Four Manhattans of Florida Orange Groves selling for 60% of Resale Value: Alico Inc $ALCO

Gold, Oil, Land Inflation Protection Strategy

Yes, it’s true, Americans will measure in any unit other than the metric system, and you can buy four Manhattans of Florida orange groves for about 60% of its resale value.

The golden age of the Florida citrus industry is probably behind it.  The introduction of the Asian citrus greening virus in 2005 started a long and slow decline.  Initially infected trees were destroyed in an attempt to stop the virus, but those efforts were quickly abandoned as the fight was hopeless.  Today, 80% of Florida citrus trees are infected with citrus greening which dramatically decreases crop yield and eventually leads to the death of the tree.

In 2003, before the greening virus arrived, Florida grew 240 million 90 lb boxes of oranges, last year that number was 18 million, but part of that decline is due to hurricane Ian in 2022.  The number of acres under production is down from 700,000 to 360,000 over these last two decades. Just a few weeks ago, hurricane Milton ripped through central Florida just weeks before the start of the citrus harvest, and dropped a significant amount of fruit to the ground.  It isn’t known how much fruit was lost, hurricane Irma in 2017 caused between 30% to 70% of the crop to fall off the trees.  

Alico Inc. (ALCO), the Atlantic Land and Improvement Company is the largest publicly traded citrus grower, with 48,000 acres of citrus groves spread across seven counties in Florida.  Management has informed us that they sustained virtually no tree death due to hurricane Milton, but they have not yet estimated the extent of the fruit drop.  While ALCO maintains crop insurance for devastating losses, it is likely that Milton was not severe enough to trigger an insurance claim.  

This year was supposed to be the rebound year after hurricane Ian in 2022.  Sometimes the trees are back at full production one year after a hurricane, but sometimes it takes two years for the trees to recover.  It appears that hurricane Milton was mild enough that 2025 should be a year of full production, assuming there is not another major hurricane that makes landfall and affects the citrus harvest.

There has been a new innovation in the fight against citrus greening, an antibiotic injection into the trunk of the orange tree at least six months before harvest to ensure that there is no measurable spillover into the crop.  This process was deployed in 2022, so we don’t have data yet on what crop yields will be in a normal year of full production without a hurricane.  ALCO management is optimistic, but of course, they have a sales function to perform whenever they speak about the company.

With the effects of hurricane Ian in 2022, an acre of Florida citrus groves produced about 50 boxes per acre.  Before hurricane Ian, that number was closer to 130 boxes per acre.  We have no idea how effective the injected antibiotics will be, but prior to 2005, an acre of Florida citrus grove produced close to 400 boxes per acre.   

In 2021, the last full year of production, ALCO was able to generate $105 million in revenue from growing citrus, for a net income from citrus of $14.5 million.  In the last few years, however, due to the declining citrus production in Florida, and ALCO’s high quality production, they have signed an offtake agreement with Tropicana which management believes should increase prices received for their produce by 30% to 50%.  ALCO has also been replanting fallow groves, and has increased productive acreage from 33,500 acres in 2021 to 36,000 in 2024.  So while 2024 will be a wildcard for production, if 2025 is a normal year, we could see citrus revenues closer to $150 million, and net income closer to $20 million, without any impact of the new antibiotic treatment.

While the earning potential of the citrus business might seem underwhelming, a potential $20 million income in a good year for a company trading at a $200 million market capitalization, and exposed to the risks of hurricanes, floods, and early freezes, the citrus land still sells for around $9,000 an acre, making the current agricultural land value of ALCO somewhere between $400 million to $500 million.  This means that if ALCO sold all of their holdings as farmland, paid off the outstanding debt, and paid the proceeds out to shareholders, the return would be between 48% and 85%.

But ALCO, aware of the difficulties of the citrus business, and also aware of the enormous population growth in Florida, is in the process of getting their agricultural land rezoned for residential development.  The most desirable parcel, a 4,500 acre grove just outside of Naples and Fort Myers, is currently in the middle of this rezoning process.  ALCO management has prior experience in transforming their land holdings slowly into residential development to maximize the value captured as they have just finished the seven year process of developing and selling approximately 50,000 acres of cattle ranches.  This process allowed ALCO to pay down their long term debt from $230 million in 2015 to about $75 million today.  Management is not planning on repaying the final $75 million in debt as it is bearing an attractive 4% interest rate, and instead management is finally ready to focus on returning capital to shareholders.

So ALCO is a company about to undergo several inflections.  

• Receiving higher prices for produce from the new Tropicana contract

• Increased acres under production from planting initiatives 

• The benefit of the new antibiotic treatment for citrus greening

• A return to normal production in 2025 assuming no hurricane next year

• A pivot toward returning capital to shareholders

So for the patient investor, receiving a modest income from the citrus business while waiting for ALCO to develop their farmland into bustling suburbs in the state with the highest population growth is an attractive prospect.

Management has not engaged in any insider buying since 2017, but the current chairman of the board has bought ALCO stock in the past at much higher prices than ALCO trades at today.  It’s not easy to gracefully wind down a business, management typically prefers to grow rather than to shrink.  Management has assured us that their plan is to develop the land and return the capital to shareholders, but only time will tell if they will deliver on their promises.