The California drought and potential implications for almond markets
Droughts are a recurring challenge for California’s agriculture sector, but our experience of the last extended drought, together with current more-than-healthy inventories, suggest that almond demand will likely be met. We discuss the historical resilience of one of California’s most valuable crops, bolstered by the uptake of climate-smart farming practices.
California is currently experiencing a major drought year that represents a significant challenge to its agricultural sector. Almonds are the third-largest crop by value in the state, and California almond production represents nearly 100% of U.S. commercial supply and 80% of global almond production.1 Recent news coverage of the drought has focused on the mismatch between the state’s agricultural water needs and its constrained supply, highlighting the vulnerability and potential market disruptions for key crops, including almonds. In this brief report, we show the historical performance of almond production, inventories, and prices during the last major drought in 2014 to 2016 to demonstrate the resilience of California’s almond industry in the face of significant drought-related challenges.
Droughts are a recurring phenomenon in the state of California, with two major occurrences over the past decade, from 2014 to 2016, and the current drought.2 Prior to the 2014 to 2016 drought, extreme droughts since 2000 were infrequent and contained to a limited area. From 2014 to 2016, however, over 70% of California experienced extreme droughts for 118 consecutive weeks.3 Modern farming practices in California recognize these periodic challenging climate conditions and are learning to adjust and adapt to these challenges. The performance of California almond producers in the last extended drought illustrates their resiliency in the face of climatic hurdles.
Droughts have become more frequent, widespread, and longer lasting over the past decade in California
Weekly percentage area in California under severe or exceptional droughts since 2000
Almond productivity experienced limited impacts from the 2014 to 2016 drought. From 2014 to 2016, almond yield averaged 2,072 pounds per acre (lbs/acre), just 7% lower than the five-year average yield of 2,227 lbs/acre experienced from 2009 to 2013.4 Meanwhile, the average kernel weight for California almonds slipped 5% to 1.45 grams from an average of 1.53 grams in the previous five years (2009 to 2013).5 The impacts of the drought for both these measures were concentrated in 2014, the first year of the drought, after which productivity stabilized and began recovering in the following two years. Therefore, the drought’s impact on almond productivity was minimized, reflecting the application of efficient operations, better genetics, and overall area expansion under the crop.
Impacts on almond productivity were limited during the last drought (2014–2016)
Almond yield (1,000 lbs/acre) and kernel weight (grams) during 2008–2021
Global almond supplies during the 2014 to 2016 drought were supported by the continued production expansion in California. While the market experienced a modest decline in production in 2014, production volume quickly recovered in 2015 and reached the then-highest crop size in 2016, backed by expanding bearing acreages (acreage mature enough to produce crops). Even with this year’s drought conditions, the impact on supplies for the marketing year (MY) 2021/2022 is expected to be partially offset by the steady increases in California almond acreage. The USDA’s most recent forecast for MY 2021/2022, which had been adjusted lower to account for this year’s severe drought conditions, still estimates California almond production to be the second highest in history. The projected resilience in almond production in the face of the current weather challenge recognizes the ability of almond growers to adopt climate-smart agriculture practices in anticipation of more limited water availability and the requirement to comply with the Sustainable Groundwater Management Act.
Almond production level during drought years stabilized by expanding acreages
California almond production (million pounds) and bearing acreage (1,000 acres) from 2008–2021
Drought this year is unlikely to strain almond supplies. Any shortfalls in supply this year will likely be buffered by sizable inventories resulting from last year’s bumper crop. Ending stocks from MY 2020/2021 are estimated to exceed 710 million pounds (lbs), more than double the 10-year average inventory level.6 The substantial in-place inventories should dampen price fluctuations triggered by drought‑induced supply shortfalls.
Almond prices went through downward corrections since the 2014 peak as inventories remain high
California almond stock-to-use ratio (percentage points) and nominal price (US$/lbs) during 2000/2021
Illustrating the relationship between market inventories and prices, the price of almonds has shown significant volatility over the past two decades, reaching a peak of $4/lbs in 2014 and dropping to a cyclical low of $1.8/lbs in 2020.7 The impact of the past drought on almond prices was therefore transitory.
Although almond prices reached their all-time high in the first year of the last drought (2014), this was more likely due to the continuation of the steady upward trend in almond prices sustained since 2009, when drought conditions weren't a concern. Even though severe drought conditions extended into 2015, almond prices started a multi-year downward correction as the supply expansion outpaced demand growth. In the upcoming MY 2021/2022, the forecasted production shortfall is expected to be partially offset by the historically high carry-in stocks, moderating supply risks but allowing for some limited uplift for the currently depressed prices.
Outlook for the future
Although the drought conditions in California are injecting a significant dose of uncertainty into the short-term outlook for almond markets, the historical experience of the last extended drought and the current more-than-healthy inventories would suggest that demand will likely be met. The return of drought conditions has sensitized the marketplace and accelerated several trends that were already in place, including the expedited retirement of almond orchards with low productivity and high-water scarcity, and the siting of new almond acreage in more water-secure locations. These drought-triggered market dynamics should partially balance supply and demand and help support California’s dominant position in global almond markets.
1 USDA Economic Research Services (ERS), December 2020. 2 Extreme droughts refer to D3-severe and D4-exceptional categories, as defined by the U.S. Drought Monitor. 3 University of Nebraska-Lincoln, U.S. Drought Monitor, July 12, 2021. 4 USDA ERS, Fruit and Tree Nuts Yearbook tables, October 29, 2020. 5 USDA National Agricultural Statistics Service (NASS), California almond objective measurement reports, July 12, 2021. 6 USDA Foreign Agricultural Service, Production, Supply and Distribution, July 12, 2021. 7 USDA NASS, Quick Stats Database, July 12, 2021.
A widespread health crisis such as a global pandemic could cause substantial market volatility, exchange-trading suspensions and closures, and affect portfolio performance. For example, the novel coronavirus disease (COVID-19) has resulted in significant disruptions to global business activity. The impact of a health crisis and other epidemics and pandemics that may arise in the future could affect the global economy in ways that cannot necessarily be foreseen at the present time. A health crisis may exacerbate other preexisting political, social, and economic risks. Any such impact could adversely affect the portfolio’s performance, resulting in losses to your investment.
Investing involves risks, including the potential loss of principal. Financial markets are volatile and can fluctuate significantly in response to company, industry, political, regulatory, market, or economic developments. These risks are magnified for investments made in emerging markets. Currency risk is the risk that fluctuations in exchange rates may adversely affect the value of a portfolio’s investments.
The information provided does not take into account the suitability, investment objectives, financial situation, or particular needs of any specific person. You should consider the suitability of any type of investment for your circumstances and, if necessary, seek professional advice.
This material is intended for the exclusive use of recipients in jurisdictions who are allowed to receive the material under their applicable law. The opinions expressed are those of the author(s) and are subject to change without notice. Our investment teams may hold different views and make different investment decisions. These opinions may not necessarily reflect the views of Manulife Investment Management or its affiliates. The information and/or analysis contained in this material has been compiled or arrived at from sources believed to be reliable, but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness, or completeness and does not accept liability for any loss arising from the use of the information and/or analysis contained. The information in this material may contain projections or other forward-looking statements regarding future events, targets, management discipline, or other expectations, and is only current as of the date indicated. The information in this document, including statements concerning financial market trends, are based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. Manulife Investment Management disclaims any responsibility to update such information.
Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained here. All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their particular situation. Neither Manulife, Manulife Investment Management, nor any of their affiliates or representatives is providing tax, investment or legal advice. This material was prepared solely for informational purposes, does not constitute a recommendation, professional advice, an offer or an invitation by or on behalf of Manulife Investment Management to any person to buy or sell any security or adopt any investment strategy, and is no indication of trading intent in any fund or account managed by Manulife Investment Management. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Diversification or asset allocation does not guarantee a profit or protect against the risk of loss in any market. Unless otherwise specified, all data is sourced from Manulife Investment Management. Past performance does not guarantee future results.
Manulife Investment Management
Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. We draw on more than a century of financial stewardship to partner with clients across our institutional, retail, and retirement businesses globally. Our specialist approach to money management includes the highly differentiated strategies of our fixed-income, specialized equity, multi-asset solutions, and private markets teams—along with access to specialized, unaffiliated asset managers from around the world through our multimanager model.
This material has not been reviewed by, iand s not registered with, any securities or other regulatory authority, and may, where appropriate, be distributed by the following Manulife entities in their respective jurisdictions. Additional information about Manulife Investment Management may be found at manulifeim.com/institutional.
Australia: Hancock Natural Resource Group Australasia Pty Limited., Manulife Investment Management (Hong Kong) Limited. Brazil: Hancock Asset Management Brasil Ltda. Canada: Manulife Investment Management Limited, Manulife Investment Management Distributors Inc., Manulife Investment Management (North America) Limited, Manulife Investment Management Private Markets (Canada) Corp. China: Manulife Overseas Investment Fund Management (Shanghai) Limited Company. European Economic Area Manulife Investment Management (Ireland) Ltd. which is authorised and regulated by the Central Bank of Ireland Hong Kong: Manulife Investment Management (Hong Kong) Limited. Indonesia: PT Manulife Aset Manajemen Indonesia. Japan: Manulife Investment Management (Japan) Limited. Malaysia: Manulife Investment Management (M) Berhad 200801033087 (834424-U) Philippines: Manulife Investment Management and Trust Corporation. Singapore: Manulife Investment Management (Singapore) Pte. Ltd. (Company Registration No. 200709952G) South Korea: Manulife Investment Management (Hong Kong) Limited. Switzerland: Manulife IM (Switzerland) LLC. Taiwan: Manulife Investment Management (Taiwan) Co. Ltd. United Kingdom: Manulife Investment Management (Europe) Ltd. which is authorised and regulated by the Financial Conduct Authority United States: John Hancock Investment Management LLC, Manulife Investment Management (US) LLC, Manulife Investment Management Private Markets (US) LLC and Hancock Natural Resource Group, Inc. Vietnam: Manulife Investment Fund Management (Vietnam) Company Limited.
Manulife, Manulife Investment Management, Stylized M Design, and Manulife Investment Management & Stylized M Design are trademarks of The Manufacturers Life Insurance Company and are used by it, and by its affiliates under license.