

Adaptation is already under way as new planting systems and protective structures for heat, cold, sunburn, wind and insects are installed. Genetics research and field trials are progressing on new varieties that need fewer chill hours to successfully set an economically viable crop, and on new drought-tolerant germplasm.

In parallel, regenerative and organic farming techniques will help reduce environmental burdens. Specific districts may necessitate switching from water-intensive or permanent crops to annual crops, to other agricultural products, or to alternative land uses altogether. But to properly hedge downside risk, capital must be willing to resettle to new geographies by finding crops with similar risk/return attributes in less volatile, proven agricultural settings and replanting in new locations crops that are today grown in the San Joaquin Valley and surrounding areas.

This capital reallocation should occur quickly to avoid the potential fallout from significant risks posed to current investments, such as environmental regulation. This year brings, for example, the first mandatory groundwater restrictions in California via the Sustainable Groundwater Management Act. Delays in repositioning capital could result in lower valuations at exit, higher entry prices for new farm purchases in climate- advantaged locations and second-mover opportunity costs.


With the relative advantages of plentiful water, crop optionality, land prices and appreciation rates, the Pacific Northwest and select other geographic niches can provide safe harbor for capital seeking the positive attributes of farmland in their portfolios.

Washington and Oregon offer optionality to plant strong-performing local crops such as apples, berries, grapes, cherries, hops, nuts, pears and stone fruit, for which there exists a large-scale, robust support infrastructure of packing, storage, marketing, services and equipment providers, rivaled only by California.

There is also the potential to plant crops such as almonds or pistachios in novel sites less impacted by climate change than the San Joaquin Valley and other traditional southern California growing regions.

For top-quality soils and growing sites, Washington and Oregon irrigated farmland trades at a discount to California, with significantly lower water risk — largely thanks to the Canadian Rockies, the Columbia and Willamette rivers, and a meteorologically advantaged location — and offers similar per-acre profitability of permanent crops. Farmland appreciation in the Pacific Northwest has historically been as impressive as in California.

Favorable temperature and precipitation trends under nearly all future climate scenarios only bolster the case. Commercially suitable locations for almonds extend into established permanent crop farming regions such as the Willamette Valley and Columbia Basin. Growing conditions there are predicted to improve as climate changes progress. The extent of current almond plantings is limited to California. However, multi-year trials for almonds and organic hazelnuts that have been ongoing in Idaho and Washington, respectively, demonstrate commercial viability and even some horticultural advantages over the current epicenters.

Considering the issues around water availability, crop yields and quality, and the myriad other climate and correlated business challenges forcing change as we speak, investors must re-examine their risk/return profile for farmland in the areas such as the San Joaquin Valley. An honest comparison between the valley and the Pacific Northwest, for example, should lead investors to begin migrating capital to more climate-secure locations.


Paul Frankel and Jeff Steen are partners at Kachina LLC, an asset manager specializing in permanent crop farmland in the western United States.

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