Re: Value of true farmland

Posted by Jerry/MT on April 23, 2008 at 11:17:46 from (206.183.116.129):

In Reply to: Value of true farmland posted by Mike (WA) on April 23, 2008 at 08:32:06:

In my opinion, high priced prime farm land in the corn belt and high rental rates for farm ground is being driven by speculation on corn and other comodities and we all know that the high commodity prices of today will only last until the farmers all start to really produce which drives supply up and demand(price) down. It may be next year or it maybe five years from now but with commodity production, supply and demand drive the price and the supply.

Land price has several drivers, the biggest one today seems to be development.If you figure out what you can net per acre in dollars from farming it correctly and then figure out what an acceptable return on investment(ROI) will be for you, you can SCOPE OUT AN APPROXIMATE VALUE.

Say you want a yearly 10% ROI( not really a high value for a business but darned high for an ag investment)and you could make a net $100/acre for the land, machinery, bldgs, livestock, taxes, fertilizer,etc (not the house cuz ya" gotta live somewhere) and management, that meants that the total investment cost per acre for all these inputs spread over the farm has to be $1000/acre($100/0.10). Next you figure the per acre costs for machinery, buildings, inputs, etc, every thing except the land value, and then sum them up and subtract them from a $1000/acre and that will be an ESTIMATE of the value of the land for ag purposes.
I used this methodology be cause I ranched on a small scale and had pretty good cost numbers to plug into the model to scope out the "real value" of ag land when we went out to find our ranch. We exceeded the ag land value predicted by this method ($890-$1100/acre by a factors of 1.5-1.8 but we were able to rationalize that by some other intangibles that had value to us and were hard to put a $ value on.)

I will stick my neck out and say no matter how you cut it, unless your cows have golden calves, or you have figured out how to grow 5 carat diamonds by the ton, development value for the land will far exceed the ag value for the ground.
There are those that say that this analysis method doesn"t account for this, that , etc and it doesn"t. However, the totally rigorous method would lower the land value for ag purposes even more. I offer it here as a tool to help you get a scoping cost on ag land. You buy in a free market so the real value is what any potential buyer is willng to pay. The final price will almost always be whatever the highest offer is. There are exceptions but they are rare.

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