Sustaining The Future of California Agriculture: A Vital Industry
Valued at nearly $50 billion, California remains the nation’s and world’s agriculture powerhouse. The state alone is the largest producer of food in the U.S., responsible for over 400 commodities and two-thirds of the nation’s fruits and nuts.
Globally, CA is the country’s largest agricultural exporting state, shipping more than $20 billion in agricultural exports in the 2020-21 season. On average, more than 44% of CA’s agricultural output is exported to over 60 countries.
However, despite CA’s critical and dominant role in our global food supply, the state is not free from challenges. In fact, today, challenges ranging from a global pandemic to supply-chain constraints are placing increased stress on agricultural food production worldwide. And as the amount of arable farmland shrinks steadily, meeting global food demand is only exacerbated.
These challenges are felt acutely in CA, where farmers lead food production and on-farm innovation. As farmers continue to navigate a changing landscape, the future of CA agriculture will depend largely on the industry’s ability to adapt – and investors will play a crucial role.
Let’s break down the global factors impacting U.S. agriculture, the critical role CA agriculture plays in our lives, and how the state’s farmers and investors alike are helping to create a resilient, sustainable food system.
The Global Food Supply: Challenges, Trends, and Impacts
The COVID-19 pandemic has brought sweeping change to our global economy. We’re experiencing ongoing inflation while attempting to navigate supply chain disruptions both at home and abroad. To make matters worse, these supply chain bottlenecks and manufacturing delays are driving up prices even higher, ultimately worsening the inflationary pressures first caused by stimulus relief efforts. Today, U.S. inflation is hovering above 8%.
The agriculture industry has been hit particularly hard by these phenomena. Thanks to delays in the manufacturing of many ingredients, prices for agricultural inputs, like chemicals, seeds, and fertilizers, are all higher than they were last year. Glyphosate, the active chemical ingredient in RoundUp, is 250% more expensive than it was last year. Meanwhile, elevated natural gas prices have driven ammonia fertilizer prices 200% higher, at $1,492 per ton.
The war in Ukraine is further complicating our global food system. Global prices for wheat and bread are soaring as exports from Ukraine and Russia – the two largest wheat suppliers – have both been derailed. This shock to the grain system has placed increased stress on U.S. wheat farmers, on top of soaring fertilizer and gas prices. Abroad, this instability raises the risk of food shortages, particularly within countries dependent on imports.
Putting aside macroeconomic challenges, farmers around the world are grappling with another phenomenon: the supply of farmland is decreasing at the same rate that the demand for food is increasing.
The global population is rapidly expanding; current estimates from the Food and Agriculture Organization (FAO) show that the population is expected to reach 9.3 billion by 2050. With more mouths to feed than ever before, agricultural output will need to increase by 60% in order to meet demand. The middle class is growing, too, particularly in developing countries, like China, India, and Brazil. This income growth is driving demand for more nutrient-dense foods like meat, fruits, and vegetables, adding further stress on our agriculture system.
Simultaneously, environmental shifts, largely driven by climate change, are disrupting the health and supply of our natural resources, like soil and water. These shifts, including changing rainfall patterns and extreme weather events like freezes and floods, pose a major threat to the future food supply. In fact, the FAO estimates that 250 million acres of arable cropland will be lost to soil degradation and urbanization over the next 30 years. This loss far outpaces the rate of soil replenishment; when left to nature, it can take up to 1,000 years to produce one inch of topsoil. With fewer resources available, the challenge of producing more food on existing agricultural land is intensified.
California: A Global Powerhouse
The “perfect storm” of inflation, global supply chain disruptions, and environmental concerns has led to an increased awareness of the critical role agriculture plays in our lives – and few economies are more vital to the future of agriculture than CA.
CA is the cornerstone of the American agricultural economy. The state boasts a value of $49.1 billion, representing more than 13% of the total U.S. market. Driven by its Mediterranean climate, temperate weather and fertile soils that are uniquely suited to sustain certain crops, it’s no surprise that CA is the country’s top producer. In fact, California holds almost all of the nation's top ten agricultural counties, with Fresno, Kern and Tulare county taking the lead.
With over 400 commodities produced in the state, CA agriculture offers unparalleled diversity. In addition to being the country’s leading producer of dairy and wine grapes – two of the state’s highest valued commodities – CA also accounts for ⅓ of the country’s vegetables and ⅔ of fruits and nuts. Within the latter category, CA is responsible for all (or nearly all) of the national production of several high-value crops, including pistachios, avocados, olives, nectarines, peaches, plums, lemons, and mandarins.
CA is also a leader in the transition to sustainable agricultural production. CA has roughly 2.5 million acres dedicated to organic cultivation, accounting for 36% of all U.S. organic production – more than any other state. It is also the only state in the U.S. to receive a USDA National Organic Program. In 2020, organic product sales in CA reached $11.9 billion.
Even more, the contributions of CA farmers extend well beyond the U.S. CA leads the country in agricultural exports, reaching $20.77 billion in 2020. The state’s top exports include dairy, wine, table grapes, rice, tomatoes and more. Even more impressive, CA accounts for more than 75% of the global almond and walnut supply.
The Unique Challenge in California
Despite the economic profitability and dominance of CA agriculture, both at home and abroad, the state is not immune from the increasing challenges facing farmers around the world - most prominently, a highly variable climate and increasing water scarcity. Like the rest of the U.S., CA is at risk of higher temperatures, more frequent floods and fires, and increased presence of pests – all of which threaten crop growth, soil health, and overall farmland productivity.
Additionally, CAs water supply has gained significant attention over the last decade as the state enters its second historic drought in under 10 years. This has led the federal Central Valley Project to declare a second straight year of no water deliveries, meaning farmers need to rely on groundwater and storage. Many farmers without a sustainable water supply have been forced to leave large tracts of land fallow; last year, farmers left nearly 400,000 acres of agricultural land unplanted. While prolonged dry spells are a feature of CA’s Mediterranean climate, there has been an increased focus on the need for water conservation and management across the state.
In order to combat these growing threats, CA farmers will need to adapt to a changing climate, while learning to cope with fewer resources. This transformation will be critical to susataining some of our country’s most nutritious and high-value crops, from avocados and citrus to nuts and berries.
This will require the use of sustainable methods, such as reduced tillage and cover cropping, as well as the implementation of innovative technology, like micro-drip irrigation and aerial imagery. Unfortunately, several barriers, including a lack of capital and information, present an added challenge for most farmers.
Fortunately, these challenges have created a unique opportunity for investors.
Sustaining California’s Growth
By channeling outside capital directly to CA farmers, investors can provide the resources to help scale the adoption and acceleration of more efficient and sustainable operations throughout the state.
One of the most impactful ways investors can help is by funding the technological innovation required to increase on-farm productivity and efficiency – which will be essential in a future with fewer resources. Precision farming, for example, can be used to evaluate specific crop needs and enable more accurate and controlled decision-making on the farm. Sensors, one element of precision farming, can be used to estimate the amount of moisture in the soil or to determine what factors may be stressing a crop at a specific point in time. GPS soil sampling can be used to inform input decisions, such as optimal fertilizer or watering amounts, to preserve scarce or expensive resources. Additionally, farmland micro-drip irrigation technology can be used to deliver irrigation water in exact doses.
Seed technologies can also provide farmers with new tools to address climate concerns. Biotech crops and microbe-coated drought-resistant seeds are helping farmers adapt to a changing climate, while seeds that have been genetically altered for pest and disease resistance allow farmers to increase productivity and reduce herbicide use.
Farmland investments are also beneficial because they help prevent arable farmland from development. This is essential in CA, where so much of the country—and the world—relies on for food. To take it one step further, individuals can invest in sustainable and organically-certified farmland, further advancing CA as a leader in organic production. This will not only help meet the growing demand for healthier food options, but can also help to restore soil health.
The Benefits for Investors
There is no doubt that investments in farmland are critical. But just as critical are the operations in which you invest. Farms with an ample, reliable water supply and healthy soils will be invaluable in the long run.
To navigate the unique challenges facing CA and to ensure the longevity of a vital industry, our team is extremely selective in the properties we acquire; roughly only 2% of deals that enter our pipeline are eventually offered on our platform. Throughout every step of the investment process, our team is highly detailed in our diligence and management of these properties – this includes everything from ensuring properties have a secure and redundant supply of irrigation water to identifying best-in-class operators to manage the land.
Properly managed farms can make an impact on your portfolio. By conserving water, emphasizing sustainable farming methods, and leveraging technological innovations to make operations more efficient, farmers can reduce their costs and increase their profits, meaning better returns for both themselves and investors. Sustainably managed farmland is also more likely to appreciate over the next few decades as the global food system increasingly relies on these viable properties.
By investing in farmland managers like FarmTogether, investors can trust that their capital is in good hands and will not only create a more resilient food system but can also build a more robust portfolio. To learn more about FarmTogether’s sourcing process, watch our on-demand webinar for an in-depth look at our water due diligence.
A Look Ahead
Given CA’s crucial role in meeting both the present and future food demand, sustaining the state’s agriculture sector is and will continue to be foundational. Thus, financing that empowers farmers to optimize their operations will be essential.
Recognizing that CA agriculture is crucial to future food supply, investors will play a crucial role in shaping the future of the state’s most vital industry and creating a more resilient, robust, and sustainable food system.
Interested in learning more about FarmTogether's commitment to funding sustainable and prosperous farming? Check out our ESG page.
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.