Buying a farm can be a daunting experience – especially for first time buyers! There are so many factors that need to be taken into consideration. What ultimately determines the monetary value of a farm? What will financiers regard as important when considering a loan application?
The concept of the VALUE of a property may differ in the minds of the buyer and the seller, and does not necessarily represent its PRICE. Price is what was paid, while value is concerned with what was perceived to have been received in exchange.
Any farm property has its own profile. Natural resources, locality, rights, improvements, potential and extent all play a part. Every uniquely combined farm profile represents a certain value in the property market.
However, farms with similar profiles but in different geographical areas are seldom assessed at the same value in the market. Area specific factors include climate, terrain, water resources, carrying capacity, industrial development, pests, diseases, alternative uses for farmland and distance to markets. Perceptions about an area are also important, and although it might be very subjective, its influence on farm values are very real.
There are other factors as well that influence farmland values, which are not area-bound, but national. These are factors such as government policy, political issues, technological advancements and the overall economic climate.
In the following series of articles we will be looking more closely at the factors that influence farmland values. The first factor under the magnifying glass will be location.
Location plays a major role in the value of farmland, as in all types of real estate. In agriculture, location in relation to the market and unsafe areas are of specific importance. A good example of location relative to the market is that of two neighbouring farms on opposite sides of a tollgate. One farmer has to go through the tollgate to get to the market, the other not. Although the location of the farms are relatively the same, the costs of transport have a significant effect on the profitability of the farm.
It is also important to consider the distance between the farm and its input suppliers. Bulky inputs such as lime and fertilizers can carry huge transport costs.
The value of a farm located near unsafe areas are mainly influenced by theft and life threatening situations. Sometimes farmers are forced to switch to different types of produce that are less likely to be stolen. For example, from bananas to ginger and lemons, as they have limited usage. Farms adjacent to main roads or that are walking or cycling distance from rural settlements are most likely to be affected by theft and life threatening situations.
Farms that are vulnerable to and continuously affected by criminal activity cannot be utilized to its full potential and therefore decrease in monetary value.
The locality of farms near mining industries can also have a significant influence on a farm’s value. The main factor that comes into play is pollution of soil, water and air.
A good example is that of farms around the Wonderfonteinspruit near Carletonville. The adjacent gold mining activities resulted in pollution of the ground and water with heavy metals over the course of many years. Farmers could no longer sell their cattle or crops, as they have also been affected by the pollution. This farmland was therefore unfit for any further farming activities and farmers had to relocate.
It is quite clear that the location of farmland needs to be taken into serious account before purchase. The relationship between the location of the farm and the specific farming activities must be complementary.
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.