Selling farmland is a unique and personal experience – but you’re not alone. With the hot market this summer, we’ve been hearing a lot of questions about value from our customers. You deserve to earn the true value of your farmland, but figuring out exactly what that is can prove cumbersome. We’ve put together this guide to help you in your calculations. As always, feel free to reach out to the Tillable Brokerage team at (800) 970-3881 if you want to chat with a licensed professional.
Understanding Your Farmland
A few items can create large variability in your farmland’s valuation, including:
- Historical yields
- Soil Quality (Soil Productivity Index)
- Presence of water management systems (irrigation or tiling, waterways, etc.)
- Parcel shape and size
While not an exhaustive list, these variables crop up most frequently in our discussions with prospective buyers. We’ll dive into each of these elements below.
Historical Yields
Yields measure how much crop is harvested per tillable acre. More crop production implies a farmer is able to sell more, which in turn indicates the farmer can earn more revenue. Given farmers are purchasing equipment, seeds, and chemicals in bulk, yielding more crops per acre results in an increase in profit – in other words, there’s very little additional cost that goes into harvesting more crops once you’re already on the farm. Higher yields equal more annual income.
Since yields are directly correlated to annual farm revenue, they are regularly scrutinized during a sale process. You’ll want to have multiple years of yields handy (we recommend at least five), since weather can seriously impact one year’s crop (for example the 2020 derecho storm in IA severely damaged supply throughout the region).
So what do buyers do with yield information? They’ll take an average of the yields provided and run two analyses: a) compare it to county average yields and available sales data, and b) use commodity prices to calculate gross annual revenue and backtrack into expected rent and land value.
Comparing to County Averages
The USDA publishes county average yields annually. Prospective buyers will compare the yield data published to what you’re able to provide on your farm. This is a very basic analysis – a lot of factors influence yield (we’ll discuss below), but you’ll want to make sure you’re well-versed on why your yields are above or below average. More importantly, if the data is available, prospective buyers (particularly investors) will examine historical yields of recent local sales. That can provide a general range of value for your farmland.
Backing into Farm Value
The most common use of yield data is to back into the farm’s value. Investors will take the average yields, apply a future commodity price assumption (based on actively trading commodity futures or just a hunch on pricing), and determine the annual gross revenue. They can then assume the revenue is anywhere between 30 – 40% of the annual rent owed on the farm. After that, they can apply a capitalization rate (cap rate) anywhere from 2 – 4% based on local comps to backtrack into total land value. There is a lot of variability to this analysis – there’s going to be a huge difference between assuming a 2% cap rate versus a 4% rate. Local comps can help pinpoint the correct rates you should be looking at when doing your own research.
You’ll notice throughout this article that all the variables we will discuss come back to maximizing yield. There are definitive measures that affect yield (mainly soil quality), and there are also shifting measures that impact yield (improvement projects and farming practices). As a landowner, you always have control over the changeable parts of farming – the biggest impact you can make on increasing your farm’s value is working with a great farmer to employ modern practices that improve yield steadily over time.
Soil Quality (Soil Productivity Index)
Soil productivity measures the yield potential of a farm’s soil. Unfortunately, it’s measured differently across the Midwest. Iowa, Illinois, Minnesota, and North Dakota have their own indices (the rest of the United States follows the same methodology). Below is a snip of the numerical ranges soil ratings can have.
Source: Granular.
Across every region, higher is better: a higher rating implies the soil is capable of producing better yields. To note, some indices are weather-adjusted and some are not. For example, a non-weather adjusted index (Minnesota) does not adjust the PI depending on where you are in the state. A northern MN farm could have the same PI as a southern MN farm, though the southern farm would likely yield better given less inclement weather.
Sales prices can be quoted as $/PI or, like in the case of Illinois, $/Class. Illinois splits their PIs into Class A, B, C, or D ratings. Since many Classes can be present in a farm, some prospective buyers will calculate a total price based on the different weightings of Classes within the farm.
As we noted above, soil productivity is meant to indicate yield – with or without historical yields, buyers can use PI comps to estimate what the farm will produce in the future. Comparable sales are important to evaluate here – use comps to see what your target selling price should be yielding with your PI. Soil productivity is available for any farm in your Tillable account – just log in to see where you’re at.
Water Management Systems
Water management is not just for farms near rivers – dependent on topography, certain spots on a farm can hold in rainwater for an inordinate amount of time, rendering the ground flooded and unyielding. Even though the ground is classified as “tillable”, annual flooding can reduce or completely eradicate yields.
Water management systems include tiling and grass waterways to allow for water to run off from the site. This helps protect the crop’s roots to grow and reduces above-ground erosion. Not every farm needs an actual improvement project to be done – talking with your farmer is the best way to figure out the annual situation of your farm. If a portion floods once every ten years, it’s probably not worth spending any money on tiling. But if the same spots show lower yields than their counterparts with similar PI, you may be able to assume a water management issue.
The cost of installing tile is usually on the landowner, though farmers may negotiate a few years of lower rent in exchange for tiling installation costs. Tiling could be a relatively cheap expense if it’s on a smaller parcel of your land (your multi-million dollar property could only require $20k of tiling). Feel free to reach out if you want to discuss tiling options with us – we can help source a quote and more importantly, decide if it’s absolutely necessary to pursue before a sale.
Parcel Shape and Size
Parcel geometry is indirectly related to yield. Irregularly-shaped parcels are hard to maneuver a tractor through, which can make planting, applying chemicals, and harvesting quite challenging. A farmer or investor would much rather have a clean rectangular parcel clear of trees over a funky shape any day. Sometimes convenience is worth a premium.
We’ve seen farmers travel over 50 miles for land. That’s a long way to drag out equipment (and pay for gas!). For that reason, farmers prefer larger parcels that provide more bang for the buck. That’s not always the case – we’ve also seen farmers drive far for 40 acres. But we do believe larger farms attract more buyers and can drive up a sale price.
All is not lost if you have a small polygon of a farm – all farmland is valuable and this is certainly a seller’s market. Emphasizing the attractive parts of a farm is the best thing you can do for your farm’s value – and we’re here to help. With over 1,000,000 acres on the Tillable platform, we’ve seen all kinds of farmland and know how to showcase the very best of your farm. Give us a call to get started!
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