Asset Management

Almonds: Harvesting value beyond the farm

Heather Davis, Senior Managing Director, Global Private Markets

August 7. 2013

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The world’s population topped 7 billion in 2011 and is expanding by 25 million people per annum1, the equivalent of adding the population of Texas to the planet each year. To meet their basic nutritional needs, food production will have to increase; by some estimates, it will need to double by 2050 from current levels.2

One crop increasingly in demand is almonds. The protein-rich seed, often called a nut, largely is grown in California’s Central Valley. Growers in that area produce all of the U.S. supply and account for about fourth-fifths of the world’s almond output. The California almond industry has seen dramatic growth in recent years, powered by strong demand from middle class consumers in developing markets including India and China. Producers have increased their planted acres, choosing to harvest almonds instead of other crops, and have made key investments to boost productivity. Shipments from California almond producers more than doubled over the past 10 years, garnering almost $4 billion in revenue for the 2011-12 crop year. To put the growth of the almond crop into perspective, in 2011 almonds surpassed the state’s iconic grape industry to become California’s second-biggest agricultural commodity behind dairy.3

The challenge producers face is a scarcity of available land that’s conducive to growing almonds, part of a global trend in which urbanization, water scarcity and environmental factors are pressuring the amount of arable acreage. Nut land — which includes almonds but also pistachios and walnuts — now attracts more money per acre than any other type of parcel in California’s Central Valley.

The opportunity in almond farming

These countervailing factors — surging demand and vanishing land — make the agricultural sector, including almond farms, an attractive long-term investment theme. The conundrum is how to invest in agriculture. Publicly traded securities that are tied to agriculture, such as stocks and bonds and commodities futures, can expose investors to market speculation and swings.

By contrast, direct private market investments in real assets such as agricultural land and related production infrastructure (e.g., crop inputs, processing, storage, etc.) have historically proven more stable — and less subject to volatility — over time.4 Direct investment in farmland and crops also provides a diversification benefit, as it has a low (in some cases negative) correlation with most traditional asset classes, historically rising when stocks or bonds fall. Investments in real assets also tend to move in tandem with inflation.5 Private investments, however, can be illiquid and real assets such as farms are often hard to value, which is why we believe they are appropriate for investors with a long-term investment horizon, which is one that stretches out over decades rather than months or quarters.

But we see agriculture, and farmland in particular, as more than a diversification opportunity and a hedge against rising prices. Based on the supply and demand fundamentals we see potential for these investments to achieve stable bond-like current income and equity-like upside potential for capital appreciation. That is why TIAA-CREF is one the world’s top five almond producers. In 2011, we produced more than 18 million pounds of almonds, enough to circle the world more than nine times or fill the fair territory at Yankee Stadium more than a foot deep.

Owning the process

But growing almonds is just one piece of the equation. TIAA-CREF’s almond investments have helped us identify additional opportunities to add value. In addition to exposure to the underlying almond orchards, we recognized that controlling some of the stages of production, marketing, and delivery — the vertical integration that exists at the intersection of agriculture and infrastructure — would help derive additional value. Not only do we own the farms, we also have a financial interest in the production, marketing, storage, and transportation of almonds. Investing in the different stages of production and delivery has enabled us to adjust products and supply based on changing market needs, providing a value-added strategy that can increase potential income from this attractive sector.

Our relationship with almond processor Treehouse California Almonds is a case in point. Historically, we relied on this company to process our almonds — remove the nut from the hulls and shells, sort them, and process them (e.g., slice, dice, blanch, roast, etc.) — for different buyers. In Japan, for instance, a high-end confectioner wanted only almonds that had been sorted and graded so that they get small, perfect nuts. Other candy makers, which produce almond-studded chocolate bars in bulk, are less choosy about their almonds, and want crushed nuts. In India, many buyers want almonds in the shell so that participants in the country’s employment program can process them by hand. Treehouse focused on meeting those different needs. Our farms would supply the company with almonds, and Treehouse had the equipment and storage facilities to process and sort for quality, size, and weight and then package, store and ship orders to fulfill global customer specifications for the raw commodity.

In 2011 TIAA acquired a minority equity stake in Treehouse in order to capture the attractive risk-adjusted returns generated by the processor, and partner with one of the leading owner-operator management teams in the industry. The investment allowed us to gain a significant stake in the processor and improve the overall almond sector risk-return profile by removing an intermediary that was capturing part of the value that we were creating on our farms. It also allowed us to better coordinate production and processing and thereby improve returns at each stage.

Follow-on opportunities

Very few producers have the opportunity to earn excess yield at the intersection of infrastructure (the property, plant and equipment to process commodities) and the agricultural product. We see attractive opportunities from being strong in both. And there are other, similar possibilities in real asset sectors (see below).

Fruit packaging is another vertical integration opportunity we are evaluating. Fruit producers (apples, citrus, cranberries, etc.) typically hire a packaging concern to sift through their commodity for quality and size control, isolating good and bad pieces of fruit, large and small pieces, before packaging them in boxes and marketing on behalf of the grower. By buying a stake in a fruit packager, a producer can capture a portion of the production and sales profit stream that it would otherwise give away to the third party.

We see similar opportunities to profit from the intersection of energy, infrastructure, and agriculture, such as crops, which can be produced into ethanol and other valuable bio-fuels. While such ventures can require a long-term investment horizon, and significant investment and capabilities (e.g., plants, equipment, knowledge of energy and energy transmission), we believe the potential returns of some of those opportunities are very attractive.

TIAA-CREF’s view: potential for hedging, diversifying and appreciating

At TIAA-CREF, we often talk about the importance of recognizing market trends and themes before others. As important is how we act on those insights. Our investment in almond production illustrates how we follow this approach in our real assets strategies. By investing in farmland and the adjacent businesses that add value to the underlying commodities, such as the production and marketing of almonds, we can maintain exposure to favorable long-term trends and changing customer needs that help us achieve multiple sources of income from agriculture.

Almonds are among several agricultural commodities that we believe offer the potential for strong risk-adjusted returns, an inflation hedge, and improved portfolio diversification. Directly investing in real assets and ancillary businesses aligns with our investment philosophy and the needs of investors who have an investment horizon that stretches out over 20-30 years. This is why in the years ahead, we will continue to pursue more ways to capitalize on the global themes that are driving demand for dwindling resources and seek opportunities to enhance the value of our real assets investments.

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