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Executive Summary
Company. Alico Industry. Agriculture Key. Capital is key to building and maintaining healthy crops.
It was only a few years ago that you could buy two cartons of orange juice for $3 at the local grocery store.
But those days are over.
And the rising price of juice and other citrus products helps explain why some savvy New York City investors have found their way to Florida's rural communities.
That's how Remy Trafelet met Clay Wilson, a third-generation Florida citrus farmer who grew up working in the family's groves in the Frostproof, Polk County, area. Trafelet is a former Fidelity Investments portfolio manager who also built a New York City hedge fund that managed billions of dollars. “We come from two totally different walks of life,” acknowledges Wilson, 53.
Their paths converged when they made the same conclusions about the citrus business. Weakly capitalized competitors have been forced out of the business by bad weather, tree diseases, rising production costs and encroaching commercial and residential development. That provides opportunities for companies like Alico to make acquisitions.
First, in 2013, a group of investors led by Trafelet bought Wilson's groves and hired him to run the operations. Trafelet and his partners then acquired Fort Myers-based Alico for $137.8 million from the heirs of the Ben Hill Griffin family, which included State Sen. JD Alexander, R-Lake Wales.
The acquisitions continued in 2014 when Alico slashed its dividend, sold its sugar land and orchestrated a blockbuster $363 million deal using debt financing to acquire nearly 29,000 acres. The deal transformed the company into the nation's largest citrus producer.
Satisfy the demand
Wilson and Trafelet, 44, see an opportunity to consolidate in a fragmented industry, where small family farms struggle to turn a profit and can't reinvest in new trees to counter greening or sophisticated fertilizing systems to boost yields.
For citrus growers like Alico with scale and capital, rising prices for juice can provide double-digit annual percentage growth in earnings. Other investors have recognized the trend: Alico's publicly traded stock (symbol: ALCO) has risen 35% since Trafelet and partners acquired their majority stake, to about $50 a share.
There's an economic moat, too. “To create a healthy and sustainable grove it can take 25 years,” says Trafelet. “You can't replace this.”
Wilson shrugs off the decline in juice consumption as a function of rising prices rather than changing tastes. (See related story.) Consumption could increase again once scientists resolve the tree-greening disease that's wiped out many groves.
Trafelet isn't concerned about falling consumption, either. “Even in the United States we don't satisfy our own demand,” he says. “It's declining, but it's not going to go away.”
Second derivative
The citrus-production business in Florida has long been dominated by generations of family farmers. But tree diseases such as canker and greening combined with rising fertilizer costs, hurricanes and freezes have conspired to force some out of business.
“When greening hit the grid [in mid-2005], I knew total production would go down,” says Wilson.
At the time Wilson was running Silver Nip Citrus, the family citrus business started by his grandfather, Latimer Maxcy, in Frostproof.
The real estate boom of the last decade also gave many growers an exit opportunity, which cut production further.
“It's a second derivative of the real estate boom,” says Trafelet. “While greening is serious, it's been exacerbated by the real estate boom. The guy who sold his grove to the real estate developer stopped investing.”
Trafelet says most of the funds he's invested so far are from a group of friends and family, and he's the largest individual shareholder.
Another prominent investor in Alico is Bruce Sherman. The Naples-based founder of Private Capital Management disclosed he had acquired a 7% stake in Alico in December. Sherman is known for being a shrewd investor who seeks companies he believes the market has undervalued.
To get that value, Wilson targets 10% market share in the juice sector. That would give him price leverage with juice processors starved for product to keep their plants operating. He could also use that leverage to negotiate lower prices for expenses such as fertilizer and fuel.
Alico completed the acquisition of Wilson's Silver Nip this year, when it folded its 7,434 acres into the company's 46,000 acres of citrus groves. The deal also included Orange-Co's 20,263 acres and Gator Grove's 1,241 acres.
Alico paid about $12,000 an acre in the three-way deal, Wilson says. That's at the high end of historical citrus land values going back to 1986, according to a survey published by the Florida Department of Citrus based on University of Florida research (see box, right).
Those acres translate to a lot of juice: On any given day during the picking season, Alico has $1 million worth of fruit on Florida's country roads headed to a processing plant.
Future opportunities
The results of all the deals, so far, are encouraging. Although the second and third quarters generally produce the majority of Alico's revenues, the latest first-quarter results were positive. On Feb. 9, Alico reported net income of $5.8 million on revenues of $16.2 million in the first quarter. That compares with a net loss of $704,000 on revenues of $15 million in the same quarter of 2014.
Wilson says the company, because of its size, now has a significant advantage on the expense side of the income statement for supplies like fertilizer and equipment. The recent acquisitions, for example, will save the company $9 million in expenses this year, he says.
“The company will generate significant amounts of free cash flow, which gives Clay quite a few opportunities,” Trafelet says.
Wilson will consider acquiring additional citrus acres. While there are no specific targets, he's particularly interested in healthy groves near ones Alico already owns that have good access to water. Wilson also says there are opportunities to expand outside Florida and bring the same citrus-management experience to other permanent crops such as nuts and fruits. That includes California and Texas.
Wilson is aware of the success of huge developments like The Villages retirement community near Ocala and Walt Disney World, both of which were partially built on orange groves.
But this isn't a land play: Alico has no immediate plans to sell large tracts to commercial or residential developers.
“That's not the goal,” Wilson shrugs, “but who knows 20 years from now?”
The Big Squeeze
Don't be too quick to call the demise of the citrus industry in Florida.
The drop in production from an incurable tree disease called greening and encroachment from commercial development has a positive side: prices for citrus have risen steadily in recent years. That could benefit well-capitalized growers.
Consider some of the data on oranges published by the Florida Department of Citrus. Orange production, for example, fell 22% from the 2012-2013 growing season to the 2013-2014 season. Florida produces half the oranges today it did 20 years ago. Groves are disappearing. “We're seeing production at record-low levels,” acknowledges Marisa Zansler, the director of economic and market research at the Florida Department of Citrus.
But the worst may be over in terms of production, Zansler and others say. The U.S Department of Agriculture recently forecast a mere 1.5% decline in orange production for the next growing season. That's because farmers are replanting trees and managing their groves to avoid the spread of greening.
There's an economic incentive to do so because juice prices have been rising steadily as production declined. For example, the price per gallon for refrigerated orange juice at grocery stores has risen 5.5% to $6.62 for the season-to-date compared with the same period one year ago, according to Nielsen Scantrack. For not-from-concentrate orange juice sales, the price is up 5.9%, to $7.63 per gallon over the same period.
“Prices have jumped significantly; the growers that managed greening did very well,” says Fritz Roka, associate professor of agricultural economics with the Institute of Food and Agriculture Sciences at the University of Florida in Immokalee.
As a result, citrus land prices have appreciated, too. Fort Myers-based Alico recently paid an average of $12,000 an acre to boost the company's citrus production. According to a land-value survey by the University of Florida, orange groves in South Florida were worth $7,982 per acre in May 2010.
Of course, the flip side of rising juice prices is a potential drop in consumption. In fact, U.S. per-capita consumption of orange juice has declined every year since 1999, according to the U.S. Department of Agriculture.
Roka worries less about prices impacting consumption than he does about changing tastes as consumers choose alternative beverages. “That's the part the industry should be more concerned about,” Roka says. “If you lose your market, that will spell the bigger problem.”
— Jean Gruss
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