Like any business the value of a farm comes down to anticipating its future stream of incomes. In assessing those cashflows its normal for the market to go through cycles of under-appreciation of the business value to periods of excessive optimism with respect to farm output. These cycles often relate to speculative cycles based on credit (interest rates), market developments and technological innovation.
When we think about the value of a property we need to consider:
1. Potential farm output: What commodities is the farm able to produce?
2. Potential value add: Are they any opportunities to differentiate the farm product as a premium product in order to extra more farmgate revenues? This might involve further processing prior to shipping, or just better brand definition or recognition.
3. Soil fertility: The productive capacity of a farm depends on natural as well as synthetic inputs.
4. Climate: The climate, whether its a natural dryland climate or a modified (irrigration) climate has a isignificant impact on yields per hectare as well as the number of crops. There is the prospect of climate change changing farm values. Farms in the north of Australia are receiving record prices at auction because of the trend towards higher rainfall in those areas. Its inevitable that greater infrastructure spending in those areas will further increase the value of these lands over time.
5. Risk management: There are a number of risk factors posed to farmers, whether its drought, floods, locusts, rodents, cyclones, bushfire, soil erosion, weed infestations or competing land uses like mining or quarrying. We need to look at strategies to reduce the risk of these elements on our business. Some of these factors are harder to manage than others. Ever-present among these risks is the market price risk. We can of course use various financial instruments to manage these risks, but we need to understand that we are not removing risk, we are changing its form. Financial institutions don't carry risks for free, and when you offload a risk, you accept a different type of risk such as a financial or counter-party risk.
6. Capital requirements: Access to debt or equity finance is particularly important where rainfall is unreliable since a farm needs to be able to finance equipment, land acquisition, overheads and inputs, and be able to meet loan obligations in times of tough climatic conditions.
7. Market dynamics: The fundamentals of the grains and lifestock market have become more complicated. Diets are changing, grains have increasingly been used for fuel production, and the land available for agricultural utilisation is declining.
8. Market Structure: In Australia 98.5% of all farms are in the hands of families. A far greater share of farm capacity however is controlled by large agricultural enterprises. The level of enterprise involvement in farming is higher in other OECD countries, particularly the USA and EC.
9. Water availability: Water is a critical resource determining what products can be produced from a property. Availability is important in two respects: The pricing of water and its reliability as a farm input. Inadequate water can severely impact farm yields.
10. Farm management: Increasingly farming is becoming an increasingly sophisticated business. Despite the growing levels of specialisation in the industry, the agricultural sector largely remains conservatively managed. This is a global factor. Enterprises have had little success penetrating this industry. In some cases, corporations have made progress by buying excess water rights.
11. Commodity prices: Like in all sectors we are concerned with real commodity prices.
12. Farm size: Closer to cities there is a tendency for farms to be broken up into smaller fragments to suit urban development or fringe lifestyles. Maintaining the productive capacity of a farm is the key to productive capacity. Larger farms have greater economies of scale. A farm has value as a going concern, or for higher value applications like urban development. An some point urban development is inevitable for fringe lands.
When we think about the value of a property we need to consider:
1. Potential farm output: What commodities is the farm able to produce?
2. Potential value add: Are they any opportunities to differentiate the farm product as a premium product in order to extra more farmgate revenues? This might involve further processing prior to shipping, or just better brand definition or recognition.
3. Soil fertility: The productive capacity of a farm depends on natural as well as synthetic inputs.
4. Climate: The climate, whether its a natural dryland climate or a modified (irrigration) climate has a isignificant impact on yields per hectare as well as the number of crops. There is the prospect of climate change changing farm values. Farms in the north of Australia are receiving record prices at auction because of the trend towards higher rainfall in those areas. Its inevitable that greater infrastructure spending in those areas will further increase the value of these lands over time.
5. Risk management: There are a number of risk factors posed to farmers, whether its drought, floods, locusts, rodents, cyclones, bushfire, soil erosion, weed infestations or competing land uses like mining or quarrying. We need to look at strategies to reduce the risk of these elements on our business. Some of these factors are harder to manage than others. Ever-present among these risks is the market price risk. We can of course use various financial instruments to manage these risks, but we need to understand that we are not removing risk, we are changing its form. Financial institutions don't carry risks for free, and when you offload a risk, you accept a different type of risk such as a financial or counter-party risk.
6. Capital requirements: Access to debt or equity finance is particularly important where rainfall is unreliable since a farm needs to be able to finance equipment, land acquisition, overheads and inputs, and be able to meet loan obligations in times of tough climatic conditions.
7. Market dynamics: The fundamentals of the grains and lifestock market have become more complicated. Diets are changing, grains have increasingly been used for fuel production, and the land available for agricultural utilisation is declining.
8. Market Structure: In Australia 98.5% of all farms are in the hands of families. A far greater share of farm capacity however is controlled by large agricultural enterprises. The level of enterprise involvement in farming is higher in other OECD countries, particularly the USA and EC.
9. Water availability: Water is a critical resource determining what products can be produced from a property. Availability is important in two respects: The pricing of water and its reliability as a farm input. Inadequate water can severely impact farm yields.
10. Farm management: Increasingly farming is becoming an increasingly sophisticated business. Despite the growing levels of specialisation in the industry, the agricultural sector largely remains conservatively managed. This is a global factor. Enterprises have had little success penetrating this industry. In some cases, corporations have made progress by buying excess water rights.
11. Commodity prices: Like in all sectors we are concerned with real commodity prices.
12. Farm size: Closer to cities there is a tendency for farms to be broken up into smaller fragments to suit urban development or fringe lifestyles. Maintaining the productive capacity of a farm is the key to productive capacity. Larger farms have greater economies of scale. A farm has value as a going concern, or for higher value applications like urban development. An some point urban development is inevitable for fringe lands.
