Exploring the changing environmental, social, and economic impact on California agriculture
California farmers face a dire situation as they struggle with severe drought and other impacts of climate change. At the same time, economic impacts of the pandemic, including supply chain issues and labor shortages, have created immovable barriers for the state’s agriculture industry. It could take decades, and perhaps never, for the situation to right itself as California’s farmers struggle to adapt to the new normal.
In the interim, investors interested in the agriculture industry should consider foreign farmland as an alternative to once-promising domestic areas like California’s Central Valley, San Joaquin Valley, and North Coast regions.
Ongoing challenges of farming in California
Lack of available labor
Labor shortages represent a key driver of crop revenue losses for California agriculture. Most notably, the state’s population of undocumented immigrants from Mexico decreased by 10 percent from 2010 to 2018. This group has traditionally performed a significant percentage of the state’s farm labor since the 1960s.
Now, however, fewer Mexicans immigrate to the U.S. for this type of work, both permanently and seasonally. Stricter border control regulations, Mexico’s relative economic stability over the past 30 years, and the nation’s aging population have all caused a labor crisis for California farms.
Today, undocumented immigrants represent about 36 percent of California farm workers, down from 66 percent in 2008. Farms in the state hired 150,000 fewer workers for crop-productive agricultural regions in 2020 than in 2010, a 12 percent decrease in just a decade and a testament to the need for workers.
California farms are struggling with expensive, challenging alternative solutions to this enduring concern. Often, farmers replace labor-intensive crops with less intensive and less profitable replacements. Others have relied on genetically modified crops and automation technology.
In one potential stop-gap, the United States H-2A visa program encourages immigrant workers to come to what was once one of the world’s most productive agricultural regions. However, many small and medium-sized farms in California cannot possibly meet the detailed and complex program requirements, including competitive wages, overtime, and provision of meals, transportation, and housing for the immigrant workers.
Automation also has its limits. Only certain crops can stand up to the rigor of these machines, as they will bruise and even destroy many types of produce.
Supply chain failures
Even for the crops that are harvested in California, agricultural exports are piling up in warehouses or spoiling as shipping companies prioritize U.S. imports. After cargo companies deliver Asian goods to the U.S. by way of California, it’s simply more profitable to send the ships back empty in order to maximize turnaround speed rather than fill them with agricultural goods first.
Before the pandemic, it cost up to 300 percent more to ship products from Asia to the West Coast than vice versa. Today, large importers from China, like Amazon and Walmart, have driven up the shipping rates from China to California to approximately ten times the cost of the reverse trip.
With shipping companies focused on maximizing profit on runs to the U.S., many California exporters are left unable to get their crops on shipping containers headed back to Asia.
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The plight of almond growers in the Central Valley epitomizes the supply chain issues facing farmers in the Golden State’s agriculture industry. California is the nation’s largest producer of almonds and grows 80 percent of the world’s almonds. However, almond farms throughout California are struggling to transport their wares abroad, and they also lack the necessary shipping containers to pack the nuts. While 60 percent of shipping containers leaving the Los Angeles area were empty before the pandemic, today it’s more like 80 percent.
The limited regulatory constraints of the shipping industry have resulted in an untenable situation for these Central Valley farmers.
While overseas buyers have purchased the products, they are not paid for until the goods are received. Many crops remain stocked in warehouses as farmers continue to absorb losses and leverage more credit. Prolonged periods of storage can potentially damage the delicate almonds, making them less valuable to discerning buyers in Asian nations and beyond.
Still, business owners have little choice but to hang in there for as long as possible. Some farmers are building additional storage space in hopes of literally buying time to wait out the shipping crisis. Others are exploring longer, more expensive alternate shipping routes along the Gulf or East Coasts.
At the same time, shipping companies will continue taking the more profitable route as global retail giants compete for space on ships and pay a premium for speed.
The dangers of drought
Climate change has exacerbated the persistent drought conditions in California and ensures that most precipitation comes in the form of rain rather than snow. Farmers can no longer rely on water storage in the form of snow, even in the Sierra Nevada mountains.
In more favorable conditions, accumulated snowpack gradually melts over months to continuously replenish the groundwater supply.
What’s more, wet years in the Golden State that once provided water availability are few and far between, if they occur at all. Rather than the once-common cycle alternating between wet and dry conditions, chronic low precipitation exacerbates water shortages. When it does rain, the hardened soil prevents surface water from nourishing crops and refilling groundwater basins.
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State officials regularly declare drought emergencies, something Californians are all too familiar with. These drought conditions have caused many water agencies to establish water conservation regulatory constraints to address the lack of surface water availability.
In short, the California agriculture industry has a vast unmet need for water resources.
Approximately 80 percent of the state’s water supply serves as irrigation water for California farmland. In addition, farms use about 80 percent of the state’s groundwater. Many farmers in Southern California must rely on costly surface water deliveries and absorb increased pumping costs, particularly in far-flung irrigation districts.
Compounding these drought impacts, the California Sustainable Groundwater Management Act will soon require farmers to pay for groundwater pumping costs. Under this law, they must also present local sustainability plans to aid the conservation of these water resources.
In a study by UC Berkeley and UC Davis, researchers analyzed the impact of local groundwater agencies that charge farmers for surface water deliveries. The study revealed that a Central Valley Project like the one mandated by the Sustainable Groundwater Management Act resulted in farmers switching to lower-value crops and reducing acreage, leading to crop revenue losses.
The drought impacts will be keenly felt by the Central Valley Project, where irrigation districts historically received federal groundwater pumping for 25 percent of their water use. According to a February report, the Bureau of Reclamation has ended these allocations from Central Valley districts because of drought-related water limitations.
Approximately 400 miles of farmland from the San Joaquin Valley in the South to Redding in the North Coast regions comprise the Central Valley Project. The Central Valley contains 500 miles of canals and most of one of the state’s primary water conduits.
More than 250 separate entities rely on these water resources, including not only cities and irrigation districts but also farmers in the San Joaquin Valley and beyond.
The California Department of Water Resources and local agencies will be able to provide some relief from these farm water shortages led by the federal government. However, countless acres will underperform due to deficit irrigation techniques, or worse, remain unfarmed idled land without access to these critical reserves.
The effects of higher temperatures
As drought and water restrictions affect agricultural land throughout the state, other factors are also making California’s variable climate untenable for many types of crops.
Increasingly warmer temperatures are causing negative feedback loops resulting in poor farming conditions exacerbating both drought and heat.
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In one example of the downstream effects of this cycle, Yale Climate Connections reports that the low temperatures in the state in the winter are higher than they used to be. As a result, perennial plants can’t regenerate during the cold off-season months because it’s just not cold enough, causing much lower crop yields with fewer, smaller fruits. Perennial crops, a foundation of the California agriculture industry, are also more difficult to diversify than annuals.
Many California crops aren’t getting the “chill hours” they need to enter dormancy, including almonds, grapes, tomatoes, and walnuts. Central Valley farmers had up to 1,200 chill hours in 1950, suitable for crops like plums, nectarines, peaches, kiwis, and apricots. Today, only about half of the Central Valley can accommodate these crops, a number that is expected to drop to just 10 percent by 2080.
UC Davis reports that the changing climate will also affect the types of produce that will grow in the Sacramento Valley, further increasing crop revenue losses. The University’s Global Climate Leadership Council projects that Sacramento Valley exports of corn, grapes, grains, and other field crop revenue could decrease by up to 11 percent by 2050.
New paths for agriculture industry investors
According to the USDA, California produces 11 percent of the total U.S. agricultural output, so these problems paint a bleak picture for the domestic farm investor.
While the acreage of traditional crops like bell peppers, broccoli, and tomatoes is declining in the state, it’s increasing on an exponential scale internationally to feed a growing population. Imports of both fresh and frozen fruit and vegetables nearly doubled between 2016 and 2021, when the U.S. spent approximately $31 billion on imported produce.
Given these unprecedented challenges in California, A=alternative markets in Latin America are quickly becoming known for having more favorable growing conditions and promising opportunities for farmland investors. For example, the region possesses approximately 30 percent of the global water supply and 30 percent of the world’s available farmland.
Despite the changing climate worldwide, investing in food and agriculture in nations such as Brazil, Chile, and Colombia can potentially create impressive annual returns.
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Brazil is among the world’s top food producers and a leader in some of the most desired crops, including sugar, coffee, and soybeans. Chile ranks as one of the best locations for global production of wine grapes thanks to its crop-friendly Mediterranean climate.
Colombia has arguably the most compelling farmland, as its varied sub-climates, ranging from tropical rainforest and mountains to plains and coastal, support a wide variety of sustainable and profitable export crops. Colombia is a well-known producer of coffee, sugarcane, bananas, limes, avocados, and coconuts. With coastlines along both the Pacific and Atlantic oceans, Colombia also has exceptional access to U.S. and other global markets.
- Low-cost land and labor, bolstered by favorable exchange rates
- Sophisticated agricultural infrastructure in many emerging economies
- Outstanding climate for many high-demand crops
- Rapid industrialization that drives unprecedented innovation within the food and agriculture sector
Emerging markets, including the three nations described above, represent 40 percent of the world’s economic output. The International Monetary Fund has set annual revenue growth projections for these markets at 6.2 percent.
As California produces fewer crops in these crisis conditions, savvy investors are increasingly considering alternative solutions to the flailing domestic agriculture industry. Connect with the team at Farmfolio to learn more about investing in farmland in emerging markets such as Colombia by completing the contact form below.