Terra Ag Ventures Closes $22 million in farmland deals in Q1 2022

I'm excited to follow up on last quarters news of Terra Ag Ventures closing $20 million of farmland deals across 1,400 acres with our latest announcement: $22 million in deal flow in Q1 2022 across nearly 1,600 acres. This latest set of deals were across California and Arizona in pistachios, pecans, row crop and almonds. You can find out more about our portfolio by visiting: Terra Ag Portfolio.

During our last announcement, I provided an overview on farmland and an introduction to our mission to provide investors access to sustainable farmland investing. Because some of our deals in Q1 2022 involve developing new orchards on raw land or replacing old trees with newly developed trees, this time around I wanted to give readers an introduction to what it takes to develop an orchard from scratch. Although there are minor differences between planting an almond orchard versus a pecan or pistachio orchard, my focus here will be establishing an almond orchard but this can easily be applied to other orchard types as well.

UC Davis and other universities do a fantastic job providing establishment budgets for new orchard development so new farm owners can get a sense of the budget required to develop an orchard from the ground up. You can find these cost studies by visiting UC Davis Establishment Studies. These studies will provide a sample budget for a hypothetical orchard development through the establishment years and until the orchard begins to breakeven. My goal here is to provide a step by step analysis of developing an almond orchard from scratch. I hope you enjoy.

Step 1: Identify the land and make sure it is suitable

The first step in developing an almond orchard (or pecan or pistachio orchard for that matter) is to identify the land you will utilize for the orchard and to make sure it is suitable for planting. This typically involves testing the soil and water and reviewing climate and weather data to ensure it can support a commercially productive almond orchard. Some of the things to watch for in reviewing the site is salinity in the soil or water, soil ph and the amount of boron or chlorides in the soil or water. Excessive amounts of salinity, boron or chlorides in the soil/water can be very damaging to almond trees. Also, almond trees thrive in soil ph levels of 6.0 to 7.5 and getting above or below that number can usually spell trouble. Sometimes you can mitigate the soil/water by utilizing soil or water amendments such as sulfur, gypsum, lime or acid but this can be costly.

With respect to climate and weather data, almonds thrive in mediterranean climates (hence why they thrive in California's Central Valley). Mild winters and warm summers are required to produce a commercially viable almond crop. Accordingly, if you are in an area that is prone to cold winters (especially around almond bloom time in February) almonds may not be suitable for your specific site. For example, in the Sacramento Valley, where it tends to be cooler in the winter than the San Joaquin Valley, freeze damage to almonds tends to be greater.

As part of your site evaluation process, you also need to identify your water source. Are you in an irrigation district or solely dependent on groundwater from an onsite well? If you are not in a district and don't have a well, can you drill a well at a cost that makes sense for the size of the project? These are important questions because in California supplemental irrigation (i.e. irrigation in addition to natural rainfall) is critical in producing a commercially viable almond crop. And with water availability and regulation getting more difficult, the risk of inadequate water to produce a commercial crop is getting greater.

Once you've determined that your site is suitable for almonds, then the real work begins!

Step 2: Work The Dirt!

Once you've concluded your site is suitable for almond production, you need to determine the type of soil you are dealing with and whether it has any hardpan issues or topographic issues. Almonds usually prefer well drained soils with good water holding capacity. Accordingly, loam or sandy loam soils are preferred. However, successful almond cultivation (especially with modern rootstocks) exists in all types of soils including sand, clay and loam. The best way to determine your soil make up is to dig a pit (about 6-10 feet deep) with a backhoe to determine your soil variability and make up.

If your topsoil is clay but 2 feet down it is sand, then you probably want to mix your soil before planting. You can do this by using a slip plow to rip and work your ground before planting. If the soil is consistent but there is hardpan (rock like material that will prevent almond roots from getting through) then you will need to deep rip the soil (usually at a depth of 5-6 feet) in order to break up the hard pan. Most farmers will usually hire a contractor to perform the dirt work because it is expensive to purchase or lease the machinery required to perform this task. A caterpillar D10 is commonly used to perform this task.

Once you've worked and loosened the dirt with a ripper, you then usually want to disk the ground and float it with a land plane. By doing this, you eliminate any large dirt clots and provide a smooth surface that makes it easier to plant and run machinery over the ground. Usually, the same contractor that performs the ripping work will do the disking and floating work for you. With fuel prices going up to historically high levels, the cost of ground work has also gone up. What would have cost $500-600/acre a year ago, is now costing closer to $700-$900/acre. Accordingly, it is important to determine the most effective way to get your ground ready for irrigation system installation and planting.

Step 3: Water, Water, Water

As I mentioned above, in California supplemental irrigation is critical to grow a commercially viable almond crop. Depending on the type of irrigation system you are utilizing on your farm, mature almonds typically require about 3.5-4.0 acre feet of water per year to produce a sizable crop. To provide some context, one acre foot is the amount of water it takes to submerge an acre of land with one foot of water. Although rain fall helps supplemental this water need, with the ongoing drought in California, most of this water will need to come from an irrigation system installed at the farm.

Once upon a time, when water was cheap and readily available, most farmers would "flood" their fields rather than installing a modern irrigation system. Flood irrigation, although inefficient and not precise, was cheap because it didn't require farmers to install pipes, sprinklers, drip tape, sand media filters, and the like. However, with water efficiency becoming more important and cost skyrocketing, most modern orchards are irrigated using some form of micro irrigation technology.

The most common irrigation system being utilized on almonds today is dual line drip. The irrigation work usually begins once your ground work (i.e. ripping, disking, floating) is completed. However, the planning process usually starts months before with the hiring of an irrigation contractor or firm. The irrigation contractor will analyze your field, how much water is available to the field (either via a district or a well) and then will produce an engineered drawing showing a proposed design for the system. This design usually includes all of the mainlines, sub-mains and laterals required for the system, the flow rates of the drip or other irrigation system as well as any sand media or other filters required for the design.

Once the design is finalized, the irrigation contractor will order the various parts required and bring in the labor to do the installation. Depending on the size of the orchard being developed, this process can take a few weeks to a few months to complete. With micro irrigation such as drip irrigation, the benefit is water conservation. You are applying water only to the root zone of the tree via two drip lines sitting on either side of the tree. With this type of system, 90% of your irrigation water is going to the tree with only 10% being "wasted" due to evaporation or run off. Newer systems are even going so far as to include subsurface drip (i.e. drip tape installed underground) to reduce the 10% loss or eliminate it altogether. An irrigation system is not cheap. You will typically need to budget between $2,000 to $2,500/acre for parts and labor to install a new system. And this number does not include the cost of a new well should your specific property need it.

Lastly, as water conservation and efficient application have become more important, many newly designed orchards will also include soil moisture probes to more accurately measure water depletion and the appropriate timing of your next irrigation.

Step 4: Bring in the trees!!

Historically, most almond trees were sold by nurseries and were grown from seed. These trees were usually planted between the months of January and March when they were dormant (i.e. without leaves or other growth). With the advent of trees grown from tissue culture in a lab (i.e. clones) this has changed. Almond trees can now be planted year round although there are optimal and suboptimal times to plant them (i.e. planting in the middle of summer is usually not a great idea).

Most growers will purchase their almond trees from a commercial nursery. There are at least a dozen such nurseries up and down the Central Valley providing almond trees to growers. The tree selection process is a very important decision because you aren't only deciding which nursery to buy your trees from, but also:

• What variety of trees you want to plant;
• What density you want the planting to be which will dictate how many trees per acre you'll need to purchase; and
• What rootstock you want your trees to have.

With respect to tree variety, the Non-Pareil variety is the most common variety planted in California because it produces a large tasty nut that sells at a premium. However, you can't plant a solid Non-Pareil orchard. You need a pollinator such as a Monterey, Aldridge, Wood Colony, Fritz, etc. Sometimes, farmers will use two pollinators (such as Monterey and Fritz) to increase cross pollination and yield. A growing number of farmers are planting their orchards using self-fertile varieties that need neither bees for pollination or cross-pollinators. The most common such variety is the independence variety. The benefit of planting a self-fertile variety such as independence is you will only have one harvest (i.e. because you have only one variety that matures at the same time, you don't need to harvest at separate times). You also don't need as many bee hives per acre (i.e. most traditional varieties require 2 hives per acre but with self-fertile, you can do as little as 1/2 hive per acre and still get strong production.

Once you've decided on your tree variety, you will also need to determine how many trees/acre (or tree density) you want to plant. Most modern orchards are more dense than orchards that were planted 20+ years ago. This is in part due to increasing land and production costs such that farmers want to maximize each acre planted. The appropriate tree density for your farm depends on a few factors, including: (i) your soil and water; (ii) your rootstock; (iii) your tree variety. Soils that are deep and well drained usually will produce a healthier, more vigorous tree. Hence a lower density per acre is warranted. Heavier soils or marginal soils (i.e. soils that may have salt or other issues) will likely produce a less vigorous tree and therefore a higher density may be justified. Additionally, your soil and water availability and quality will also dictate which rootstock you use. Some rootstocks are more vigorous and thus a lower tree density is probably a smart choice. Others are dwarfing and thus a higher density makes more sense. Lastly, your tree variety is also a factor in your tree density per acre. Some varieties are more vigorous than others. For example, independence is a less vigorous variety as compared to Non-Pareil and often times, farmers will choose a higher density with the independence variety.

The most common density I'm seeing planted in modern orchards is a 21x15 planting or 138 trees per acre. The 21 represents the distance (in feet) between tree rows and the 15 represents the distance (in feet) between trees in each row. Some orchards with great soil and vigorous rootstocks may go with 22x16 (124 trees/acre) and others planting less vigorous varieties or rootstocks may go with 20x12 (182 trees/acre). Two other concerns in choosing your tree density include equipment maneuverability (the tighter the spacing between rows, the harder it is for equipment to get in and out) and whether you go with a square or square offset (diamond) design. Most modern orchards are planted on a diamond pattern to maximize light interception. Additionally, if possible, a north-south planting (as proven by various studies) will give you better light interception and thus yield than an east-west planting.

Rootstock is the other factor to consider when choosing what trees to purchase from a nursery. Rootstock development has come a long way over the last decade. Nurseries now have various rootstocks to choose from including peach/almond hybrid rootstocks and complex peach/plum/almond hybrid rootstocks. Rootstock choice depends on soil type, tree variety type (some rootstocks are not compatible with certain varieties), whether you have pest or other issues (including nematodes in your soil) and water quality among other factors. Your soil and water samples and your Pest Control Advisor will come in handy when choosing the rootstock most suitable for your farm.

In considering tree density, variety and rootstock, cost is also a factor. The cost for trees has only gone up over time as labor and fuel costs have risen. As such, a single almond tree now costs as much as $11.00. Some rootstocks and varieties have royalties because they are patented and thus the cost is even higher. The more dense you plant, the higher your per acre cost. For example, if you are planting 138 trees per acre (21x15) your tree costs will be approximately $1,500/acre. And this doesn't include planting costs which we discuss next.

Step 5: Planting the trees

Once you've chosen your tree variety, rootstock and density, you'll next need to get those trees planted into the ground you previously prepped. This is usually done by a labor crew you pay on an hourly or per/tree basis. Planting usually involves a few different steps including planting the tree, staking the tree and finally, adding a tree protector. When planting, it is important to make sure the tree is not planted to shallow or too deep. You want the tree roots to be covered and you don't want your labor contractor cutting roots off or jamming them into the hole designated for that specific tree.

With respect to tree staking, many parts of the Sacramento and San Joaquin Valleys are quite windy. By staking each tree, you give the tree support during their most vulnerable years to ensure they grow straight and thus are easier to harvest when mature and are less likely to topple over. The decision of staking usually involves (i) where to buy the stakes, (ii) whether to get treated or untreated wood (treated is more expensive but lasts longer) or to go with metal stakes (more expensive but more durable) and (iii) what size of stake to utilize. Although the labor contractor will install the stakes, you still have to purchase them.

Last, but not least, your labor crew will add the tree protectors to the trees. The tree protector is provided by the nursery (at a small cost) and goes around the trunk of the tree (i.e. the rootstock). The purpose of the protector is to "protect" the tree from rodents, sun scalding and insects while it is most vulnerable. The tree protectors and stakes are usually removed within 1-2 years after planting.

With rising labor and fuel costs, the cost per acre for a labor crew to plant trees has also gone up. If you are paying your labor crew on a per/tree basis, you can assume the cost will be about $2.50/tree for them to plant, stake and add the tree protector. So if you're going with 138/trees per acre density, the cost per acre will be $345/acre. And this cost doesn't include the cost of the stakes which is another rising cost. For treated wood stakes that are 2x2x5 in size, you can probably assume a per stake cost of about $1.20/stake or $166/acre. This brings your total cost to plant to approximately $510/acre.

Step 6: Finalizing the budget and costs

If you add the tree cost ($1,500/acre) to the planting cost of $510/acre, you are looking at a total tree + planting cost of $2,010/acre.

Add to that the cost of the irrigation ($2,500/acre) and ground work ($800/acre) and you are looking at a per acre cost of about $5,310 for ground work, irrigation installation, trees and planting costs. This doesn't include any additional work that may be needed such as tree removal (assuming you are redeveloping an existing orchard rather than developing raw land) or fumigation costs (again, if you are redeveloping you need to be weary of nematodes that could impact tree health). Tree removal + fumigation costs will likely add another $2,500 - $3,000 per acre to your budget.

It is important to get multiple bids for each of the above listed items so you can compare costs and make the best choice for your farm. This will also help you better prepare your budget so you can monitor cost savings or overruns more closely or in case you are applying for development financing with a lender who will want to better understand what exactly they are financing. On this latter point, an ag lender or commercial bank may be willing to provide you up to 65% of your development costs in the form of an interest-only loan that would then start amortizing over a 20 or 25 year period once your trees are producing a commercially viable crop. This can help alleviate some of the financial burden on the front end so that you can spread your costs out over time.

Step 7: Final touches!

You've made it to the finish line. You've prepped your ground, you've installed your irrigation system and you've planted your trees. What's next? Before you're on your way to becoming an almond farmer, there are usually some final touches that you will want to implement at your farm.

For example, once your trees are planted, you will want to test your irrigation system and give these newly planted trees some water so that their roots don't dry out. Additionally, if you start seeing weed competition (which is bad for young trees especially) you will want to apply a top kill and possibly even a pre-emergent depending on the time of year. This will help prevent weeds competing with your young trees for water and fertilizer.

Depending on when you plant, you probably also want to give your trees a shot of fertilizer once they are visibly established. This typically occurs 2-6 months after the trees are planted. If your farm is prone to vertebrate issues (i.e. squirrels, gophers etc.) you will also want to bait or trap to avoid these rodents from girdling your trees or eating the roots. These rodents can decimate a young tree pretty quickly. Lastly, once the trees are established and start to push growth, you will want to come back 1-2 times that year to sucker and prune your trees to encourage new growth above the trunk.

Planting an almond orchard (or pistachio or pecan orchard for that matter) is not for the faint of heart. It takes a lot of money, time and attention to detail. But it also can be one of the most rewarding feelings once your orchard is established and you can look back and say "hey, I did that!". Developing an orchard requires team work, performing tasks on time to avoid costly delays and working with various vendors that are critical to your success.

If you are considering planting an orchard or want to learn more, please don't hesitate to reach out to me at [email protected].