December 10th, 2018
Did you know that the average value of Canadian farmland increased 8.4 per cent in 2017? In Ontario, the increase was 9.4 per cent.* These continual increases show that the time to sell a farm may never be better than it is right now. If you’re thinking of selling a farm, you may be wondering how to price it accurately. Undervaluing will leave money on the table, and overvaluing will leave your farm sitting on the market for longer than you may want. Unlike residential real estate, there are many other factors that come into play to price your farm correctly. Let’s take a look at each one in more depth.
Key Factors to Consider for a Farm Land Appraisal
You would expect that greater profits would drive demand for farmland, and therefore increase the cost. However, this report from Bonnefield Research determined there has not been a strong correlation between farm profitability and farmland values at a provincial or national level. The reason lies in how the farmer does business. For example, a farmer with an aggressive business plan, staff, storage capabilities and effective marketing will likely yield more profits than a farmer that lacks these abilities, even if the yield and crop is the same. So if you are running a very profitable farm, it’s worth highlighting this for the purpose of the sale, but it shouldn’t be considered too heavily when determining a selling price.
Farm Productivity and Equipment
Farmland productivity is measured by yield per acre and thanks to advances in agronomy, improvements in equipment and greater efficiencies in farming, the ability to operate a productive farm has increased consistently. Greater yields mean more revenue from each acre of farmland, making farmland more valuable. If you are selling equipment that contributes to the productivity and operation of your farm, the value of that equipment must also be considered when selling a farm.
Commodity Prices and Quota
The cost of the commodity that the farm produces is another factor to consider. The value of what comes from a beef farm will differ from that of an egg farm. Quota prices are either set by a marketing board, or open for bids. Quota is often subject to transfer restrictions and must be approved by the marketing board that manages production.
In general, Canada has enjoyed low interest rates for several years and this has directly correlated with an increase in the average value of farmland. Low interest rates reduce the cost of capital to acquire farmland, which has made it easier for more Canadians to pursue their dream of owning farmland. However, we have started to see recent increases in borrowing costs which has started to cool the farmland market slightly in 2018. This doesn’t mean it’s not a good time to sell. You may simply need to adjust the value of your farm accordingly if you want to attract buyers.
In Ontario, each farm property is assigned a farmland neighbourhood for the purposes of establishing a value for property tax purposes. You can use this as a guideline to help to determine the value of your farm by looking at:
- The climatic zone of the region: Is the climate more enticing and productive for the type of farming that you operate on the property? Higher heat units often correlates into higher yields.
- The soil quality and texture: What is the amount of sand, silt and clay in the soil? Soil is a major influence on the type of crops grown, as well as on crop yield, and varies considerably across Ontario.
- Similarities in market value and farm operations within the same neighbourhood: What have other farms sold for recently in your neighbourhood? How many other farms in the area are producing the same type of crop or product?
- Regional disparities and location: Farms close to urban development areas will often see higher land values. Farms also located in diverse production areas, such as dairy or vegetable productions areas will also see higher demand for land and as such, higher values.
Farms may require valuations for reasons other than the sale or potential sale of the farm. There are professional valuators who may assist you in accurately determining the value of your farm. These valuators will often compare farm sales in your region, and assign a value to your buildings and equipment depending on age and condition.
Consult with a Lerners Agricultural Lawyer
Selling a farm certainly has unique factors to consider, starting with accurately determining its value. At Lerners LLP, our Agricultural Law Group specializes in helping clients with all aspects of agricultural law, including the sale of farmland. For more information, please contact us at: 519-672-4510.