California's ag real estate getting nutty

Feb 3, 2014

— Orchards a hot commodity, but water reigns supreme in Far West

It’s been a hard year for the West in terms of drought, and the far western states especially. While much of the western U.S. has seen a lessening of drought incidence and intensity, states like California and Nevada are bearing the brunt of the western drought with swaths of red taking up residence in their territories.

But, despite—or in spite of—the drought-inflicted hardship on the land, there is some opportunity to be had and optimism about real estate in the plains of the dusty dry. One of the key opportunities for landowners thinking about selling—and challenges for those trying to coordinate those sales—in the Far West market is that demand far exceeds supply.

Pete Nevin of FarWest R&C specializes in ranch and ag properties in Nevada and parts of California. He said that the market for what he specializes in is doing well.

“I find that the market for the larger ag ranches, hay production, cattle ranches has been pretty good despite the drought; hay farms that produce—usually the larger ones—and cattle ranches that can run 500 cows or more,” he said.

In California, the verdict is that the market is nuts. Literally. “The nut sector is very hot; almonds, walnuts, pistachios,” reported Kent Dawkins President of Van Schaack Land Co., who specializes in farm properties and especially orchard land in California’s Sacramento Valley. “One of the main reasons is they are all big export crops. Demand for the product is very strong worldwide.”

According to the most recent U.S. Agricultural Exports report, California exported $6.01 billion worth of tree nuts in 2012 alone, not to mention other orchardsourced exports. California is the top-ranked state for tree nut exports, fetching 35.6 times the amount of the next highest competitor, Georgia.

“These permanent plantings have enormous profit potential,” noted Jim Rickert, President of Western Agricultural Services and an Accredited Rural Appraiser/Accredited Farm Manager with the American Society of Farm Managers and Rural Appraisers.

“They are very expensive to put in, but all of a sudden you have orchard values that are a low of probably $10,000 an acre to a high of maybe $25,000 an acre. And you have thousands of acres of these things. In a real profitable year, those orchards can produce thousands of dollars’ worth of net income an acre.”

The value of orchards in the north-central and northern parts of California have increased demand for any land capable of carrying orchards enormously, to the point where almost nothing is available. When asked if grazing land or non-orchard land was being bought up and converted, Rickert answered with an immediate “Absolutely.”

“As fast as they can possibly get it if they can find the land,” he added. “We have techniques now to go into pasture lands and some of the formerly non-irrigated lands or field crop lands that they’ve just been converting that land at a rapid pace. Just take a drive on Interstate 5 sometime from Red Bluff to Sacramento and you’ll be amazed how many trees are planted there.”

He estimated orchard crops make up at least 50 percent of the agricultural production in that area of the state.

According to the most recent Land Values report from USDA’s National Agricultural Statistics Service (Aug. 2013), all cropland in California increased in value 3.9 percent in 2013 compared to 2012, to an average of $10,190/acre. When broken down into irrigated versus non-irrigated cropland, the importance of water becomes clear. At an average of $12,500/acre, irrigated cropland increased in value 4.2 percent between 2012 and 2013. Non-irrigated cropland on the other hand increased only 1.4 percent to an average of $3,600/acre.

Pastureland, by comparison, was stagnant at an average of $2,800/acre in the Golden State. In Nevada, pastureland values were nonexistent for the past four years given insufficient sales reports.

What (and who) is selling

A constant refrain among the consulted realtors and land brokers WLJ talked to was that there simply isn’t enough product out there to meet demand. When asked who is selling currently, Dawkins answered with a quick and decisive “nobody,” which is aggravating the demand-exceeding-supply relationship in the Far West market.

Despite being lumped together, the California and Nevada real estate markets are very different in terms of what potential buyers are seeking. The constant in both states, however, is that there isn’t enough of it.

Nevin had some specific profiles of what buyers are wanting and what is selling well—when it exists—in Nevada. The thread running through those profiles: private land and as much selfcontained self-sufficiency as possible.

“The less dependent you are on lease land, the more desirable the ranch,” he said succinctly. Nevin explained how some of the most soughtafter ranches in his territory have had contiguous deeded acres, as well as being what he called “intact.”

“Finding ranch properties with value beyond ag use that are intact—that still have their water rights, mineral rights, grazing rights—the availability of complete ranches has been an issue.”

Another high-demand element for properties in the area which adds to that genre of completeness and self-sufficiency is having multiple water sources.

“Ranches that have various sources of water—underground, surface, river and stream water—that can be a challenge.”

For California, both Dawkins and Rickert painted a picture of buyers so desperate to own orchards—or ground that can sustain orchards—that they are independently making offers to landowners rather than waiting for property to come on the market.

“The challenge has been that there’s been a great demand for land to be planted to orchards and nobody can find it,” reported Rickert. “It’s not where it comes on the market. Now it’s people making unsolicited offers. They go out and find people and [landowners] are getting contacts asking, ‘Do you want to sell your property?’” “There’s so much demand, that it’s really hard to appraise those types of properties right now. I don’t know what someone would pay for one,” he said, though he opined that if a prime piece of land suitable for orchards were to come to auction there could be a feeding frenzy in terms of prices offered. He did have an example of one recent unsolicited offer he’d heard about, however.

“In one case I can think of, a walnut orchard where the person got an unsolicited offer for a third more than the last comparable sale we had,” he said, noting that the most recent sale had been in the area of $20,000/acre. “That gives you an idea how volatile and how much change is going on in some of these commodities.”

Dawkins mentioned similar experiences where buyers were going directly to sellers or landowners (i.e. potential sellers) with offers rather than trying to buy land in a more standard way through realtors or brokers. That sort of private activity makes prices and trends hard to track.

“Finding the product is like finding a needle in a haystack,” he said of the difficulties of being a broker in the current environment. “There’s a lot of private transactions. Most people can call a neighbor rather than hire a broker to sell it.”

Who is buying

“It seems like we’re getting buyers from California, as well as the other western states that are more interested in Nevada ranches,” Nevin noted. He said that known productive grazing or hay land is moving well to existing ranchers in neighboring states who either can’t produce enough forage at their home ranch, or are getting edged out by property values.

This latter detail was a possibility noted by Rickert. Cattlemen with good California pastureland that could be converted to orchards could buy a whole lot more grazing acres in other areas.

“We could see this at some point, where some cattle operator has a property suitable for conversion to an orchard, could sell that and buy a bigger cattle operation because they could purchase maybe five acres of grassland for what they’re selling one acre of orchard land for. I haven’t seen that yet, but I wouldn’t be surprised if that happened.”

Mostly he reported seeing those interested in orchard land looking to buy.

“There are no small guys now,” said Dawkins when asked who is buying up orchard land. “Mainly large, current growers and pension funds.”

“There’s an awful lot of pension money that owns permanent plantings up and down the Sacramento valley,” agreed Rickert.

Challenges and the future

“The cost of water is critical. The cost of water is going up too—from what I’ve been told—$1,000 per acre foot or higher,” reported Dawkins on what he saw as one of the biggest challenges to the real estate market in his area.

“Whether you can grow a crop at all if the drought continues, number one. And the cost per acre foot, number two. Those are the two big factors,” he summarized.

Rickert concurred that, aside from a lack of availability, the lack of water is the biggest challenge. He explained that in his area of north-central and northern California, people are already being forced to feed hay to cattle and irrigate up in the mountains because there simply is no water to grow things. He gave a personal example to highlight how bad it’s gotten.

“The amount of hay that’s being fed is extraordinary. This one cattle operation that we operated—an old traditional cow/calf operation—in a typical year, the cattle down in the foothills in the winter time get fed about one truckload of hay, about 25 tons. That’s our average for about 34 years we’ve been doing this. This year we’re feeding a truckload every eight days and been doing it for months, and we should probably pick up the pace because we’re running out of dry grass.”

Rickert was also of the opinion that one of the big questions in the near future in the area was what crops were going to be cut from the growing roster because of the water restrictions.

“There’s a shortage of water and some crops are just not going to be planted because of it. There’s going to be some fallow land, and the question is: ‘What’s going to be left out?’” He opined corn for grain and corn silage were likely at the top of the list for being cut, as well as forage crops like alfalfa.

“On the cattle side of it we’re talking about weaning calves early and maybe marketing them early,” he said in an effort to get the calves shipped out to other parts of the U.S. where the water issue isn’t so dire.

The reason orchards are not only surviving but growing in California is because the rates of return are so high for the nut crops that orchard owners can afford the high price of water.

“Some crops in California are really doing well and most of those crops are exported. And then you have everyone else who is suffering from drought and don’t have the profitability of their business,” Rickert said. “A good cattle pasture in the Central Valley gross, oh I don’t know, $400-500 an acre. And a good orchard might gross, oh, $10,000. And might net $5 or 6 [thousand].”

“You’re just not going to grow the low value crops— the wheats and the corn and the alfalfas and the fairly low value forages—if you don’t have a surplus of water.”

Of course extreme challenges make for the potential of extreme opportunities for some. With buyers all but beating down the doors of landowners to make private offers on orchard-suitable land in California, and buyers in Nevada looking for intact, private ranch land, those who possess such sought-after properties find themselves in an enviable situation. Demand far exceeds supply, and those with the supply hold the reins.

“If you have prime soil and excellent quality irrigation water—either from a surface source or really good aquifers for wells—then I don’t know what someone would pay for that,” said Rickert.

“There’s good opportunities,” said Nevin. “Some of these smaller family-owned ranches [ /- deeded 1,000 acres] tucked into canyons and places and have been in the family for years, that’s going to be a good opportunity.”

He noted that given the ages of current producers and the movement of heirs away from ranching is creating a situation where some intact, old ranches are occasionally coming to market. For those in such a situation, the selling opportunity is strong since buyer interest exists largely unsated.

Nevin also pointed out that management services can also offer opportunities for good rates of return on land purchases by investment buyers, which is an additional venue of potential for buyers.

When asked what they thought the future might hold for the Far West market, the three men expressed optimism regarding the unmet demand that exists in their territories, but caution about the drought issues.

“Nobody really knows what’s going to happen over the next few years,” said Dawkins in closing. “There’s a correction in every market, but I certainly don’t see anything in sight that tells us there is a weakening of the market at this point.” — Kerry Halladay, WLJ Editor