Buying a farm – a Valuer’s perspective | Specific climate, specific risk

In the previous article, I discussed the importance of locality when determining the value of a farm.  Location in relation to relevant markets and unsafe areas were of specific importance.

In this article, we are going to take a closer look at another major role player in the valuation of farmland, namely climate.   Climate is one of the most critical aspects that determine how much and what can be produced in an area and how much a purchaser is prepared to pay for farmland.  Climate includes aspects unique to an area such as rainfall, wind, temperature, frost, and hail.

The word ‘rainfall’ might be one of the most powerful prayer-starters in a farmer’s vocabulary.  Some pray for more, some pray for less.  Whichever the case, it has a significant influence on the price of farmland per hectare.  In areas where rainfall is scarce, such as the Kalahari, it forces farmers to purchase larger areas of land in order to sustain a viable farming business.  That same business can be successfully sustained on smaller farmland in areas with higher rainfall, such as Mpumalanga or even the North West province.  Therefore, price per hectare scales down in dryer areas as supposed to areas with higher rainfall.

Temperature plays a significant role in determining which type of crop can be planted where.  Some crops, like potatoes and avocados, need a frost-free growing period, whilst other crops, such as apples, need cold winters to initiate proper flowering.  The suitability of areas for specific crops plays a role in the price the purchaser is prepared to pay for that land

Hail is another important climatic factor that needs to be considered. The severity of hail damage can be catastrophic.  Total crops can be destroyed with a singular storm.  The Lowveld of Mpumalanga, Loskop Valley, Brits and many other irrigation areas are well known as high-risk hail areas.  Hail not only destroys the crop, but also damages the stems.  The lesions that are left serve as an entrance point for fungus and other diseases, thus hail can have a long term effect and should not be viewed as isolated damage.

The risk of hail damage can be mitigated with hail netting.  This increases the establishments cost of orchards and vineyards, although this high cost is not fully reflected in the price of the established vineyard.  During the 2003/2004 season a farmer in the Loskop Valley lost nearly R32 million in one hail storm, which destroyed the total citrus crop and damaged young vineyard plants that had not yet been covered by hail netting.  The cost of netting and risk of crop loss should be carefully considered.

Although less consideration is given to wind, this climatic factor can have a big influence on the suitability of certain areas for specific crops.  A good example is the Gamtoos Valley, which is well known for its citrus production.  However, the area closer to the Gamtoos River mouth is unfit for citrus production, partly because of exposure to strong winds blowing in from the sea.  The wind results in leaves rubbing against fruit and causing unsightly marks, which in turn lowers the fruit’s grading and makes it unfit for export. The result is that farmers pay less per hectare for farmland in that area.

It is evident that the complex nature of climate in relation to its suitability for specific farming businesses needs to be carefully considered.  Specific climates also brings with it specific risks.  These risks and costs form part of the equation of value.

Rumpff Krüger
Professional Valuer
Commercial, Industrial & Agricultural

Special mention and thanks to Mr. Pine Pienaar who graciously gave permission for his book, Farm Valuations in Practice (Pienaar, 2013) to be used as a source.

Average annual rainfall in South Africa
(Source: www.fao.org)

*This article was originally published on the Farmer’s Weekly website