September 2, 2014

At the Global Ag Conference in New York this year, the CEO of TerViva Inc, Naveen Sikka, was asked to speak for a few minutes about his company.  He began by asking the audience, “How many here would believe me if I said there was a new crop that could produce 6x more oil per acre than what soybeans produce?” A few hands went up.  “How many here would believe me if I said there were tens of thousands of acres with irrigation all set up to grow this crop, but were sitting idle?”  No hands went up.

The new crop he was referring to was an oilseed tree called pongamia. And the tens of thousands of acres he was referring to were the abandoned (and dying) citrus acreage in Florida that have been suffering under multiple diseases, the worst being HLB – also known as citrus greening. 

Back in 2009, Naveen called me at my farmland real estate practice looking for suitable land for this crazy tree I never heard of.  The more I learned about this tree, as we drove hundreds of Gulf Coast miles together, the more I realized this was really a twist on the passive buy-and-hold models farmland investment models.  This model was to proactively drive farmland returns by establishing a high-value crop on relatively low-value land.  Could this be one of the biggest undiscovered agricultural opportunities in the US at a time when traditional crop prices are cycling back to multi-year lows?

Pongamia           

Pongamia is an oilseed tree that is native to Australia and India.  It is adapted to tropical and subtropical climates. In the US, pongamia was introduced back in the 1920’s when it was planted as an ornamental.  Many mature trees can be observed in southern Florida on both coasts along freeways, in neighborhoods, and in state parks and shopping centers. 

Conceptually, growing pongamia is like growing soybeans on trees.  It yields a generous harvest of nuts whose seed properties are similar to soybeans.  The single seed inside the pod looks like a large lima bean.  The tree has a high tolerance to salt and its cold tolerance is similar to citrus, so it is geographically suited to the same sites where citrus grows – generally growing zones 9b and warmer. 

What’s the advantage for pongamia over soybeans?  Pongamia’s per acre yields of oil are 6x greater than that of soybeans on prime Iowa farmland, plus it can grow on a footprint where soybeans generally cannot.

One of the first things growers notice about this tree crop is that it drops right in to the existing citrus field architecture.  Some growers have literally planted it between the old citrus stumps.

Pongamia is very much like any orchard tree crop.  The tree must first get established. It will begin to flower around year 3-4, and it becomes commercially harvestable around year 4-5 and has a productive life of over 50 years.

There is also a strong ecological theme with pongamia. It is a legume (like soybeans) so it fixes nitrogen in the soil and enriches it.  To date, no pesticides have been used- or needed – in any geography TerViva has planted – Florida, Texas, or Hawaii.  Insects, livestock, and deer really do not care for the leaves.

Harvesting – Processing – End Markets         

• Harvesting can be mechanically done with a nut tree shaker. This is how pecans, almonds, pistachios and other nuts are harvested. Mechanical shakers also minimize the cost and the burdensome challenges of dealing with manual migrant labor necessary for most orchard crops.  
• Processing after the harvest is all low-tech and low CAPEX; the seeds are shelled with a peanut sheller, and then crushed with a soybean crusher. 
• The end markets are a separate discussion, and that’s where this gets interesting.  Like soy, there are two end markets for pongamia:  the oil and the seedcake.

Processing                                                                                                                                                                        

Once mechanically harvested, all that remains is to shell the pods and just like soybeans, crush the seeds into oil and seedcake. A facility for shelling and crushing is not a large capital expense; perhaps $1MM-$2MM would suffice for a crushing facility that could service about a 75-mile radius.  Several economic development entities have indicated that there are federal and state economic development funds for projects that can spur growth and create jobs in rural communities. 

End Markets                                                                                                                                                 

Chemically, pongamia oil is practically a first cousin to soybean oil, but it has some bitter flavenoids, so it is not edible.  Its utility is for broad industrial applications that currently utilize soybean oil and palm oil. Industry loves soy and palm oil because these seeds contain rich long-chain carbon compounds, which are high in energy content and can be separated into compounds such as oleic acid, palmitic acid, linoleic acid and others.  These plant-based compounds are used in soaps, detergents, lubricants, cosmetics (like Oil of Olay), surfactants, inks, paint binders, and even plastics.  In fact, a whopping 60% of the pongamia oil is oleic acid, compared to soybean with 24%.  Oleic acid is so valued that Monsanto has created a new GM version of soybeans called Vistive, just to increase the oleic acid content. 

Pongamia oil also has known biopesticidal properties. A recent study found it to be more effective than DDT.   There is a body of literature on the use of a 50/50 mix of neem oil and pongamia oil as an exceptionally effective biopesticide.  Early evidence also has shown pongamia oil could be an effective substitute for “435 mineral oil” that growers mix with many of their crop sprays and are paying about $4.50/gallon.  The market size for horticultural oils is quite impressive.

As a jet fuel, the Department of Defense and the airline industry have a strong interest in fuel refined from plant oils called biojet fuel.  Here’s why: It is 7% lighter than conventional jet fuel so a plane can fly farther or carry larger payloads.  But most importantly, it burns considerably cooler than fossil-based jet fuel, which means longer engine life between scheduled overhauls and lower maintenance costs.

These downstream markets (mentioned above) are fun to talk about and are very high added-value markets. However, the deepest market and most readily available – and quite profitable market – is to simply refine the oil into diesel.  This is the base case.

Growers can produce oil for about $1.60/gallon.  There is broad demand for good virgin oils from biodiesel refiners that generally pay in the vicinity of about $3.50/gal.  When that long-chain carbon compound in the oil is combusted, it releases a lot of energy.  (Ethanol is only a C 6:1 compound that releases much less energy when combusted.  This is why it is such a poor fuel for performance and mileage.) Currently, about 80% of biodiesel in the US is produced from soy oil.  No matter what you think about renewable fuels, they are going to be around for a long time.  Both political parties express favor for them. Additionally, most countries around the planet have aggressive mandates for renewable fuels. 

The remaining seedcake (after the oil is crushed) can be used as a high protein animal feed. It has about a 27% protein content which is quite high.  TerViva is currently conducting tests with Texas A&M of the seedcake as an animal feed.  So far, Phase 1 livestock feed tests have been quite positive, and Phase 2 testing is now underway.  The next step is submitting the results for regulatory approval.  Most plant-based proteins are interchangeable commodities.  Livestock and poultry feeders are always in the hunt for the lowest price protein to blend in their feeds. 

Separately, the seedcake can also be used as a high-nitrogen (4%N) organic fertilizer.  Nitrogen has become a very expensive crop input in recent years.  Additionally, as a fertilizer, it is also reported to have great nematocidal and slow nitrification properties in the soil, which may be helpful in addressing the aggressive growth in consumer demand for organic foods that has caught many off guard.

Expected Returns                               

Establishment costs per acre are close to citrus – about $2000-$3000/acre and annual input costs are a fraction of citrus, amounting to primarily weed maintenance.  With relatively conservative assumptions, TerViva estimates that the trees should yield about 400 gallons of oil and 2.25 tons of seedcake per acre.  Assuming the base case of selling the oil as biodiesel to refiners, that translates into >20% 8-year IRR or a per acre net return of about $800-$1200/acre.

Florida – the home of possibly one of the greatest agricultural disasters on earth

Few people outside of the state of Florida realize that, according to some industry observers, the 150 year old citrus industry could be on the brink of collapse in as little as two years.  The cause is a pinhead-sized insect that transmits a bacterial infection called Huanglongbing (HLB) to citrus trees and slowly chokes off the flow of water and nutrients from the roots to the leaves.  Not only have scientists been unable to come up with a viable cure, they haven’t even been able to culture it in the lab. 

Citrus contributes $9 billion in revenues to the state and employs 76,000 people.  Ten years ago, in its heyday, the state produced about 240 million boxes of fruit. As of the most recent USDA crop report, that number has declined to as low as 104 million boxes.  That rate of decline is not linear it is accelerating.  Estimates are that as production declines to 80 million boxes, most of the remaining processing plants will begin to shut down.  After that, citrus in Florida could remain only as a niche crop. 

The nastiest part of HLB is that infected trees can take years before the first symptoms appear, but by then the tree has already lost a great part of its root mass. The best strategy growers have is to just keep the progress of the disease at bay by feeding it repeated heavy doses of pesticides and fertilizers.  It used to cost growers close to $500 per acre for these sprays.  Today, those costs are exceeding $2000/acre!  These high costs with declining yields are squeezing the life out of the growers’ profit margins.  And it’s not doing much to help the long-term health of the soils, either.  Imagine if an incurable disease wiped out corn and soybeans in Illinois and you’ll get an idea of the magnitude of the impact to the state. 

The Challenge of Identifying Alternative Crops     

Citrus groves that once sold for as high as $14,000 per acre now sit barren and weed-infested. They sell for close to $3,000-$4,000 per acre. Not only have millions of dollars of landowners’ wealth evaporated, but also have the state’s tax revenues.

Some growers are replacing their lost citrus by planting peaches and blueberries. However, those crops are expensive, labor intensive, and can have considerable price competition from other states when their harvests come to market.  Planting only a few thousand acres of these specialty crops could swamp the marketplace with over-supply and crush prices.

Stated differently, if there was a viable alternative crop to grow, there wouldn’t be over 125,000 acres of abandoned citrus land. 

Arguably, the only agricultural industry with deep enough demand to accommodate the tens of thousands of acres of these former citrus properties coming into production is the oilseed industry where the worldwide market demand for oil and protein is huge and growing. Currently, oilseed demand is being met primarily by soy, and to a lesser degree by cottonseed, canola, and other minor (by comparison) row crops like flaxseed and safflower. So why haven’t some of these row crops filled in the void in these lost groves? 

There are two major problems in the soils in the southern half of Florida. While the Florida is blessed with a long growing season and generous rainfall, the soils where citrus is grown are extremely sandy with a hard clay layer underneath. This sand layer makes it difficult for them to hold nutrients.  During the rainy season, which runs from June to October, the almost daily rainfall flushes fertilizers and other nutrients out of the soil. The other problem is the field configurations. Citrus cannot tolerate its roots standing in water for long periods of time so the great majority of the groves were “bedded-up” when the groves were initially set up. Topsoil was pushed into raised beds with a furrow in between to remove water in heavy rain events. Over the years, soil compaction occurred while in this configuration.  Attempts to simply grade the raised beds flat for row crops still resulted in a wavy topography (once the soils settled), which created drainage issues.  Some tried deep-disking this sand and the underlying clay layer in an attempt to blend the two into a sandy loam-like consistency, but the result was a mud bog that seemed to never drain properly. 

Pongamia’s Solution

Since 2012, TerViva has been establishing trial plantings with major citrus growers in Florida and the results have been exceptional and growth has been robust. We’ve found that pongamia fits right in to the existing field architecture of the citrus groves so that beds and irrigation systems need no reconfiguration. Many growers have literally planted between the old citrus stumps. The trees are rather light on water requirements and input costs amount to primarily weed maintenance. 

Many of the citrus growers that TerViva works with are quite open to acting as operators for investors who want to come in to the state to buy depressed acreage and establish pongamia plantations of their own. Some of these arrangements have already commenced in 2014. Not only is this an opportunity for a good annual agricultural income, there’s a great chance that these old groves can be productive $14,000/acre properties again.  

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Tom Schenk is Director of Business Development for TerViva, Inc. For more information call him at 509-251-2565.

The opinions expressed in this editorial are the author's own and do not reflect the view of Global AgInvesting.