Special Report: Western Drought Watch: What California’s fading cotton crop in favor of almonds reveals about premium farmland and a warming planet
Cotton was big in California by the 1950s. Now the crop’s diminished foothold in the state, on land reeling from the worst drought since the late 1800s, reflects how climate risks are shaping the future of farmland across the globe.
“The Central Valley, historically, has been a place where cotton was quite widely grown,” said Martin Davies, president and chief executive officer at global farmland owner Westchester Group Investment Management, a part of Nuveen.
“But the era of cotton has dimmed,” Davis said, in a phone interview, of California’s agricultural core, a highly irrigated stretch of interior farmland that has been moving away from cotton to growing almonds, table grapes, raisins and other, higher value crops, especially as water shortages grow stark.
The drought-prone Central Valley grows a quarter of the nation’s food on 1% of its farmland, including about 40% of its fruits, nuts and vegetables. But it relies on rivers, reservoirs and still badly depleted underground aquifers, despite recent heavy rains and flooding, to irrigate much of its farmland.
“What you do see are areas where water is migrating to these higher value crops and some land being left fallow, and some land in the Central Valley being used, or set aside, to recharge aquifers,” Davis said.
These graphics show California’s rise as a powerhouse in almond crops (green) in the past decade, while its cotton footprint has fallen.
California has gone big in almond, but reduced its cotton crops in the past decade. Green reflects almond farms, while pink shows cotton crops. Source: Esri, USDA NASS Cropland Data Layers
The value of U.S. land farmed for crops jumped 7.8% this year from a year ago to an average $4,420 per acre, compared with annual gains of roughly 4.5% over the past two decades. Low interest rates, improving commodity prices and broader inflation are factors.
Commodity prices, including for cotton
also soared as extreme heat and drought across much of the U.S. often led to scaled back production.
Higher commodity prices help farmers who’ve been able to reckon with a tough year by growing and harvesting crops that command top dollar. But they also can push up grocery bills and impact what households can afford.
Farmers in California planted only 111,000 acres of cotton this year, a more than 38% decline from the year before, according to the U.S. Department of Agriculture.
“That’s not just happening in the U.S.” said Mark Iong, a senior equity analyst at Homestead Funds, pointing to Brazil, a South America agricultural heavyweight, which has been experiencing its worst drought in about 90 years.
But Iong said the year’s lower crop yields combined with higher commodity prices could be “a blessing in disguise” for some farmers, particularly since the USDA’s latest estimates peg farm incomes as 19.6% higher this year from a year ago at $113 billion, on track for its highest level in seven years.
“As folks look out to the next 20-30 years,” as the world population grows and questions linger about the arability of land as climate disasters potentially accelerate, he expects the U.S. to ramp up efforts to get “the most out of each acre of farmland,” through “less focus on chemicals and more on machinery and precision agriculture,” big data and other new technologies as part of the coming “Fourth Agricultural Revolution.”
Need to Diversify
Institutional investors, including Bill Gates, have been flocking to U.S. farmland for its resilience during downturns and steady historical returns, which the Westchester Group pegged at 9.8% on average from 1970 to 2019.
The Illinois-based asset manager started more than 30 years ago in farmland. It has grown into one of the world’s top asset managers of agricultural land globally, overseeing about 2.2 million acres and nearly $8 billion in farm assets.
To hedge its bets, Davis said climate modeling for crops and regions has been essential, but so has diversification, from investing in California wine grapes in the Napa Valley, Sonoma and Monterey Bay to regional investments in Washington State and Oregon.
“2020 was just an awful year from a wildfire perspective,” he said of blazes that tainted grapes with smoke and destroyed several Napa Valley wineries. “That’s where investments in other crop types comes into play.
Water is Everything
Crops can’t grow without water or farmland.
The world’s arable land grew only 11% in the 30 years since the early 1960s, even as the population roughly doubled to nearly 6 billion, according to the Food and Agriculture Organization of the United Nations. That implies arable land per person fell by 40%.
Increased irrigation of farmland during that stretch also meant much higher crop yields to feed more people. But researchers at the Princeton Environmental Institute last year warned that “several billion acres” of additional irrigated farmland will be needed to feed an estimated global population of 9 billion by 2050, vastly more than scientists has been projecting.
“There is quite a lot at stake here,” said Alexandra Russo, thematic equity and sustainability specialist at Allianz Global Investors, which has a $2 billion water strategy.
“What I think will happen is that the types of crops will shift over time,” Russo said, pointing to estimates where half of global grain production could be at risk by 2050, due to water scarcity.
And if grains come under pressure, so will other forms of food. “Animal-based protein is significantly more water-intensive to produce, given we need to provide a cow with corn. And about 56% of all freshwater in the U.S. is already going to feed livestock,” Russo said.
But for now, profit and consumer tastes often still drive what gets planted or raised on farms.
Acreage devoted to thirsty almond crops in California — where nearly all U.S. production is grown — rose almost 6.5% in 2021 from a year before, according to USDA data.
Although, “due to low water allocations and record high temperatures in June,” the agency said “the crop did not develop as well as expected,” in its latest crop update, which forecast production to fall 10% from its 2020’s record production of 3.12 meat pounds worth about $5.6 billion.
“The types of crops we produce are increasingly going to be at risk,” Russo said. “Of course, that could lead to lower yields and have an impact on our food security as a nation.”