Article | Intelligent Investment

A shifting paradigm: Data’s influence on agribusiness buyers and land valuations

The rural property market has historically been dominated by local purchasers, but the dynamics have shifted.

June 10, 2022

By Simon Altschwager

Farmer on ipad in grain field using sophisticated technology to value farmland sun shining in background

The rural property market has historically been dominated by local purchasers – those that operate farms in the surrounding area. The benefit this audience has in their buying decision, is their understanding of the dynamics inherent to that area, and even of the specific property being offered. As a result, farming land has tended to be purchased on a ‘dollar per hectare’ basis, with the rate dependent on the quality of the land and level of development. For larger grazing properties, a ‘dollar per head’ approach is considered, based on an assessed carrying capacity (i.e., Dry Sheep Equivalent (DSE)).

More recently, when it comes to the audience of those buying farmlands, the rural property market dynamics have shifted. These days, the potential buyer pool includes investors from outside the local area, be that intrastate, interstate, or even overseas. These buyers tend to have a ‘big picture’ perspective. They may be considering investing in different areas around the state, country or perhaps even further afield. 

In addition, local purchasers are also lifting their eye to the horizon, outside of their immediate local areas. This is in part due to necessity, with a lack of supply in the immediate area, as well as the desire to diversify and reduce climatic risk factors.

How data analytics is expanding the opportunities for non-local buyers  

Given the growing involvement of non-local investors, the ‘dollar per hectare’ approach is less relevant than it has been previously. Despite the need to consider prevailing local values, the current focus is on ensuring value for money at a far broader scale. The key consideration is the productivity of the land, and hence the revenue of each farm relative to its risks and reliability.

While local investors used to have the upper hand in knowledge, property and agricultural data has become far more accessible for market participants. Information relating to soils, productivity, climate and transaction activity is now more readily available, with many companies and government departments providing varying levels of analysis for consumption. This has allowed potential investors to develop a far greater understanding of diverse markets, often without leaving the office.

How investors (and valuers) consider ‘value’ when it comes to agricultural investment

The use of benchmarking on a productivity basis has become much more common. Beyond the traditional DSE approach, values are also being assessed on the basis of metrics including Adult Equivalent (AE), Standard Pig Unit (SPU), $/bird and $/tray.

For cropping properties, analysis has often been undertaken on a ‘dollar per tonne per hectare’ basis. This is otherwise referred to as ‘dollar per wheat tonne equivalent (WTE)’, which enables the productivity from a wide range of row crops to be calculated back to a standard metric. 

The alternative valuation approach: Analysis of rainfall and soil-type

Conducting production and value analysis based on rainfall and soil-type data is an alternative approach to land valuation. That is, how do values respond to changes in rainfall, be that volume, or consistency?

The ‘Average Monthly Rainfall’ (reflecting the growing season) can be adjusted according to ‘Average Monthly Air Temperature’, ‘Latitude’, ‘Topography’ and ‘Elevation’, to determine ‘Average Monthly Effective Rainfall’. This is the component that is actually available for plant growth, and can be used to calculate benchmark productivity estimates for ‘DSEs’, ‘AEs’ and ‘WTEs’ for each region.

Another increasingly popular approach to agricultural valuations is Discounted Cash Flow (DCF) analysis, taking into account future expectations regarding benchmarked income and expenditure as well as risks around reliability. While having been extensively utilised in the commercial property industry for many years, DCFs have seen limited usage in the agricultural space until relatively recently, where the increasing scale of properties and portfolios now justifies such an approach.

How a maturing property market is creating sophisticated assessments for land value

The rural property market is evolving and maturing quite quickly. As a result, investors are now taking an increasingly sophisticated approach in assessing land values, with comparisons conducted on a much broader scale than previously available. Valuers are tasked with predicting how market participants would behave should a property (or group of properties) be offered for sale. Accordingly, their assessment of value must reflect how the market is viewing values. We are potentially reaching a point where the majority of agricultural assets will be valued on a financial basis, which may reset the relativity between the respective sub-markets.

Where the market is evolving, so must valuers and the methodologies adopted.