Farmland is an incredibly valuable resource. It’s no wonder it is attractive to both existing farmers looking to grow their operations as well as investors who are interested in diversifying with an investment type that generates positive returns.
But trying to determine the value of farmland that is for sale can take some inside knowledge and experience in agriculture real estate.
So, let’s take a look at how buyers can evaluate the land’s value and determine if making a purchase is a good financial move.
Farmland values remain steady
When looking at farmland asking prices, it’s good to start with a background on Recently, farm real estate, which includes land and structures, has represented four-fifths of the total value of all U.S. farm assets. Farmland values have been holding steady, in general, since about 2014.
Research from the United States Department of Agriculture shows farmland values increased thanks to – for the most part – general economic factors, such as low interest rates, as well as the expected farm earnings during that time period.
Values had been appreciating up to that point since the 1980s farm crisis. There has been some ebb and flow, though. The USDA notes that some regions have still seen “modest” increases in value year over year. Other areas have seen some decline.
Use affects land value
Land use can have an effect on the value of farmland. Traditionally, cropland has had a higher value than pastureland since it sees higher returns per acre due to crop production.
This trend does vary by region, according to the USDA, but cropland is mostly valued at least as highly – if not higher – as pastureland no matter the region.
How the buyer intends to use the land obviously can affect its value, especially when the buyer’s intended use for the land is not necessarily how it currently is being used.
Why people buy farmland
The buyer’s land use can come down to the reason why they are buying farmland. For the most part, there are three possible reasons why a person may look into purchasing farmland: production, investment or consumption.
Production is a very straightforward reason. The buyer wants to put the land to use to generate farm-related income that can cover expenses and result in a profit.
Investment purchases are made when the buyer’s plan, in the medium to long-term, is to turn around and sell the land after its value has increased. This can often be sold to people who may want to use the land for some type of development.
The other reason, consumption, is mostly for pure personal reasons, such as starting a small hobby farm or using the land simply as the site of a home.
Who is buying in farmland?
It’s no secret that land is a valuable resource, which is why farmland can make so much sense as an investment or business purchase. In fact, farmland can drive some of the best returns when compared to other investment types.
So, who is investing in farmland? Well, for the most part, current farmers are the ones making purchases to grow their business operations.
ISU Extension and Outreach’s 2018 farmland value survey indicated 72 percent of farmland sales went to existing farmers. Investors accounted for 21 percent of land sales in that year.
What farmland values mean for landlords vs. renters
Higher farm values affect landowners and renters differently.
For landowners, increases in farmland values allow for increases in real-estate-secured debt, according to the USDA, as well as more land purchase opportunities for their operations. Lower interest rates have been very beneficial, too.
Renters, on the other hand, likely see higher rents when land values increase. Higher operating costs can hamper a renter’s ability to expand production.
Determine value with an economic analysis
When you are considering making a farmland purchase, or just want to know what it could be worth, there are a couple of methods available to help determine its value.
The first of these methods, an economic analysis, provides a look at how much the land is worth based on the land’s net income earning potential. Iowa State University Extension and Outreach has put together a good resource that walks readers through how to perform an economic analysis.
This type of analysis determines the economic value of farmland. In short, the analysis walks through how to estimate the economic value by dividing the land’s expected annual return from owning and operating the farmland or renting it out to a farmer tenant by the expected rate or return of comparable properties.
The analysis does not factor in any sentimental, esthetic or other personal value a potential buyer may find in a particular tract of land.
Determine value with a financial analysis
The other form of analysis suggested by ISU Extension and Outreach is a financial analysis. This method seeks to answer whether the farmland will create a positive cash flow after all operating, ownership and debt payments are made.
A financial analysis can help clear up whether purchasing the farmland is financially feasible, primarily by looking at cash flow. That can depend on several factors, such as the price of the land, how much of that price the purchaser has to borrow and also at what term and interest rate.
Whether the analysis determines cash flow is positive or negative for the buyer can also be influenced by whether the buyer has to withdraw revenue from nonfarm expenditures or if the purchase relies on any subsidies from other revenue.
As ISU Extension and Outreach notes, the results of the financial analysis will often be determined by the buyer’s financial situation. The land’s economic value does not factor into this type of analysis.
Farmland value can have emotional ties
There is a sentimental side to deciding what farmland is worth, both from the buyer’s and seller’s perspectives.
Overall, though, the emotional factors should take a backseat to any practical factors that carry weight in such an important decision.
What’s your land or property worth?
Not knowing the value of your land can make important financial decision very difficult. Contact Advantage Realty and Land Management today for a free estimate or for help with other farm real estate needs.