How Is Farmland’s Value Calculated?
Breaking it down.
Breaking it down.
Calculating the value of farmland isn’t as straightforward as it is with stocks or gold, for example.
While the methods used resemble the ones used in real estate, farmland remains a unique asset with its own evaluation process and metrics.
The value of farmland depends ultimately on three criteria.
The quality of the farmland
The value derived from the farmland
The farmland market
In this article, we break down each of them.
1. The Quality of the Farmland
The quality of the farmland concerns everything related to the nature of the farmland.
They are:
Soil quality: is the ground aerated? Does it contain enough nutrients? Are there enough insects living there?
Water quality
Air quality: is the air clean? Is wind driving out the pollution?
These factors will be strongly influenced by the location of the farmland.
While farmland located far from human activity may be of higher quality, the value of the land itself may be lower simply because land isn’t as much needed far from cities as it is near and around cities (we’ll talk about this below).
So the answers aren’t as straightforward as they seem.
Next are the factors that indirectly determine the quality of the farmland.
These are:
Infrastructures: irrigation, type of landscaping (terrace), etc.
Farmer’s skills: is the farmer skilled at farming? Does he or she plant the right crops at the right time in the right type of soil? Does he or she maintain the land? Does he or she leave it in fallow so the land can regenerate?
Farmer’s type of agriculture: is the type of agriculture regenerative? Does the farmer use a lot of pesticides and fertilizers? Are those environmentally friendly?
These factors will not only have an impact on the value of farmland, but also on the value of what the farmland produces, which is our second criterion.
2. The Value Derived From the Farmland
The value derived from the farmland concerns everything that the farmland produces.
Farmland generates cash flow by both producing outputs (food) or by producing a service.
Most farmland most of the time produce food: corn, wheat, sugar, rice, potatoes, soybeans, barley, etc.
The value of farmland will be partly derived from the type of food it produces. The more valuable it is, the more valuable the farmland will be.
For example, the Netherlands is the country in Europe where farmland is the most valuable because the country is the second worldwide biggest food exporter in value.
While the Netherlands does not produce as much as the French, Italians, Germans, or Spanish, they produce high-valuable foodstuff and are the leaders in Europe in terms of agricultural technologies and efficiency.
As we said above, farmland doesn’t only produce goods. It can also be rented out and add an additional source of income for its owner.
Farmland can be rented out when left in fallow and when no animals are grazing.
Examples are renting it out to hunters, to boy scouts, to a music festival, to a circus, to a camping site, etc.
The potential for these additional sources of income widely depends on where the farmland is located (in a warm/cold country, near a city, etc).
All in all, the value of a plot will have to take into consideration the type of food that can be grown on the plot and the additional sources of income that can be obtained by renting it out.
3. The Farmland Market
The farmland market is the last criterion that determines the value of farmland.
Markets with strong demand and low supply will see the value of farmland be considerably higher than the markets where supply is abundant.
Once again, the state of the market depends on a lot of criteria, among which are:
Location: lands located around cities are often more valuable because they often become residential plots due to the growth of cities. Many farmers have made a fortune selling their plots to real estate developers this way.
Availability of farmers to take care of the plot: lands with a high density of farmers will also be more valuable as there are low chances that the land be unfarmed.
Quality of the land
Quality of farming infrastructures
Price of food: farmland tends to be a good investment when the price of food is expected to grow.
Furthermore, the farmland market depends also on macro-economics conditions, such as:
Interest rates
Energy prices
Laws
Presence of institutional investors
These metrics explain the supply and demand in the market which is an important criterion that sets the value of farmland.
Conclusion
Farmland is a simple asset to invest in but complex to evaluate.
This complexity highlights why farmland investing is reserved for seasoned professionals with several years of experience and intimate knowledge and understanding of the industry.
LandEx’s mission is to offer its users a selection of high-quality farmland selected for their potential to increase in value in the future.
When you invest in plots listed on the LandEx platform, you invest in assets vested by professional land managers with decades of experience.
This is why LandEx is one of the best ways to invest in farmland.
Go to landex.ai today, and begin your land investment journey.
Use the code TALON and receive €10 of investment credit.
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