Pistachio file photo

Turbulence in the agriculture industry has recently led to a shakeup in the Central Valley.

Rising costs, lower commodity prices and capital constraints are challenging the most well-positioned in the industry. Some major players, including those backed by private equity, have folded. Others may be on the lookout for an exit.

On the way out

When it comes to private equity, the biggest cautionary tale came into focus in October, when Fresno-based Prima Wawona filed for bankruptcy protection four years after the merger of Gerawan Farming and Wawona Packing.

Dan Gerawan, former owner the stone-fruit giant, is suing Paine Schwartz, accusing the firm of draining more than $24 million from Prima Wawona before it failed.

In January, Prima Wawona issued layoff warnings for more than 5,290 employees.

More than two dozen grower entities are seeking bankruptcy court approval to purchase more than 13,000 acres of farmland in Fresno and Tulare counties being liquidated by Prima Wawona.

This February, Central Valley almond grower Trinitas Farming LLC filed for Chapter 11 bankruptcy protection with about $188 million in debt.

In 2015, Redwood City private equity firm Trinitas Partners organized to acquire and operate almond ranches in the Central Valley.

Trinitas Farming will sell its 17 almond ranches covering nearly 8,000 acres in Fresno, Tulare, San Joaquin Contra Costa and Solano counties.

This week, the San Joaquin Valley Sun reported that Fresno’s Assemi Group is looking to divest from its farming operations, seeking a buyer for tens of thousands of acres of farmland.

The group is also looking to sell its Touchstone Pistachio Company, a major nut processor owned by the Assemi Group.

A statement at gvwire.com insists the Assemi family is not getting out of farming.

Darius Assemi said they are evaluating and rightsizing their portfolio.

“There are some rumors in the media which are not true. We are not getting out of farming. As an investor and operator, everything we own is for sale at the right price. We are committed to our staff and growers. We are involved in several businesses and this is an attempt to pair down some of them,” Assemi said.

Cash as fertilizer

It may be difficult to grasp how capital intensive farming can be.

For Trinitas Farming to maintain just the farming needs of its nearly 8,000 acres of almond orchards for five weeks, it requires $2.2 million, according to bankruptcy court documents.

Adam Mortanian, co-founder and managing director of farm and ag real estate lender PACT Capital, said it is very difficult for most commodities in California.

Mortanian said lenders don’t like when costs go up and profits go down. They become more apprehensive when lending.

“A lot of farmers have a lot of equity in their land and those farmers are having a more difficult time accessing that equity because they can’t cashflow the repayment of those loans based upon the stand alone farm income today,” Mortanian said.

Private equity firms and institutional investors have been investing in agriculture for decades.

In the last five to 10 years, however, the nature of farming has changed and required a more strategic process, team and operations. Private equity chases paper returns, different than on the ground farming management, Mortanian said.

Mortanian said opportunistic investors will see this as a time to enter for a longer term investment. There has not been a big entrance by investors yet because they are waiting to see what happens to interest rates and commodity prices, Mortanian said.

Interest comes, goes

Private equity in agriculture has historically had its ups and downs, said Fresno County Farm Bureau President Ryan Jacobsen. But in the last 10 years, there was an increase in investment.

One of the major concerns for farmers right now are low commodity prices, with most crops trending downward or at long-term lows. Income is forecast to fall.

The regulatory side of doing business is not only difficult, but also costly. With so many challenges to operate, and lower returns, investors are exiting.

“It’s a brutal time on the farm and now the public is starting to see the ramifications of that,” Jacobsen.

For the significant amount of capital required for a farm, the rate of return is usually lower when compared to other types of industries.

Jacobsen said he doubts that there will be heavy interest from private equity firms to invest in ag in the future. Even though California agriculture is asset rich, it has a poor cashflow, which is less attractive to investors, he added. 

Upside of private equity

Private equity funding can be a positive, said UC Davis Professor of Agriculture and Resource Economics Daniel Sumner.

He said the ag industry has always had capital coming from lots of different sources, with private investment being a convenient way to attract capital as opposed to becoming a publicly held company, which is far more complicated.

The typical situation Sumner said, is that an investor will finance a farm, but not have an active role in managing the farm. Usually someone manages a farm for outside investors.

“An equity investor with any common sense will find somebody who has been a farmer in a local area, and continue to be a farmer in the local area and farm for the investors,” Sumner said.

Local knowledge in the ag industry is much more important than for other types of businesses, said Sumner, where intimate things about the crops, weather, and the soil of local agricultural area play a big role.

Many operations are owned by several family members serving different roles on the farm, and people can make mistakes, Sumner said. However, a private equity firm losing $1 million is a better case than a family member running the farm losing their own money, he added.

Sumner said he has seen cases where private equity investors just don’t understand the variability of agriculture.

While the trends of private equity come and go, there are plenty of investors waiting in the wings.

“Some investors say when you people running out the exit is when you go through the entrance,” Sumner said.