As California Drought Eases, Farmers Fret Over Regulations, Outside Investors

While nearly 40% of California emerges from the drought, generational farmers in the state are still concerned that regulatory changes will lead them to sell to investor groups.

Lindsay Rittenhouse/ The Street

Feb 13, 2017 11:28 AM EST

New Challenges for Farmers Arise as California Emerges from a Historic Drought

For Paul Wenger, whose family has been growing almonds and walnuts in California’s Central Valley for three generations, his state’s historic drought may be ending just as pressures from regulators and incursions from private equity and pension funds make it harder to wring a profit from his 400-acre farm.

As of last week, about 42% of California has emerged from drought, according to a weekly report by the U.S. Drought Monitor. About 11% is in an abnormally dry period, 36% is in moderate drought, 10% is in severe drought and 1% is in extreme drought, after massive rain and snow storms drenched the state over the last month. A drought emergency was declared by California Gov. Jerry Brown in April 2014.

Meanwhile, in Northern California, the increased precipitation resulted in the evacuation of nearly 200,000 residents near the 770-foot Oroville Dam. On Sunday, the spillway on the dam, the tallest in the U.S., began to erode, causing water levels to rise at such a rate that officials forced residents of nearby counties and cities to leave their homes and find shelter elsewhere.

For now, the state may have dodged the effects it faced in 2015 from the drought, when 30% of cropland and workers were reduced in the state, resulting in a loss of $1.84 billion and 10,100 jobs. Wenger’s Central Valley Region, a stretch of lowlands that extends from Sacramento to Bakersfield, was the hardest hit in the state, according to analysis from the University of California, Davis, Center for Watershed Sciences.

The dry weather forced farm operators to not only cut jobs and reduce their crops but even declare bankruptcy: filings for protection from creditors under Chapter 12 rose 28% nationwide in the first half of 2016 from the year prior, according to the St. Louis law office of Thompson Coburn. It’s not just the weather that’s making some farmers opt to “get out” and sell to investors, said Wenger, 61, who’s also president of the California Farm Bureau Federation and farms 400 acres, 200 of which he owns, in Modesto, Calif.

“Farmers have always adapted to climate change,” Wenger said. “We’ll see crops vary from year to year but that doesn’t scare me as much as the regulatory (challenges) coming down on me.”

To be sure, in 2015 Wenger said he was forced by the drought and the regulations that came with it to remove 20 acres of aging nut trees, although he did not have to let any of his workers go.

Wenger employs five full-time workers along with himself and his two sons on the farm. “The first people I ever hired were immigrants to this country and they’ve been working for me for so long, they’re family,” he said.

Paul Wenger next to a walnut tree.

Heightened regulations have prompted many farmers to sell their farms, or at least certain acres on their farms to investors including hedge funds, private equity groups and pension funds.

For the three months ended Dec. 31, investors held 233 agricultural properties worth about $3.89 billion in California, a large sum of the total $7.99 billion in agricultural property investors, primarily pension funds, hold nationwide, according to the NCREIF Farmland Index.

For the same period last year, investors held about $3.23 billion in California farmland and $6.72 billion nationwide, the report shows.

Westchester Agriculture Asset Management, UBS Farmland Investors (UBS) , Prudential Agricultural Investments (PRU) and Hancock Agricultural Investment Group (HBHC) are among the major investors as of now, a person who spoke on the condition of anonymity told TheStreet.

“We’ve been investing in farmland for a long, long time,” James McCandless, managing director at UBS Asset Management – Global Real Estate (US – Farmland), told TheStreet.

McCandless said the UBS farmland investment division, holding $1.3 billion in agricultural property in 15 states, was established in 1983. Currently the firm holds 21 properties in California.

From an investment standpoint, California is an attractive place to invest in farmland because it offers a wide array of crops from cotton to oranges, creating a diverse portfolio, McCandless said.

McCandless said that because the firm buys acres of land then leases them out to farmers, he relies on the expertise of the people operating the land UBS acquires. He said UBS is confident in the expertise of California farmers.

Wenger’s view is that investors don’t know how to run farms in California, especially since most are headquartered on the opposite side of the country.

“Family farmers have to defend a lot of what we do,” he said. “People say, why are you planting trees on a hillside. Well it’s not a farmer doing that, it’s an investor doing it.”

A 2014 Oakland Institute report said that from 2000 to 2011, 500 million acres of farmland worldwide was bought or leased by investors, more than eight times the size of Britain, and from 2003 to 2013 the price of land increased 213%.

“When the price of food spiked in 2008, pushing the number of hungry people in the world to over 1 billion, the interest of investors spiked as well,” the Oakland Institute report said, predicting that over the next 20 years, another 400 million acres of farmland would likely be sold to investors.

On average, an acre of open land, which can be used to grow tomatoes or cotton, in California is worth between $9,000 to $12,000, while an acre of nut trees can be valued from $30,000 to $35,000, UBS’s McCandless said, although these prices vary depending on how productive the land is and how much water it has access to.

“There became a world rush for the things we grow here in California,” Wenger said. “Agriculture is still pretty much family-oriented but it’s going to become just like the mom-and-pop shops,” which have largely disappeared in the face of competition from giant corporations.

Wenger said agriculture is still independent but that “independent fabric is being ripped apart.”

His grandfather bought his farm in 1910. Since then, Wenger and his family has mainly relied on natural precipitation, rain and snow, and the Don Pedro Reservoir on the Tuolumne River. But recently, due to push back from environmentalists, Wenger was reduced to using just six acre-inches a year for irrigation from the reservoir, under State Water Control Board regulations, which were refined in May of 2015.

Wenger needs about 30 acre-inches a year to water his crops. Since there was no rain, he said he was forced to buy two wells for $500,000. And due to the demand for drilling wells – since that was the only viable option for farmers in need of water – it took almost 16 months for a service provider to get to Wenger’s farm. By that time, he said the rain had come and he never used them.

Water rights have divided the State of California for decades as residents argue over which region is entitled to what water source. But since the 1960s, environmentalist groups have added to the feud by taking the view that water should be restricted for farmers and instead conserved for natural preservation.

Wenger said he and his fellow farmers are subjected to a host of new regulations in California, which keep them behind computers most to file costly and time-consuming reports that equate to tax returns. For example, by 2023, the California Environmental Protection Agency will force every heavy-duty diesel truck to have a 2010 model year engine or newer to reduce its carbon footprint.

Wenger said he will have to get rid of a perfectly-in-tune truck he uses maybe a month out of the year that’s worth $120,000 and sell it for maybe $5,000 to someplace outside the country because it can’t be used here. As he said, whether that truck is being used in California or Mexico, “we’re all breathing the same air.”

Wenger said he understands the importance of passing laws that protect the environment but until the entire world follows suit, it does not do much good.

And while farmers are being blamed for their water footprint, Wenger pointed out that it takes 1,500 gallons of water a day to tend to the crops needed to feed one person who consumes a daily 1,200-calorie diet. He said until people decide they want to go without groceries, he needs to do his job of growing food.

“Everything has a water footprint,” Wenger said. “Everyone takes for granted that the food will be there. We just never had famine here in this country so we’ve never had to go without.”