California agricultural appraiser Ben Slaughter knows his audience and is careful not to get too nuts when making recommendations.
So how is it that the senior appraiser with Correia-Xavier in Fresno, Calif. wasn’t run out of a room full of wine grape growers at a meeting of the San Joaquin Valley Winegrowers Association when he started talking up the positive value of almonds?
Could it be some of those wine grape growers themselves have almonds in their agricultural portfolios and understand the facts?
Slaughter understands his audience and knows that global market conditions and the San Joaquin Valley’s rich soil and Mediterranean Climate have made it easier to profit from almonds than grapes. Still he’s not bearish on grapes, even within a Valley that has seen more than its share of vineyards pulled and replaced with trees.
Outside of the San Joaquin Valley vineyard values remain strong, according to Slaughter.
“The financials over the last few years in Napa and Sonoma are absolutely fantastic, because they’ve allowed some of these guys to hang five, six, seven tons, and get $2,500 a ton,” Slaughter said.
As vineyard financials remained bullish, so too have land prices.
Slaughter has seen land in Napa wine country trade for between $250,000 and $400,000 an acre.
That’s not hard to imagine with an average Cabernet price of $6,000 per ton in the region that can yield four tons per acre.
For high-end wines at or above $100 per bottle, Slaughter says grapes “will easily sell for $8,000 a ton and up.
“These growers will spend an entire year with a wine maker looking over their shoulder,” he continued. “It’s an interesting world and much different than what I’m accustomed to here in the Central Valley.”
In neighboring Sonoma County Slaughter says he likes to break up the vineyard real estate into the warm part and cool part of the county.
“You’ve got areas where Cabernet is preferred and areas that are better for Pinot and Chardonnay – these markets in the past couple years have acted a little differently,” he says.
While static for some time, Slaughter says the Pinot markets “took off” in the later part of 2013 when good Pinot vineyards began trading above $100,000 an acre.
Also seen about the same time throughout California were three back-to-back record-high crops for grapes. As market supply for grapes remained somewhat short in Slaughter’s estimation there was an incentive to grow grapes for tonnage rather than trim back a few clusters and go for higher quality. He sees this mentality switching with higher grape supplies and an improving economy enticing consumers to trade up to higher price-point wines.
While drought and weather impacts were seen, it wasn’t until the current year that weather played a more significant factor in growing grapes. What the drought hasn’t done to date is affect land prices, he said.
Slaughter told his audience that Pinot and Chardonnay growers had some troubling weather in the springtime while “most of the Cabernet and Bordeaux’s I’ve seen have looked okay.”
Farther down the California coast grape land values are lower, but not disappointing. Once outside the famed Napa and Sonoma region land values fall below $100,000 an acre.
For regions like the Central Coast (Paso Robles and Monterey), and even Lake and Mendocino counties along the North Coast, the average land price in 2015 rose above $40,000 an acre with some properties in the past year selling for around $60,000, he said.
Though Slaughter admits tree nuts have seen a rise in popularity he’s certainly not cautioning grape growers to replace vines with trees. Not at this point.
“Pistachios were an absolute disaster” in 2015, Slaughter said, noting “there are stories of China now turning to Iran to buy pistachios, which they haven’t done in 20 years or so because the price of what’s available from California today is so high.”
He also mentioned a softening of almond and walnut prices from their record highs, but nothing to cause concern.
“I think with a good snow pack and a good water year and dormancy we could see 2.4 to 2.5 billion pounds of almonds,” he said. “If that happens you’ll see the nut price come down a bit more. They’ll still be profitable with a good orchard, but we have a potential to produce a lot of nuts.”
Slaughter recognizes that high returns in tree nuts have been attractive to long-time growers and investors alike. He still sees almonds in the neighborhood of $2.50 per pound to the grower as still a good deal.
Land prices for tree nuts seem to be trending in unison, though he sees fewer trades in pistachios and walnuts simply because of the size of the almond industry at nearly one million acres.
Slaughter says Napa and Sonoma grape growers continually ask him about almonds, particularly the differences in labor needed to harvest the two crops.
“One of the nice things with a nut crop is it’s easy to contract farm,” Slaughter said.
This can entice entry-level farmers and institutional investors alike, he said.
A disincentive for nut crops is the water needed. “These are really water-dependent crops,” he continued.
Central Valley grapes
Slaughter and others remain optimistic about Central Valley grapes, even in the wake of market forces that include the competition from foreign imports against Valley grapes. Harder hit seems to be the San Joaquin Valley (SJV) as consumers trade up to the higher price-point wines made from grapes grown outside the Valley.
Foreign competition against SJV grapes is also hurting growers in the region, Slaughter says.
This is a shift from recent years where consumers switched to lower price-point wines made from SJV grapes.
It was the impacts of the great recession and consumers trading down to sub-$7 wines that helped Central Valley wine producers and grape growers weather the recent economic downturn better than they might have otherwise. With conditions trending in the other direction, Slaughter admits the incentives are there to move out of grapes and into almonds.
As San Joaquin Valley land values range from $20,000-$30,000 an acre, sales volumes remain low, Slaughter says. Even mixed-use properties with vines and trees are hard to come by.
“The good news is your vineyards are probably worth as much or more than they’ve ever been,” he said. “The bad news is they might be worth more if you pulled your grapes and planted almonds.”
Again, Slaughter cautions against a mass jump into almonds given nut acreage out there and the potential for much higher crop yields that could push almond prices back to the the $2 range instead of their record highs of more than $4 per pound.
Slaughter says water scarcity for agriculture will be the larger driver; though he suggests it may not be a short-term deal-breaker for some.
“The discussion used to be ‘location, location, location’,” Slaughter continued. “Now we talk ‘water, water, water’.”
He shared the story of a recent conversation with an institutional investor who was asking about water in California. The investor knew the drought stories and knows of California’s new Sustainable Groundwater Management Act.
Given the estimated 20 years for the state to likely clamp down on groundwater pumping, Slaughter says investors may be more inclined to continue to move ahead with almond plantings and other high-value crops in the short term in an attempt to “pocket some money,” knowing that it’ll be a while before any sort of agricultural “bubble” bursts and profitability declines significantly.
While some are asking: “when will the bubble burst;” Slaughter says he’s not so sure there is one.
“A bubble is defined as when price and income decouple and they are no longer correlated,” he said. “The price people are willing to pay for the asset is no longer correlated with the amount of money that asset makes. This is not what is happening in California agriculture. If there is a bubble it’s a commodity price bubble, not a land value bubble because people have acted rationally with the amount of money you can make from that farm.”
The water discussion is why he believes properties in the Sacramento Valley may cause a “flip” in buying activity wherein northern California may become more popular for growers to purchase because of the source of the water.
“I think some of the exodus to the Sacramento Valley is evidence of that,” he said. “You’ve got folks going up there not just because there’s good ground water, but they have all kinds of surface water.”
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