It’s the Nut Price, Dummy

I got a call from a savvy nut grower in the north Sacramento Valley a couple of weeks ago.  He knows his way around the world money markets as well as an almond orchard.  We talked about a number of topics, and the high price of ag land came up.  “Where is this going to end?” he asked.  We agreed that nut prices are up, way up, in some cases, but what nut price he asked, would cover the huge price tag on some pieces of land, some pushing $20,000/acre?  I didn’t know, but thought I’d try to find out.  Here’s what I learned.Ag land prices are certainly way up.  Irrigated land prices in California are up 100% between 2002 and 2012.  (Click HERE to see the 2012 press release from the USDA National Ag Statistical Service on California ag land values and HERE to see similar numbers from the 2012 Trends in Agricultural Land and Lease Values from the CA Chapter of the American Society of Farm Managers and Rural Appraisers).  On average, southern Sacramento Valley orchard land prices quoted to me in fall, 2012 averaged around $10000/acre, with the high end around $15,000 or higher although not many orchards are available for sale and when they are sold they’re often to neighbors looking to expand without ever going on the market.To try to try to get a better picture of land prices for successful almond production (my degrees is in soil science), I drove to Davis.  There, I met with Dr. Karen Klonsky, UCCE Extension Specialist, based in the Ag and Resource Economics Department at UC Davis.  Click HERE to see Dr. Klonsky’s Cost and Return web site.  Using a basic set of assumptions taken from the 2012 Cost of Establishing and Producing Almonds in the Sacramento Valley publication for establishing a new orchard, including: 3% interest, using previous irrigation system, no return to management, and the following yield over the 20 year life of the orchard*:

Orchard leaf	3	4	5	6	7	8-10	10-13	14-20
Yield (kernel lb/acre)	400	800	1400	2200	2400	2500	2200	2000

we looked at the relationship between nut price to growers and what land price was “affordable”.  Using the present value of money function in an Excel spread sheet and the assumptions listed above; we calculated that at a steady price of $1.58 per kernel pound for the 20-year life of the orchard, the land price would have to be $0/acre to pay all costs.  Anything less than that price, would result in a net loss.  On the other hand, if the price of nuts was $2.00 or $2.50 per kernel pound for 20 years, that would justify a price of about $10,000 and $22,000 per acre for the land, respectively.  If nut price was $2.50/lb for years 3-10 and $1.50/lb for years 11-20, that would allow land cost of $11,700/acre to be paid without net loss.  A similar land price was justified if nut prices were low ($1.50/lb) early in the production (years 3-10) and higher ($2.50/lb) in the last decade.  In the last 10 years, average nut price, as reported in the annual Almond Almanac from the Almond Board of California, has ranged from $1.11/lb (in 2003) to $2.81/lb (in 2006), with prices below $1.58/lb in three of those years. Click HERE to see the 2012 Almond Almanac.  The last three years the average prices have been rising from $1.65, $1.79, and $1.92 with rising yields and total production.Where does this leave the question that we started with—what land price can a grower make pay out if he/she buys orchard land?  Looks like, if production was solid over the life of the orchard – based on Sacramento Valley cost and production assumptions as reported in the most recent UC cost of production study for the region – that, essentially a $1/kernel lb. swing in the current and future price of almonds drives a huge swing in economically viable land prices.  So whether a piece of legitimate orchard land – there is another topic for another blog post -- is affordable is really all about betting on future prices and possibly a little increase in yield with improvements in growing practices AND assuming there is enough water.Every farm operation is different.  So the details in this blog post should be taken with a huge grain of salt.  However, it might be worth putting your costs and production expectations (based on solid production history on a site or in your district) in an Excel spread sheet and run those numbers against a range of nut prices to try to get an idea of whether a particular parcel of land is close to worth the asking price.*These yield numbers are slightly different than those used in the 2012 Cost of production publication.