February 02, 2021
A Deep Dive Into Permanent Crops
Accelerating consumer taste for healthy snack foods around the world. High cash values of each harvest. Innovations in harvesting technology and technique. All of these and more trends in modern-day US agriculture are big drivers of institutional and private investors’ interest in permanent cropland.
Comprising tree, vine, and shrub crops with productive life spans often spanning decades between replantings, permanent crops are one of the major categories of farmland investments in focus for FarmTogether and many other investors looking to diversify with farmland. As of September 2020, US permanent cropland assets comprised nearly 40% of the NCREIF Farmland Index, and with these assets holding steady at roughly 15% annualized yield over the last decade, their share of the index will likely continue to grow. Currently, the “total investable universe” of permanent cropland in the US is estimated to be worth at least $71 billion.
So far, roughly 85% of FarmTogether’s investment offerings have been in the permanent crop space. We’ve invested in everything from apples to citrus to tree nuts, and yet our current portfolio just scratches the surface of the diversity of the permanent crop category. There is a huge range of options out there and each one carries its own unique return potential and risk profile, and understanding the nature of each crop and its management requirements is critical to making good investment decisions. So, much like we did with row crops, we’d like to dive into permanent crops’ diversity, historical significance and modern-day economic importance, and the characteristics that make them attractive investments.
Thanks to numerous cultures’ undying reverence for wine, vineyards are perhaps the most high-profile type of permanent cropland that exists. Beyond producing grapes, vineyards themselves - in Europe, the US, South America, and Australia - are often high-end tourist destinations. In the US, California’s Napa and Sonoma counties comprise the best-known grape growing region in the entire country, as the wines produced in their mediterranean-like climate are rated among the finest in the world. Grape vines have productive life spans often lasting decades, and for winemaking, it is often the “old vine” harvests - as old as 50 to 100 years or more - that are the most celebrated and valuable.
That said, while winemaking represents the most lucrative use of grapes, it is far from the only one, as grapes have been eaten fresh as well as consumed in dried and preserved forms and as juices for thousands of years. The main wild ancestor of most grape varieties, Vitis sylvestris, is native to central Asia and now has more than 10,000 varietals descended from it. Grape cultivation dates back to about 8,000 B.C.E. in the Near East and was spread rapidly by the ancient Egyptian, Greek and Roman civilizations. Ultimately, it was Spanish settlers of missions in the American Southwest that brought grapes to the new world in the 18th century, and their production took hold in the particularly suitable climates of Northern California and slowly expanded from there.
Today, California is still the runaway leader in grape production among all US states, but other notable producers include Oregon, Washington, and New York. As of 2017, over 1 million acres of vineyards were planted across the country, and California alone accounted for 88% of the total national grape harvest.
Yet, there is evidence to suggest that, thanks to climate change, the grape-growing landscape in the US and around the world could be due for serious disruption, especially in the case of the particularly climate-sensitive grape varieties used for winemaking. Scientists estimate that if mean global temperatures rise by 2 degrees Celsius, the total area of global farmland suitable for wine grape production could drop by up to 56 percent.
The inevitable reallocation of production that follows will be uneven, with already-warm regions such as Napa Valley at the greatest risk of losses, and cooler and wetter regions such as New York or the Pacific Northwest potentially in a position to benefit as they become more suitable for varieties displaced in other regions. Better still, some of the overall loss of suitable areas for wine grape production could be mitigated if growers are prepared to experiment with the incredible genetic diversity of wine grapes by breeding and planting more resilient varieties.
Berries and Other Shrub Crops
Having covered vines, let’s move on to another category of permanent crop plant: Shrubs and brambles. There are many shrub-like plants used for growing ingredients in human food, but the ones of greatest commercial significance in the US that can be neatly described as permanent crops all fall into the general category we know as berries. Specifically, there are two families of berry plants that deserve the most attention: Rubus crops, which include raspberries and blackberries, and Vaccinium crops, such as cranberries and blueberries.
Rubus plants can also be referred to as brambles and are actually a member of the rose family, Rosaceae, as evidenced by their thorny stems and compound leaves. Their ecological origins are mixed - ancestors of different varieties have been traced to different parts of Asia, Europe and North America - and their commercial production today reflects this broad reach. Raspberries and Blackberries are grown on each of those continents, and are consumed fresh as well as in processed forms such as juices or jams. While both the Russian Federation and Poland rank ahead of the US in total planted acreage of Rubus berries, as of 2015, the US was nevertheless the runaway leader in total crop value at roughly $530 million, nearly twofold that of Russia’s total crop value. Though grown nearly nationwide, the leading producers of Rubus fruits among US states are Oregon, California and Washington.
Vaccinium berries, meanwhile, are native to more northern latitudes in Asia and North America and are distinct from Rubus berries in a number of key ways. Whereas Rubus berries are often planted in hedgerows, and managed with yearly pruning to encourage new vegetative growth over a productive lifespan of up to 10 to 20 years per plant, the cultivation methods for both cranberries and blueberries differ significantly, in that both are predominantly “wild-harvested”.
Cranberries, a low-lying, vine-like shrub that grows in dense patches in wetlands, are grown and managed in large “beds” that are flooded at harvest to encourage the ripe fruit to separate from the plant and float atop the water, where they are then scooped off before the beds are drained and any non-harvested fruit can continue to ripen. This cultivation method originated with American cranberries in the Northeast of the US, and areas where cranberries are grown are commonly referred to as “bogs”. The ecological requirements for this type of production are fairly specific, especially when it comes to the types of soil required, and have prevented the spread of commercial cranberry farming throughout the rest of the country - but, impressively, some cranberry bogs in the Northeast are more than 150 years old and still bearing fruit.
Blueberries are similar in that they grow in extremely dense stands, but tend to be found on open meadows or in woodlands in a larger variety of northern temperate climates. Rather than spreading from seeds, new blueberry growth actually stems from underground runners called rhizomes. This lends itself to a particular style of cultivation and wild-harvesting which typically plays out in two year rotations - half a grower’s land will be mowed to encourage new vegetative growth, and the other half will be allowed to bear fruit, which is then either hand-picked or “raked” from the top of the stand with machinery. This style of production occurs on a large scale in at least 14 US states as well as a number of other countries in Europe and Asia, with the US ranking as the largest producing nation. Unlike cranberries, though, a substantial and increasing share of commercially-grown blueberries in the US are specific varieties that can be planted in Rubus-style hedgerows and managed and harvested more similarly to other permanent crops.
One of the fastest growing categories of permanent crops, tree nuts have exploded in popularity among commercial farmers in the US and globally over the last several decades due to their high yields and high cash value per crop. “Tree Nuts” can be generally defined as single-seeded fruiting bodies of trees, in which the seed is enclosed by a leathery or bony outer layer. Their value has increased greatly as markets, both in the US and abroad, have seen much greater demand for healthy snack foods and non-meat, non-dairy sources of protein.
California’s Central Valley has played host to a large share of this conversion to tree nuts, and the crops produced there are emblematic of the diversity in this categor. Throughout the Central Valley, Walnuts (Julgans regia), Pistachios (Pistacia vera), and Pecans (Carya illinoinensis) are all grown widely. [We’ll address almonds a bit further down in the article.]
Though of different ecological origins, these crops have a number of key characteristics in common. Each one requires long, hot summers followed by cool winters in order to bloom, and are wind-pollinated having separate male and female flowers, meaning that growers have to maintain orchards with the right mix of male and female trees throughout in order to achieve an even fruit-set. This is perhaps the most fickle aspect of their production as the timing of the release of pollen from the male flowers, and the bloom of the female flowers, depends on climatic factors like the total number of “chilling hours” - time below 45 degrees fahrenheit over the winter - that the trees experience. Without sufficient winter chilling, as many Central Valley growers experienced during the historic drought of 2011-2016, a mis-timed release of pollen can mean that trees actually produce hollow fruit, or what farmers refer to as “blanks”. In desperate situations, growers who foresee this problem can get around it by releasing large numbers of bees into their orchards or even by spraying their orchards with pollen obtained from elsewhere.
Still, for all that they have in common, each tree nut crop has a distinct backstory. Walnuts and Pistachios have both been grown in California’s Central Valley for over a century, and their production in that same region still accounts for the lion’s share - over 90 percent - of national production of both crops. Pecans, meanwhile, are much newer to California, having first been planted in the Central Valley just in the 1970’s and with a much greater history of being grown commercially across the Midwest and South.
Outside of California, another significantly popular tree nut crop is the Hazelnut, which until fairly recently had not even had a significant commercial presence in the US. That is changing rapidly, though, with Oregon’s Willamette Valley being a hotbed of conversion to hazelnuts as well as a significant amount of research into hybrid varieties that could spread rapidly throughout other regions of the US.
Each of these trees, as with most tree crops, must go through an early premature period of little to no yield before the tree reaches a productive size, which can often take 5 to 10 years; that said, beyond that initial period, these trees can remain productive for decades after that with the right pruning and management. To avoid complete uprooting or “renovation” when changing old trees for new ones, as well as to manage each crop’s climate preferences and mitigate pest outbreaks to which any one variety might be susceptible, most nut orchards utilize a practice called “grafting” common to many tree crops. Grafting entails splicing a young cutting or “scion” of one variety onto an established woody base, or “rootstock” of another. For example, though the English Walnut is the primary variety harvested in the US, it is often grafted onto Northern California Black Walnut rootstock, which is more tolerant to cold winter temperatures.
At this point, readers with knowledge of tree nut production in the American West, especially here in California, might be wondering why this section has made no mention of almonds, which are grown perhaps more widely than any of the other nuts mentioned above. There is one simple reason: An almond, in scientific terms, isn't actually a “nut” at all - it is the seed of a stone fruit!
Drupes - aka “Stone Fruit”
“Stone Fruits”, or Drupes, are tree fruits defined by an outer fleshy layer surrounding a single shell or outer hardened endocarp with a seed inside. In the US, the name stone fruit usually is used to describe fruits descended from the Prunus genus. This includes almonds, along with a wide variety of other fruits produced in the US and around the world, such as peaches, nectarines, plums, apricots, and cherries, as well as some modern hybrids of those fruits such as “pluots” or “apriums”. Prunus fruits are native to Europe and central to western Asia, but were brought to the new world during the last three to four centuries.
The US produces a huge diversity of Prunus fruits across a number of regions: Cherries in the Midwest and the Pacific Northwest, peaches and nectarines in the South; meanwhile, nearly all types of Prunus fruits are grown in California. That said, almonds are undoubtedly the fastest-growing and most commercially significant of this genus of crops in California, given the diverse and growing demand for their use in both whole and myriad processed forms, and yet the are the only Prunus crop to be grown primarily for their seed, rather than for the fleshy fruit itself. California is the only US state to produce almonds commercially, and yet Calfiornia’s production accounts for 80 percent of the world’s total almond crop.
In terms of farming practices, Prunus stone fruits share a lot of characteristics with tree nuts and other tree crops as far as how orchards are designed and maintained, in that growers of these crops regularly utilize pruning and grafting to keep their trees healthy and productive. Also like tree nuts, if maintained properly, these crops can have productive life spans of multiple decades without a drop in yield, though they tend to bear the most fruit from roughly 5 to 15 years of age. When harvested, almonds are harvested much more like tree nuts - using a mechanical shaker to knock the fruit off the tree, and then swept into rows and vacuumed off the ground after the flesh of the fruit has had several days to dry and separate from the seed. Other Prunus crops eaten for their fruit are primarily harvested by hand, due to the soft and fragile nature of the fruit itself.
Still, the term “drupe” is actually unrelated to the Prunus family itself; instead, it is simply a botanical term referring to the structure of the plant’s fruiting body. Beyond Prunus fruits, drupes actually encompass a much wider array of other crops from different families, including olives (genus Olea), dates (Phoenix), mangoes (Mangifera), and even coffee beans (coffea).
One distinction related to stone fruit may surprise you: Avocados (Persea americana), despite their structure suggesting readily that they should belong to the drupe category, are actually botanically classified as berries. Yet, given that they grow on trees, rather than shrubs, their production much more closely resembles that of stone fruit than it does other berries. Avocados are native to Central America and are grown predominantly in Mexico, but the US does produce some avocados commercially, almost entirely in California. In fact, in 2013, then-Lt-Governor Gavin Newsom named Avocados California’s state fruit. Needing a very warm climate, almost all avocados grown in California are from the southernmost reaches of the state, about 60% of which are grown in San Diego county.
Another significant category of tree crops is that of citrus fruits, all belonging to the Citrus genus native to East Asia. The most commercially significant and recognizable varieties are oranges, mandarines (tangerines), grapefruits, lemons and limes, but there is a significant diversity beyond those as well, including pomelos, meyer lemons, kumquats, and “sweet oranges” such as blood oranges. Different citrus fruits are produced extensively around the world, with the US usually ranking as the third-largest producing nation in terms of total harvest volume after Brazil and China, and ahead of Mexico, India, and Spain.
In the US, most citrus consumed as juice is produced in Florida, while citrus grown for consumption as fresh fruit is primarily concentrated in California, Arizona and Texas. But within any of these states, different sub-regions can be particularly well suited to certain varieties given the range of water, soil, and temperature requirements among these crops. Like other tree crops, citrus growers extensively utilize grafting to maintain the health of their groves, with different rootstocks being uniquely suited to specific environmental conditions and hardiness to pests. Grafting, though, has been particularly significant in citrus production in that it has also allowed breeders to develop seedless varieties that have become incredibly popular as snack foods. Seedless citrus cultivation began with navel oranges in California’s San Joaquin Valley in the late 19th century and has expanded rapidly since then.
Worryingly, though, global citrus production is under increasing threat from one particularly virulent pest: Citrus Greening disease. Otherwise known as huanglongbing (HLB), this disease is caused by a bacterial infection spread by insects that burrow into citrus plant tissue, and causes the fruit of infected trees to appear green in color and taste bitter, and generally be unusable for food. It was first discovered in China in the early 1900’s, and has wreaked havoc there and in multiple other major growing regions. From 2004-2018, Brazil had lost 52.6% of its sweet orange trees to citrus greening, and the US has lost 21% of its total production over roughly the last decade. Florida has been particularly badly affected, leading to a 72% drop in production of oranges used primarily for juice and other processed products. Scientists and growers alike are racing to help, looking both to research into genetic characteristics that could introduce hardiness to the disease as well as renovating groves and using other in-field pest management practices to mitigate spread.
“Pome” Fruits: Apples & Pears
To round out our discussion of tree fruits, let’s take a look at one final category: “Pome” fruits, consisting of apples and pears, along with some other commercially less-significant fruits such as quinces, Asian pears and crab apples. These fruits are distinct from the other fruits and nuts we’ve discussed in that, botanically, they are “accessory” fruits, meaning that the fruit itself forms not just from the ovary but from several parts of the flower. The trees that produce these fruits are deciduous and much more cold-tolerant than the others we’ve discussed, and in fact grow best in regions defined by extremely cold winters.
Apples (from the genus Malus), which we’ve discussed at length in another post, are native to Central Asia and showcase perhaps more genetic diversity than any other single crop in history, with thousands of different varieties many of which are experiencing a commercial resurgence with consumers’ demand for heirloom apples. They are grown commercially in 32 US states, and the US apple crop is regularly valued at over $5 billion annually.
Pears (Pyrus), meanwhile, have similar geographic and ecological origins to apples and have been grown in China for at least the last 4,000 years, but do not enjoy the same modern commercial significance as their more widely-consumed cousins. US Pear production was estimated in 2014 to be worth about $457 million, with the Bartlett Pear being the most popular variety and Washington, Oregon and California being the top three producing states.
All pome fruits are particularly susceptible to diseases, the most significant of which might be fire blight, a bacterial infection that shows up as “cankers”, or sore-like spots on the trunks of trees. Grafting and pruning, as with many other permanent crops, are among the best defenses to these diseases. Also like other tree crops, pome fruits need to be pollinated in order to produce fruit, but with one key difference: Pome fruits are actually self-infertile, meaning that they need to be cross-pollinated with another cultivar in order to bear fruit. This makes the art of selection and maintenance of pome fruit varieties much more complex and dynamic than that of other fruits, and is a major reason why these families of fruit trees are so incredibly diverse.
Investing in Permanent Cropland
Our discussion of some of the key categories of permanent crops in US agriculture is far from exhaustive, but should demonstrate just how interesting these crops can be from an investment perspective. There is such a wide variety of types of crops, not to mention the variety of commercial uses for the produce of each of them, and yet almost none of them are completely safe from the various types of risk to crop health that a grower might experience - whether due to climate change, disease outbreaks, water stress, or even just changing consumer tastes. Furthermore, in many cases, the viable areas for their production are shrinking, with high-quality permanent cropland becoming increasingly scarce.
Given the shifting playing field in permanent crop production, the trend in consumers’ tastes toward healthy snacks and meat and dairy alternatives, and the influence of climate change on viable areas for production, we think now is a better time than ever to be investing in high-quality permanent cropland. FarmTogether’s style of investing and approach to due diligence lend themselves well to finding great permanent cropland opportunities and we plan to continue expanding in this category going forward.
Disclaimer: FarmTogether is not a registered broker-dealer, investment adviser or investment manager. FarmTogether does not provide tax, legal or investment advice. This material has been prepared for informational and educational purposes only. You should consult your own tax, legal and investment advisors before engaging in any transaction.
Was this article helpful?