Assessing the Current Almond Market Environment
Current Market Conditions
Values for almond orchards in California are falling significantly as a result of an extended period of continued low almond prices, poor yields, input cost pressures, and higher interest rates. For example, almond prices on an inflation-adjusted basis reached their lowest levels since 1999 in 2022 according to the USDA and remained depressed through 2023, while yield per acre across California fell to the lowest levels since 2005. Inflationary pressures have further squeezed gross margins for growers. Higher interest rates have also resulted in higher mortgage and operating loan interest expenses for many growers. This has resulted in headline articles highlighting recent high-profile Chapter 11 bankruptcy filings from large, private equity backed corporate almond farms.
In the near-term, the large amount of almond, pistachio, and walnut acreage coming to market is overwhelming current buyer demand and thus land prices are falling significantly. We expect the tree nut market imbalance to continue throughout 2024.
Longer Term Outlook
Due to the inelastic supply of permanent crops, cycles take place over longer periods of time. We have discussed in previous articles on AcreTrader.com how the Covid-19 pandemic resulted in an inventory build of almonds domestically and has thus pressured prices. One aspect that traditionally makes almonds an attractive permanent crop investment, their long term shelf life (~2 years), can also result in inventory build for a largely export reliant crop.
Long-term supply is ultimately a function of bearing acreage and yields. There are two primary considerations when thinking about long-term supply, the current age of existing bearing acreage and the impact of the Sustainable Groundwater Management Act (SGMA).
We agree with the saying that "nothing fixes low prices like low prices" which holds true for almonds as it does for most commodity industries. According to the Almond Board of California, since 2021 the number of acres removed have exceeded the number of new planted acres and as a result, the number of total almond tree acres (bearing + non-bearing) has decreased for the first time on record dating back to 1995. This means that bearing acreage is likely to fall in 2024 for the first time on record.
Figure 1. Bearing Acreage
Source: Almond Board of California (2024), AcreTrader
The Almond Board of California began to track orchard removals in 2021 as a result of the decade-long water supply pressure facing the industry. Approximately 82,958 acres were removed in 2023, a 37% and 46% increase from the 2022 and 2021 levels. While almond prices began to rebound in late 2023 and early 2024, exceptional bloom conditions throughout mid and late February and early March have led to continued price pressure on the expectation of a larger 2024 crop. These continued lower prices, still elevated input cost pressures, and higher interest rates are likely to cause orchard removals to remain at high levels.
The economic life of an orchard varies based on prevailing market conditions, but it is generally considered to be 25 years. Notably, the average age of orchard removals in 2023 was 21.8 years, demonstrating that the prevailing headwinds are driving a supply response. Looking at a cohort analysis of California’s planted acreage, according to the Almond Board of California, it is clear that approximately 14% of planted acreage is 20th leaf (20th growing season) or older and 27% consists of aged inventory. Notably, 2004-2006 plantings, which alone are 12% of current bearing acreage, will reach 20th leaf over the next three years.
Figure 2. California Almond Acreage By Vintage
In addition, as we have highlighted in past reports, we estimate approximately 14% of bearing acreage lacks access to surface water and is wholly reliant on groundwater pumping. California is seeing the implementation of groundwater pumping regulations for the first time ever, which should further remove bearing almond acreage.
Given the current economics and the groundwater regulations facing the almond industry, coupled with the 2004-2006 plantings reaching the end of their economic life, we believe it is reasonable to assume that orchard removals will continue to outpace new plantings over the next several years. During the last 3 years for which we have data, orchard removals have represented 31%, 35%, and 51% of the bearing acreage that is 20th leaf or greater. If we assume that removals of 20th leaf and greater remains at 50% over the next 3 years, and new plantings in line with the 2004-2013 historical average of approximately 47,600 acres annually, then it implies bearing acreage will fall by approximately 92,400 acres from year-end 2023 through 2026, or approximately 7%.
Figure 3. Estimated Bearing Acreage
Source: Almond Board of California (2024), AcreTrader
Looking at yields, yield per acre fell in 2023 to the lowest level since 2005. This is due to the abnormally cold bloom conditions in February and March 2023. This followed on the heels of a late freeze in the Spring of 2022 that impacted much of the Central Valley.
Figure 4. California Almond Yield Per Acre
Source: USDA (2024)
The 2024 bloom is noted to have been exceptional and it is expected that 2024 yields will result in a strong crop, with initial estimates calling for 2.8 billion - 3.1 billion pounds. If we assume that yields in 2024 and beyond return to the pre-2022 10-year average of 2,231 pounds per acre, it still points to total production having peaked in 2021.
The 2023 almond crop is expected to finalize around 2.4 billion pounds. We assume a rebound in the 2024 crop given the bloom conditions to a yield per acre of 2,231 pounds and assume that remains thereafter.
Figure 5. Total Almond Production
Source: USDA (2024), AcreTrader
To understand whether or not the inventory pressure facing the almond industry will alleviate, we must turn to the demand side of the equation. According to the Almond Board of California, through February 2024, domestic almond shipments are flat, while exports are up approximately 8%. This results in total inventory down (13%) since February 2023. We assume the 2024 crop year domestic shipments are flat and exports up 7%. We then assume domestic shipments increase at 2% annually and exports increase at 5% annually in 2025 and 2026. We also believe that the continued demand for plant-based protein will continue to drive demand for almonds.
Figure 6. Historical and Projected Inventory
Source: Almond Board of California (2024), AcreTrader Estimates
Putting this all together to form a picture of over or under supply, this analysis shows that inventory as a percentage of total supply should return to pre-pandemic levels in the coming years. We believe this should be supportive of higher almond prices from recent years' depressed levels. However, we can’t predict if, how quickly or to what extent this may occur.
(1) USDA, Fruit and Tree Nuts Outlook: September 2023 (2) CBS News, "Cost cripple California's leading crop, some almond growers saw game over", by Tori Apodaca, March 5, 2024 (3) Los Angeles Times, “After years of rapid growth, California’s almond industry struggles amid low prices”, by Ian James, March 4, 2024 (4) The Business Journal, Another Private Equity Farming Giant with Trinitas Bankruptcy; 7,856 Hitting The Market”, by Gabriel Dillard and Estela Anahi Jaramilom, February 21, 2024
Disclosures:
The estimates contained herein reflect analysis regarding potential outcomes, are presented solely for informational purposes and are not guarantees of future performance. Many factors, including unpredictable economic conditions, may cause actual results to vary materially from and there are no assurances that the results will be obtained.
Alternative investments are considered speculative, involve a high degree of risk, including complete loss of principal and are not suitable for all investors. Investments are illiquid, not listed on an exchange, and not a short-term investment. Investment decisions should be made based on an investor’s objectives and circumstances and in consultation with our financial or tax professional. Past performance does not guarantee future results.