Its time for another write up on a rather unusual asset I found interesting - Paramount Farms (largest Pistachio processor in the world). Although privately held, Paramount Farms seems to have solid underlying assets that have the ability to produce consistent cash flows year in year out. Even though yields for major crops have fluctuated wildly over the past 5 years, I found that Paramount’s ownership of its water bank allows it to maintain the level of its yields in dry and wet years alike. In addition, it processes about 20-24% of the worlds pistachio crop which gives it the market power essentially regulate prices. Finally, the value of its waterbank will likely outdo the value of its orchards as it becomes a crucial player in the billion dollar californian private water market.
The full write up is on my website:
www.thisisvalue.net
excellent write up. two questions. why did you do this write up? its interesting and I"m curious to know where you found all your info. i looked on Wikipedia, US accounts for less than 65% of almond production by their FAO stats. second, if you haven’t seen their financials, how do you know how profitable they’re. firms like bunge, ADM, etc have similar characteristics in terms of trading commodities and having industry leading positions in terms of distribution for certain commodities. do you think their financials will proxy paramonts?
This is good. Have to look more into this. I think similar to Burry’s almond orchard buy.
Frank, These were companies I came across at work by pure coincidence. With regards to the production info, I got mine from the USDA which puts their latest estimates for the next crop at 884.5 k tonnes while the world production 1.03m tonnes, so actually about 86% whereas last years crop was around 84%. Here’s the link: http://www.fas.usda.gov/psdonline/ You’re right there aren’t any figures for their profitability. But I used two yardsticks. One was the profitability of another company from California which is a purely almond based business. According to their financial statements their net income margin was 64%. Second, I found pistachio prices that were paid to farmers last year from the USDA. They were paid around $3.7/kg while in retail stores in UK the price of their pistachio products (wonderful pistachios) sell for around $20/kg. To a certain extent I am assuming that along the supply chain, they have a couple of places to make a decent margin. But even if you don’t do the calculations they seem to have a tight grip on the pistachio market which basically allows them to regulate prices to the point of profitability if that’s what they want. Some of the articles I read in Businessweek and The Sacramento Bee indicated that they are using their position and the ownership of their water bank as leverage to negotiate better deals with growers.
Apologies, the other major almond company in California is Blue Diamond Growers.
good research. isn’t blue diamond private?? 65% is extremely high and sounds very interesting.
yeah it is but because they are a cooperative they publish an “Annual Report” with some financials and an just a roundup of the entire business. Check it out if you’re interested http://www.bluediamond.com/documents/Annual_Report_2011.pdf
how does this patron model work? does the COGS include the cost to grow the almonds? looks like they exchange equity in the company for almond production. if so, you have to look at equity earned by the firm itself…i’m unfamiliiar with this model.
I will have to look into the model further but right now what I know is this: California has around 825k acres dedicated to almonds and their latest production figures are around 1.95b pounds which gives it a per acre yield of 2360lb. The almond board estimates per acre costs to be $3900 and Blue Diamond paid its growers around $2.15/lb (5074/acre) which gives the growers a margin of about 30% on average. This leads me to believe that Blue Diamond COGS include a margin over cost of production for the growers. In addition, all remaining profit is paid out to them as well. It seems like money does grow on trees in their case. Also another indication that these farmers are doing extremely well is the steady growth in output - since 2007 production in California has increased 52%. For me paramount is still the better asset because of its water bank.
let me know what else you find out…i think if you consolidated the results of farmers income + profits in partnership, the results will look significantly different…from just the company level at diamond where profits are paid out to farmers, the profits are nice, but not growing on trees
ubermensch (or Frank too) - Check out OSH. Spinoff, think you might like it. Looks like a t ypical Greenblatt play.
Orchard Supply? ok i will take a peak when time is available…