Climate Change – A Tough Nut to Crack

Is your favorite snack doing more harm than good? How does climate change impact almond production? Is almond farming fueling environmental degradation?

Exhibit 1: United States Department of Agriculture, National Agricultural Statistics Service

Almond production in California, where 80% of the world’s almonds are grown, is at an all-time high [1]. Almonds are specialty crops earning high returns for producers and institutional investors alike [2, 3]. The almond industry contributes heavily to the state’s economy; at $5.1B in 2015, almonds are California’s top export by value [5]. Since 2010, California has experienced an extended drought which has impacted agricultural production and the industry at large. News outlets even reported that “almonds are sucking California dry,” a reference to the amount of water needed for almond farming [4].

Famoso Nut Company is an almond processing and sales company based in Kern County, California, the largest almond-producing county in the state. Famoso works directly with growers, runs a processing plant for hulling and shelling, and sells almond products and byproducts.

Survival of the hardiest almonds

Most varieties of almonds require a specific climate to grow – cold winters, wet springs, and dry summers for harvest. Weather pattern shifts (i.e. summer rains, warmer winters) threaten the ideal growing environment in Central California which puts Famoso’s key business input at risk [6].

Changing weather patterns in the years to come may be manageable for Famoso even as it impacts growers’ total yield. Like grapes produced for wine, not all almonds have the same temperature requirements [7]. In the future, different types of almonds may be more competitive in the region. It is in Famoso’s best interest to proactively work with researchers and growers to closely monitor weather changes and plant accordingly to optimize yields. A “wait and see” approach may otherwise result in low yields which would impact the entire value chain.

Longer term, if almond trees require relocation to higher latitudes in response to warming temperatures [8], Famoso will have to build strong relationships with growers (who enjoy being able to come to the plant and check on their products) so that the processing plant can serve a larger radius. While transportation and related labor costs may increase from the field to the plant, ultimately, almonds and byproducts from hulling and shelling move south to ports and other buyers, so total transportation costs should not increase drastically [6].

What to do about water?

Exhibit 2: State of California Department of Water Resources, 2014 (click to enlarge)

In California, the majority of water is stored in the form of snow in the Sierras. As winter fades, this snowpack melts and replenishes a network of dams and reservoirs (surface water). In recent years, warmer temperatures mean that most water has come in the form of rain and the snowpack is melting earlier and more quickly. Additionally, the state has seen less overall precipitation due to bad droughts [9].

When surface water is not available, growers pump water from underground aquifers. Property owners currently have rights to underground water sources and can drill wells to pump as much water as they’d like. This is leading to subsidence – as groundwater is depleted, the land above it collapses because nothing is holding it up. This damage is irreversible and permanently diminishes both water storage capacity and agricultural land in the region. Water districts are currently working with landowners to encourage the community to self-regulate its water usage. To support these efforts, Famoso funded research that resulted in a map which highlighted the best soil types for percolation and shared it with districts and growers. That way, they can most efficiently set aside acreage to flood, which allows water to seep back through the soil and recharge underground water sources [6, 10].

Without the right incentives, actors may act in their own interest which can lead to irreparable harm for the industry. As a key player in the production value chain, Famoso should work to educate growers and local regulators to influence regulation that can serve as guardrails to protect the longevity of the land.

Additionally, Famoso should encourage its growers to invest in new irrigation methodology and technology (i.e. sensors). By helping growers understand the payoffs of this large capital investment and even going so far as offering to loan money for improvement projects directly, Famoso could solidify its supplier relationships and also reduce climate change’s impact on its business.

Additional questions for consideration:

  1. For every 1°C increase in average temperature, California risks losing $26B or 1% of GDP [11]. Given the risks associated with depleting water sources, what should the following stakeholders do to address this challenge?
  • Public institutions
  • Private companies
  • Industry associations
  • Scientific community
  1. Almond prices remain high, so acreage is increasing as growers chase financial return. Who within the value chain bears the most risk when almond production exceeds global demand and prices fall? On the other hand, risk of water depletion would limit production and therefore increase pricing. There will be winners and losers in both scenarios; who bears the cost [12]?

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[1] “2017 California Almond Forecast,” United States Department of Agriculture, National Agricultural Statistics Service, May 10 2017, https://www.nass.usda.gov/Statistics_by_State/California/Publications/Fruits_and_Nuts/2017/201705almpd.pdf, accessed November 2017.

[2] “Barbarians at the farm gate,” The Economist, December 30, 2014, https://www.economist.com/news/finance-and-economics/21637379-hardy-investors-are-seeking-way-grow-their-money-barbarians-farm-gate, accessed November 2017.

[3] Davis, Heather. “Almonds: Harvesting value beyond the farm,” TIAA.org, August 7, 2013, https://www.tiaa.org/public/assetmanagement/insights/commentary-perspectives/perspectives/almonds-harvesting-value, accessed November 2017.

[4] Willis, David. “How almonds are sucking California dry,” BBC.com, November 16, 2014, http://www.bbc.com/news/magazine-30052290, accessed November 2017.

[5] “California Agricultural Statistics Review, 2015-2016,” California Department of Food and Agriculture,  https://www.nass.usda.gov/Statistics_by_State/California/Publications/California_Ag_Statistics/Reports/2015cas-all.pdf, accessed November 2017.

[6] Bruce Beretta (Famoso Nut Company), interview by author, phone, November 13, 2017.

[7] Bland, Alastair. “With Warming Climes, How Long Will A Bordeaux Be A Bordeaux?” NPR.org, May 8, 2013, https://www.npr.org/sections/thesalt/2013/05/06/181684846/with-warming-climes-how-long-will-a-bordeaux-be-a-bordeaux, accessed November 2017.

[8] Hannah, Lee, et al. “Climate change, wine, and conservation,” Proceedings of the National Academy of Sciences of the United States of America, 2013 110 (17) 6907-6912; published ahead of print April 8, 2013, doi:10.1073/pnas.1210127110, accessed November 2017.

[9] Waymouth, Belinda. “Climate change puts California’s snowpack in jeopardy in future droughts,” UCLA Newsroom, March 9, 2017, http://newsroom.ucla.edu/releases/climate-change-puts-california-s-snowpack-under-the-weather, accessed November 2017.

[10] Charles, Dan. “As Rains Soak California, Farmers Test How To Store Water Underground,” NPR.org, January 12, 2017, https://www.npr.org/sections/thesalt/2017/01/12/509179190/as-rains-soak-california-farmers-test-how-to-store-water-underground, accessed November 2017.

[11] Hsiang, Solomon, et al. “Estimating economic damage from climate change in the United States,” Science, June 30, 2017, pp. 1362-1369.

[12] Swegal, Hayden. “The rise and fall of almond prices: Asia, drought, and consumer preference,” Beyond the Numbers: Global Economy, vol. 6, no. 12 (U.S. Bureau of Labor Statistics, October 2017), https://www.bls.gov/opub/btn/volume-6/the-rise-and-fall-of-almond-prices-asia-drought-and-consumer-preference.htm, accessed November 2017.

[Exhibit 1] “2017 California Almond Forecast,” United States Department of Agriculture, National Agricultural Statistics Service, May 10 2017, https://www.nass.usda.gov/Statistics_by_State/California/Publications/Fruits_and_Nuts/2017/201705almpd.pdf, accessed November 2017.

[Exhibit 2] “Summary of Recent, Historical, and Estimated Potential for Future Land Subsidence in California,” State of California Department of Water Resources, 2014, http://www.water.ca.gov/groundwater/docs/Summary_of_Recent_Historical_Potential_Subsidence_in_CA_Final_with_Appendix.pdf, accessed November 2017.

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6 thoughts on “Climate Change – A Tough Nut to Crack

  1. It is very interesting to see Famoso demonstrating its social responsibility by funding researches. It reminds me of IKEA who is also extremely socially / environmentally responsible in its wood supply. I think the author’s recommendation is similar to what IKEA did in reality, which is reinforcing a long-term approach to sourcing by imposing strict rules on every step of the value chain.

  2. Interesting. An alternative view is that recent studies have shed light on an important benefit to keeping those one-million-plus acres of California almond crops alive: carbon sequestration.

    Almonds, along with other perennial crops, suck up CO2 and keep it in the soil. Since perennial crops stay in the ground all year long, they help keep carbon locked inside of the soil instead of released back into the atmosphere. According to an analysis of the carbon life cycle in the almond industry, well-managed almond crops can potentially capture and sequester more carbon than they emit—around 38% more, if all the hulls, shells, and other biomass produced by nut farming were burned as a renewable fuel source.

  3. One area kind of caught my eye with regards to monitoring weather and planning for the future. Your second question about water depletion limiting production seems counter to the realities of California. They were in a prolonged 10 year drought but almond production is at an all time high. And then 2016 was one of the biggest years on record with regards to annual rainfall and the empty lakes and reservoirs started filling up to capacity. I don’t know that anyone expected 2016 to be such a huge year in terms of rain. Also, the Rocky Mountains had incredible amounts of snow and as such the Colorado River has been flowing high now for quite a while, California gets quite a bit of water from that river. I wonder how an industry, such as the Almond industry, can really prepare for any long term effects from weather, increasing and decreasing water supplies and if it really matters for almonds. And with Climate Change rhetoric going from the “Upcoming Ice Age” that was professed in the 70’s to Global Warming will kill us all in the 2000’s, what is a company supposed to do in terms strategy. Global average temperatures have risen less that 1 degree Celsius in the past 30 years. Is that enough to drive a strategy, and has it really mattered to the almond industry?

  4. I think the biggest burden for change sits with government institutions and large private corporations. As Cissy mentioned, the industry does not seem to be feeling the pains of the drought they are causing. With this, growers are not incentivized to change as their near-term prospects are not put in jeopardy. To make the change required, the government either needs to set regulations as they likely have the biggest incentive to reduce the economic impact of rising temperatures. By setting certain standards for water retention or use, the government could force organizations like Famoso to make more significant investments in curbing the effect of their operations. Otherwise, unless Famoso begins to see that the demand cannot be met by the current grower’s supply, which does not seem to be evident, they will likely not make the investments required.

  5. I agree that Famoso should work with growers, policy makers, and regulators to protect the land and their yields. They should also consider other locations conducive to almond trees (http://www.worldatlas.com/articles/top-almond-producing-countries.html) to diversify their production risks. As Fomoso expands operations, they can request government subsidies from new growth regions, lower their production costs, and make a hedge against draughts, fires, and climate change in California.

  6. I agree with Thomas that the government institutions should lead the initiatives here. A few examples of regulatory initiatives come to my mind. First, when I worked at the World Bank IFC investing in real estate projects, we closely assessed whether they were environmentally sustainable or not, and we looked at whether they were LEED-certified.[1]. LEED is a U.S and global sustainability standard in the real estate industry and the certification incentivizes companies to adopt higher standards.[2] I’m not sure if agriculture industry has a similar standard in place, but if not, either the government or a non-profit consortium can establish a sustainability standard that applies to the farms in California. The government can reward the certified farms through tax break or subsidy.

    Another example is the Community Reinvestment Act by the U.S government, where the government incentives major banks to invest in under-developed urban areas. Goldman Sachs, for example, actively invests in the properties in the inner cities through its Urban Investment Group; in return, the government loosens certain asset requirements for Goldman Sachs so that the bank can boost its profitability. Likewise, I’m wondering if the government can incentivize the finance industry to actively invest in the areas vulnerable to climate change so that the adverse impact of climate change can be mitigated.

    [1] https://42floors.com/edu/beyond-the-basics/what-is-a-leed-certification-and-how-do-you-get-leed-certified
    [2] http://www.reoptimizer.com/real-estate-optimization-blog/real-estate-optimization-blog/bid/183374/5-ways-an-leed-certification-can-benefit-your-commercial-real-estate

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