California Farmland To Plunge “20% Or More” As Returns Sink To Lowest Level Since 1992
Last August we questioned whether California farmland was overvalued by $70 billion (see our aptly named post: “Is California Farmland Overvalued By $70 Billion?“). Our reasoning was fairly simple, as we argued such a draconian outcome was the inevitable result of large institutional buyers scooping up 1,000s of acres of Cali farmland and massively overplanting almonds because, at least at the time, it was the hottest crop earning the highest returns…and that’s what NYC hot money likes.
Unfortunately, chasing short-term returns by massively overplanting a permanent crop with a 25 year useful life and creating a huge supply bubble in the process rarely works out all that well. Here’s what we said 9 months ago:
But the Midwest is not the only place where farmland has bubbled over. California farmland has been bubbling up for years now with unplanted farm ground with “decent” access to water currently selling for $20,000 – $30,000 per acre. Land with mature almonds, California’s cash crop, is more likely to trade at $30,000 – $40,000 per acre. This bubble, like so many others, has been caused in large part by institutional capital “reaching for yield” in a low interest rate environment…yet another Fed bubble lurking under the surface.The plan was relatively simple, in the absence of attractive fixed income yields, large asset managers (like TIAAmentioned above with $850BN of AUM) decided to purchase hard assets like farmland instead. Farmland could then be planted with the highest value crop, which just happens to be almonds in California, to drive attractive ROICs on invested capital. A few simple charts illustrate perfectly how the story played out.
And, right on cue, almond prices crashed leaving land owners with a ~4% ROIC, down from 16%, on land they likely purchased for north of $35,000 per acre.
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