The Peru problem isn't just hitting California - it's hitting Washington state too ...

In January I was invited and delivered a keynote address at Cherry Institute, the annual meeting of Northwest cherry producers in Yakima, Washington. As many of you who read my content will recognize, the pitch was similar to what I tell a lot of California folks these days. Specialty crops (fruits, nuts, and vegetables - which of course include cherries and other northwest tree crops) face a constant struggle with the biggest issue facing most of them all the time - the continued decrease in available domestic labor and the ongoing increase in costs of regulatory costs and international labor costs.

In the case of California, the annual labor costs in 2023 were $16.3 billion for 850 million hours of labor (blended cost ~ $19.50/hour). Roughly 1/3 of those hours are for non-harvest hours (weeding, planting, thinning, spraying) and 2/3 are for harvest hours. As more international farm workers are required, the use of the H-2A program has gone up by 8x in 18 years, from 48,000 in 2005 to 378,000 in 2023. The H-2A labor is significantly higher cost than domestic labor - $17-18/hour for California (domestic) workers and $28-30/hour for H-2A workers ($19.75 adverse effect wage rate set by regulators - AEWR + housing + transportation + food).

The other number that impacts labor cost is the increasing cost of regulatory compliance. Cal Poly Ag Economics Professors Lynn Hamilton and Mike McCullough have completed research which shows the regulatory cost for specialty crops has gone from $109/acre/year to $1,600/acre/year from 2005 to 2024. These costs show up most often in direct labor cost increases as people are required to deliver the compliance requirements.

The choices for California farmers is simple - as domestic labor continues to get harder to find growers can: (1) increase H-2A usage further (which will increase their blended hourly cost); (2) automate with robotic solutions to reduce their need for farm labor; or (3) relocate the acreage to Peru (and other places like Peru which provide different labor and regulatory economics).

The two other topics covered are automation successes and the capital challenges. For automation success, things like weeding and spraying robots, as well as harvest assist, are delivering solutions that provide economics that work for growers. Harvest, on the other hand, is not yet meeting grower's economic requirements. On top of the challenges with harvest (2/3 of hours), venture capital overall (Silicon Valley) and in AgTech have dropped by 50% and 70% respectively from 2021 to 2023 (and look to have stayed around the same levels in 2024 with AgTech dropping a bit further to $16B in 2024 - roughly in line with 2023 and a 4% drop overall).

Faced with increasing capital challenges and a handful of startups meeting grower's economic needs, growers are increasingly faced to hire more H-2A or move acreage. Once I showed the Cherry Institute the numbers comparing California to Peru, they wanted to run their own numbers and see if Washington was in a comparable position to California. The key number to compare is ag exports. For roughly the last 20 years, the stories tell a picture of some growth in the US and Latin America (175% and 100% growth) as well as California (141%), but Peru goes to the front of the class with a 2,180% growth to $10.6B in ag exports in 2020 (and the number has gone up since 2020).

The growth is happening in multiple crop types, with blueberries being a particular standout - and blueberries pulled a double (2x growth year over year) in 2024. Peru is achieving this with a series of alliances (a $3.6B investment in a port above Lima with China as part of Belt and Road) and strategic policies around water (investment in government water storage projects and a far simpler process for growers to invest in water storage on land they own or operate) and labor (which is widely available at roughly $4/hour).

The final piece of the narrative is the acreage and farmer loss for California. Now not all of this is going to Peru - some of it goes to fallow acreage (unfarmed), Arizona, other US states, or Mexico. But it's hard to argue that Peru is winning from the California grower challenges around economics laid out above. What do the results look like? Well, from 1997-2022 California lost 4.6M acres and by 2052 California is forecast to lose 32% of acreage (roughly 9M total - from just under 29M to under 20M in 55 years). Even more ominous, California is projected to lose 52% of all farmers in the same 55 years.

My friend Ross Courtney from Good Fruit Grower decided to do the same deep dive for Washington that I did for California. The full article link is below but the graphic below tells a lot of the story. The short version - Washington is seeing similar trends but the trend lines are not as steep. Look at the top two graphics comparing number of farms and then the bottom two comparing the acreage loss. For Washington, the 1997 number was around 40,000 farmers, which dropped to 38,000 in 2002 and then had an unexpected jump back to 40,000 in 2007 (sometimes these jumps happen because of adjustments to the underlying data model - but not always). Then from 2007 on you see the drop to 38,000 (2012), 36,000 (2017), and 33,000 (2022). The projections straight line for 2027 (then drop to around 26,000 in 2052. If these projections hold, that would be a loss of 33% of Washington state farmers over 55 years. Not as bad as California but nothing to be happy about for the farming community in Washington.

Now let's take a look at the acreage loss. Starting from 16 million in 1997, the actual acreage count drops to 14 million by 2022 (actual USDA census data) and is then forecast to lose an additional 2 million acres to 12 million acres by 2052. Similar to growers, this is a 25% loss in acreage over 52 years. Again, not as steep a drop as California - but definitely not great news.

California farmer tells cautionary tale for Washington ag — Video – Good Fruit Grower

Just as with the research I've done on California, it's hard to draw a straight line from the acreage and farmer loss between the decline in Washington and the rise in production in Peru. It's quite likely that none to a small handful of growers shut down Washington operations and moved to Peru. The acreage is the more interesting metric. Again, it's hard to say that the acres that shut down in Washington went directly to Peru - you would have to look at each year and see what the crop mixes were and the grower mix and do a lot of detective work with educated guesses. And in the end I don't think it matters - what matters is the trends that are growing increasingly clear and piling up for years and now decades of actual historical data that when just projected forward tell the story of where we are going based on where we have been.

My guess is that anyone who does a similar analysis for the other top producing specialty crop states is likely to find similar results - again, the steepness of the line likely varies but I have talked to my friends in Arizona and they acknowledge the loss of both farmers and acreage the past 20 years with more of the same the likely forecast going forward. Many of the conversations focus on the same issues as California - rising costs, harder to find domestic labor, regulatory burdens, and water challenges all are topics.

I want to thank my friends at the Cherry Institute for inviting me to speak and share some of what I'm seeing in California and Peru and the data and analytics behind the anecdotes. It's clear that Washington state is facing similar pressures for similar reasons, and it's becoming clear that Arizona is in a similar position. Once again I am not advocating for acreage to go to Peru. I'm merely pointing out that the data is starting to pour in and it suggests that this is not a problem that is isolated to California.