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 

The graph shows weekly percentage areas in California that have experienced severe or exceptional droughts since 2000, occurring more frequently and for a longer duration in recent years.
Source: U.S. Drought Monitor data, accessed on July 10, 2021.

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 

A graph measures almond yield against almond kernel weight since 2008, demonstrating the limited impacts on almond productivity during the 2014-2016 drought.
Source: USDA National Agricultural Statistics Service California almond objective measurement, July 12, 2021; USDA Economic Research Service, as of July 12, 2021. 2021 yield and kernel weight are estimated by the USDA. The shaded area indicates drought years.

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 

A bar chart shows that almond production level in California has steadily increased since 2008, due to expanded acreages.
Source: USDA National Agricultural Statistics Service California almond objective measurement, July 12, 2021; USDA Economic Research Service, as of July 12, 2021. 2021 production is estimated by the USDA. Red-highlighted bars indicate drought years. Years are marketing years.

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 

A line graph measures California almond price against recent substantial increases in in-place inventories and last year's bumper crop, which has caused a downward correction for prices.
Source: USDA National Agricultural Statistics Service California Almond Objective Measurement, July 12, 2021; USDA Economic Research Service, as of July 12, 2021. Hancock Natural Resource Group (HNRG) research, as of July 12, 2021. Years are marketing years. Stock to use is calculated as the average of beginning and ending stocks divided by the sum of domestic consumption and exports. The MY 2020/2021 stock-to-use ratio is calculated using estimates from the USDA. The MY 2021/2022 projected stock-to-use ratio is represented by the green dotted line segment, calculated using USDA and HNRG projections. The shaded area indicates 2014 to 2016 drought years. 

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. 

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Keith A. Balter

Keith A. Balter, 

Senior Advisor, Strategic Initiatives, Timberland and Agriculture

Manulife Investment Management

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Weiyi Zhang, Ph.D.

Weiyi Zhang, Ph.D., 

Senior Agricultural Economist

Manulife Investment Management

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Jaspreet Aulakh

Jaspreet Aulakh, 

Senior Natural Resource Economist

Manulife Investment Management

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