Desert Farmer Taps Into Global Markets

To airline passengers cruising over the Mojave Desert, the farms in Cadiz seem to appear from out of nowhere, an unexpected checkerboard of green painted on the dusty no-man’s land off historic Route 66.

On the ground, these checkerboards are actually thousands of acres of farmland, row after row of citrus trees, peach trees and trailing grape vines that produce hundreds of thousands of boxes of fruit a year when crops elsewhere are still ripening or are long gone.

Its owner, Santa Monica-based water resources firm Cadiz Inc., is hoping to duplicate this agricultural marvel and turn a parched corner of the Egyptian desert into another Coachella Valley, supplying Europe with juicy citrus and jumbo Muscat grapes out of season.

While most California growers are still struggling to get their fruit into international markets, Cadiz and its farming unit, Sun World International, have discovered a lucrative niche helping growers across the globe plant their own grapes, plums and citrus.

In Egypt, Sun World is being paid to design a massive drip-irrigation system for one of the world’s largest farms and to plant its own patented crops. If everything goes smoothly, it will earn an ownership stake in this phase of Egypt President Hosni Mubarak’s Toshka project, which at 100,000 acres is five times the size of Sun World’s California farming operations.

Between Toshka and the deals Sun World is cutting to license its fancy patented crops overseas, it is well on the way to becoming a global farmer with enough reach to insulate itself from crop price plunges due to weather or oversupply.

“They’re smoothing out the seasonal ups and downs of the [agriculture] business,” said Debra Coy, a water analyst with Schwab Capital Markets in Washington.

And, analysts say, with Toshka, they are paving the way for more arid farming projects in places such as the Middle East.

Here in the U.S., Sun World is already one of the state’s largest fruit marketers, growing and shipping about 14 million boxes of fruit each year. But it has struggled to turn a profit in recent years as crop prices have dropped while it was investing large amounts of money on irrigation equipment and new plantings across the state.

“The farming operations are still in . . . a growth mode,” said Michael Crawford, an analyst with Los Angeles-based B. Riley & Co. “There’s been a lot of capital going in without a lot of revenues coming out.”

That should change next year, analysts say, when some of those plantings start bearing fruit and as income flows in from its crop-licensing operation.

Moreover, by using water-conserving farming methods, the company should have enough water to keep its crops green in coming years, with enough left over to sell to other users.

The Sun World unit earned $22 million last year before interest, taxes and depreciation and amortization on revenue of $115 million. However, the drag of interest expense related to its parent’s land investments pushed the entire operation $8.5 million into the red.

Cadiz was formed in 1983 after the founders identified an aquifer in the Mojave Desert, and it has spent years accumulating the land around it as well as other prime farmland around the state.

Cadiz’s income has been largely contingent on the company’s ability to cut a deal with a water agency to tap the Cadiz aquifer. Since 1996, the company has been negotiating with Southern California’s Metropolitan Water District to supply water from the Cadiz aquifer and store water from the Colorado River in the aquifer when supplies are plentiful.

That controversial deal, which aroused the ire of some environmentalists, probably will be concluded next year and would mean hundreds of millions of dollars in revenue for Cadiz, which could turn the thinly traded public company into an attractive play for some long-term investors.

“If you understand the dynamics of the water business in Southern California, then you know they’ve got a unique asset there,” Coy said. “It’s certainly not going to go down in value.”

Sun World’s fortunes also have dramatically improved since it was scooped out of Chapter 11 bankruptcy by Cadiz in 1996.

The fruit packer, started in 1976 to sell patented specialty fruit, had poured tens of millions into research and development and even bought full-page newspaper ads to introduce consumers to innovative new varieties of fruit such as the Sun World seedless watermelon and red flame seedless grape.

These products became so popular that growers rushed to plant their own acreage, bringing so much fruit to market that they ultimately became commodity items. Within years of its introduction of the seedless watermelon, there were 35 other varieties on the market, said Sun World Chief Executive Timothy Shaheen.

There were other costly stumbles and management excess. Mangoes developed for the Japanese market proved too expensive to compete with Mexican and South American imports. A costly tomato growing operation in Mexico had to be divested.

And acres of vanity fruit developed by the company’s founders--such as Domenick “Cookie” Bianco’s Cookie Cots apricots--were ripped out to plant more lucrative crops.

Now, Shaheen says, nothing is planted unless the company knows it has a market for it.

“Historically, agriculture has been production-driven,” Shaheen said. “You go into an area and plant all you can, then worry about developing the market. We want to develop the market first, and as it continues to develop, increase production.”

Sun World creates its hybrid fruit at an R&D; facility in Bakersfield, the largest private fruit-breeding facility in the country. About 20,000 grape vines and stone fruit trees are planted here, starting out as wispy green shoots in laboratory test tubes before graduating to on-site nurseries and eventually out to the fields, where 99% will be thrown away, leaving just a few sugary-sweet, early-ripening contenders.

Cross-breeding research of this type is both expensive and time-consuming, taking about eight years to produce a single viable commercial grape.

After watching its rivals capitalize on its successes, Sun World has become much more careful about protecting its leafy-green intellectual property. It has narrowed its focus to crops such as grapes and stone fruit, which are harder to copy because of the longer time it takes to bring them to maturity. It also is limiting the amount of acreage that licensees can plant.

In Spain and South Africa, Sun World has filed lawsuits to force companies found to be growing its seedless grapes under another name to pay royalties both for previous sales and all future harvests.

Most of Sun World’s licensing business is done in South Africa, Spain, Italy, Morocco and Australia, markets that don’t directly compete with California. Growers there pay for the rights to grow a certain amount of a fruit such as Superior Seedless grapes, and they pay royalties on the fruit they sell.

Licensed fruit such as this is especially popular in countries that don’t have extensive rules govern

ing produce, analysts say. With no assurances of quality of generic produce from the government, branded varieties make consumers feel more comfortable about what they’re getting.

“The general public [in these places] has less faith in the regulatory regime,” said Gordon Rausser, an expert in patented crops and former dean of the School of Agriculture at UC Berkeley. “As a result, their natural inclination . . . is to turn to this type of self-regulation.”

Here in the states, Sun World has had far less luck convincing people that its designer fruit is something special. Its Black Beauty seedless grapes or LaRouge Royale sweet red peppers are piled in the same bins with several other varieties, Shaheen says.

“We don’t pay a premium price for them,” said one Southern California supermarket buyer who asked not to be named. “We don’t do that for anybody.”

But Sun World and Egyptian officials are betting that retailers in Europe will, when Toshka ships its first crops in coming years.

Root stock for grapes and citrus trees is being flown overseas and a nursery is being set up to adjust these crops to the region’s climate and water. The 40-mile canal that will bring water from Lake Nassar to the dusty desert site is under construction and will be complete in mid-2002, after which Sun World will begin planting its first crops.

The goal of this huge water infrastructure project is to draw workers out of the overpopulated Nile Valley to work agricultural jobs in its South Valley. Eventually, the farm at Toshka is expected to employ about 60,000 workers.

The massive farming project was financed by Saudi Prince Alwaleed bin Talal, who this year has spent more than $1 billion on Wall Street, snapping up shares in such major U.S. technology and entertainment companies as WorldCom Inc., AT&T; Corp., Amazon.com Inc. and Walt Disney Co.

Toshka will take almost two decades to develop and could incur many extra costs for labor, transportation and water.

To hedge their bets, Sun World officials have selected versions of crops that are already big sellers there--jumbo seedless Muscat grapes (most on the market are seeded) and red-fleshed plums with a resilient black skin that enables them to ripen on the tree.

By getting these popular products to European markets early, Alwaleed’s company hopes to sell more than its competitors and garner a much higher price.

“If you can get into international markets [earlier than others], then you can get a better share of the market,” said Ahmed A. Goueli, a former Egyptian minister of trade and Kadco chief executive.

But experts say there are no guarantees in the produce business.

“It’s a global marketplace these days and it’s hard for anyone to make exorbitant profits without someone moving in to take that away, someone with much lower costs,” said Ron Trostle, a senior economist with the U.S. Department of Agriculture.

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Sun World Sites

Cadiz Inc. hopes to duplicate the success of its farming unit, Sun World International, in Egypt. Sun World has managed to grow crops in the barren Mojave desert, east of Los Angeles. Now the company is designing a massive drip-irrigation system for one of the world’s largest farms.