Monthly Archives: January 2015

Housing prices only ever go up and wells never go dry.

Over on Mother Jones, Tom Philpott writes about hedge funds investing in almond orchards.

But massive financial interests—banks, pension funds, investment arms of insurance companies—are moving rapidly into the nut trade. Take TIAA-CREF, a New York-based retirement and investment fund with nearly a half-trillion dollars in total assets under management. The firm, which owns 37,000 acres of California farmland, claims to be one of the globe’s top five almond producers. On its website, TIAA-CREF says its California holdings produce more than 18 million pounds of almonds, or “enough to circle the world more than nine times.” In a report last year, the firm had one word for investors: nuts. It cited the rise of the nut-hungry Asian middle class and a global land base that’s “vanishing” because of urban sprawl, water scarcity, and environmental degradation. Almond orchards, said TIAA-CREF, were an “attractive long-term investment theme” with the potential to combine the steady income of bonds with the growth potential of stocks—a kind of investor’s holy grail.

Then there’s Hancock Agricultural Investment Group, a subsidiary of the sprawling Canadian insurance and financial services giant Manulife Financial. It manages $2.1 billion worth of farmland, mainly for large institutional investors like pension funds. Individuals can buy in—for a minimum investment of $5 million. HAIG owns at least 24,000 acres of almonds, pistachios, and walnuts, making it California’s second-largest nut grower. In a recent report to investors, HAIG reported that its nut holdings delivered more than 30 percent in total return (income from crop sales plus land appreciation) in 2013, far outpacing gains from its other crops like wine grapes, apples, cranberries, corn, and soybeans.

Did you guys read The Big Short, by Michael Lewis? The book is mostly about three characters who foresaw the housing market collapse and shorted it. But he also spends some time discussing why ratings companies missed the enormous risk of total collapse. If you recall, mortgages were bundled into batches and sold in tranches. Rating companies applied historic default rates for mortgages to a tranche to value it. But their models didn’t include the possibility that something could happen that could make every mortgage in the tranche default, rendering the entire package valueless. When the housing market collapsed, it made all the mortgages underwater at once; what made one mortgage valueless to the loan holder made the rest of the mortgages valueless at the same time. Defaults on mortgages were not independent events.

The same is true for these almond portfolios. The event that makes one almond orchard die or become valueless will hit all of the other almond orchards as well. Several readily foreseeable events could cause that: a drought like this year but a couple years longer. A groundwater basin failing (or being adjudicated) would hit every overlying orchard simultaneously. The nice people in Los Angeles and San Francisco could pass an initiative amending the California constitution to say that it isn’t a reasonable use of water to overdraft a basin or drain rivers to provide pleasant snacks for the world. The SWRCB could do that themselves.

When this level of almond production fails, the orchards will die in tandem. If I were a county or the state, I would get some laws on the books now. I would pass the Dead, Abandoned, Blightful, Nuisance Orchard Law, that says that if anyone abandons more than 1,000 acres of orchards in the county, they must pay an extortionate fine in cash money. Dollar dollar bills, y’all. Pass the law now while hedge funds somehow believe that almonds and groundwater are magically immune to climate change and patiently bide your time. The day will come.

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