SPECIALIST AGRICULTURAL VALUATION METHODOLOGY APPLIED
ALPRO in conjunction with financiers, farmers, agricultural commodity specialist; tertiary institutions, Governmental Departments, auditors, legal experts and professional property valuers have developed a comprehensive agricultural valuation process and reporting format, registered as a trademark, ensuring uniformity and consistency, within this very demanding and specialized domain. Yet again this is a dynamic process of adaptation to the dynamics of the agricultural sector.
Time constraints from request to providing the report has become the dominating issue within the valuation industry. Without adequate internal processes, uniformity and consistency far reaching mistakes will be inevitable. The mere enormity of ring fencing the extent of scope encompassing the valuation of a commercial diversified running concern calls for the understanding of agriculture enterprises. Sub division of all components contributing and presenting different individual values to the total value proves to be the only method in ensuring accuracy and not sub consciously ignoring contributing factors during the valuation process. The ALPRO sub division of various agricultural components there for implies a systematic controllable and verifiable approach in the valuation process.
The uniform sub division developed and utilized by ALPRO makes provision for the following components each analyzed separately and individually as part of the total:
- Legal Entity – ALPRO value agricultural properties individually as per registered Title Deed notwithstanding the fact that in practise most often more than one registered title deed forms part of one farming operation. This requires skill but is essential in providing financiers with the clinical facts in respect of sureties as well as enhancement of the transfer process in land transactions. In combination with the Title Deed approach the verification of Surveyor General Diagrams ensure that the correct factual data of the subject property being applied in the process.
- Location – Similar to any real estate, location has a direct influence on the value of such a property. Although location in the agricultural sector is in most cases depended on perceptions and not directly linked to potential a clear understanding of the location influences is imperative when valuing agricultural properties. As part of the location factor the availability of infrastructure such as electricity provision, roads, support services etc. needs to be analyzed in relation to the dependency of the type of commodity.
- Water rights – The single most valuable contributing component on agricultural real estate need not only to be analyzed according to specific agricultural norms applicable on the specific location, but also in respect of the water source in relation to the sustainability of the source as well as the method of application for agricultural purposes. A clear understanding of the water allocation legislation and different classifications of registration as well as substantial documental prove, as water rights is no longer directly linked to the Title Deed complete the analysis conducted by ALPRO in analyzing the water right component of an agricultural property. Water right should always be provable and linked to the valuation as water rights could be sold separately from land, there for ALPRO’s approach in valuing water separately from land components, accept when permanent crops are applicable.
- Land Components –The specific utilization of land on a subject agricultural property represent different values. It is essential to devise land components according to the specific application whilst simultaneously taking in consideration alternative potential when valuing an agricultural property. The basic land component division developed and utilized by ALPRO will be but is not restricted to:
- Irrigation Cropping Land – Land utilized for growing of seasonal crops with registered water allocation according to the accepted agricultural norm for the specific location and all water reticulation systems in place. Surface irrigation equipment is not valued as part of this land equipment but as a movable asset
- Equipped Land – Rotational irrigation cropping land with all water reticulation networks in place. Water utilized on irrigation cropping land could be redirected to this component.
- Potential Irrigable land - Land suitable for growing seasonal crops but not yet developed. Water registration and availability is a pre requisite.
- Permanent Crops – The valuation of this land component normally distinguish knowledgeable and experienced agricultural valuers from inexperienced ones. To place a value on permanent crops require specialist agricultural knowledge in respect of a multitude of factors such as yield in comparison with age and type of cultivar, market influences, environmental conditions etc. The process of analyzing this component should include the following factors:
- Type of Irrigation System
- Type and specific cultivar
- Age of the crop
- Establishment norms (Spacing; maintenance and harvesting provision, condition etc)
- Dry Land Component – Land utilized for the growing of seasonal crop solely dependent on rain for irrigation purposes. The quality of soil and location becomes the crucial factors in classifying the dry land component in the following categories:
- High Potential Dry Land – Excellent soil quality with high rainfall averages and provable yields.
- Medium Potential Dry Land – Either the soil quality or the average rainfall factor is missing being reflected in the yield per hectare.
- Low Potential Dry Land – Both the soil quality and/or average rainfall components are absent.
- Grazing Land Component – Land utilized for grazing purposes. The general topographical characteristics of the subject property need to be considered in placing a value on such components combined with the climatology of the area. Additional to these aspects carrying capacity (Hectare per large stock unit) should be considered and the extent of this component plays a major role in the value. Internal demarcation and fencing as well as special esthetical attributes is also a contributing factor in determining the value of this component. An essential aspect to be considered is the presence of fire breaks, as the establishment thereof is a costly time consuming exercise whilst the absence have far reaching legal implications. The Grazing Land Component is sub devised by ALPRO in the following categories in analyzing this component:
- Natural Mountainous grazing land
- Natural Low lying grazing land
- Cultivated pastures (Dry / Under Irrigation)
- Waste land component – This is land not suitable for any agricultural application such as cliffs; gorges; riverbeds; runways, dams, fixed improvements roads etc. and should be differentiated from grazing land. If this is not done double value occurs.
- Commercial Land Component – This is land on farms utilized for the construction of commercial processing plants such as mills; diaries; pack houses; Lodges etc. The fact that such commercial ventures normally operates as a separate business unit/entity and could be compared to similar facilities within commercial zone land implicates a different land value.
- Fixed Improvement Components – This component's value differs vastly from that of urban fixed improvements due to influencing factors such as reduced costing; non compliance with building regulations; taxation benefits received; specific application and need in relation to the farming operation; location as well as condition. The basic concept should be to:
- Determine the category of the improvement as well as the necessity thereof.
- Determine the to-day specific building cost based on the material utilized.
- Measure the surface.
- Determine the depreciation factor percentage for age and condition.
- Determine the location factor percentage for the subject property.
ALPRO have made a clear distinction between fixed improvements on an agricultural property according to the following categories:
- Class A Improvements – Fixed improvements essential on any farm. The factor of over capitalization need to be considered.
- Class B Improvements – Fixed Improvements essential and complementing the farming operation. Specialized knowledge regarding specific commodity norms in respect of fixed improvements must be considered in determining the applicability. Such improvement value is reflected in the land component and not as a separate item as this adds value to land components. Class B Improvements includes aspects such as fences; live stock management facilities; roads etc.
- Specialized Improvements – Those fixed improvements specifically designed, developed and equipped in processing produce or streamlining operations with direct cost reductions. The location of such specialized improvements plays a major role in determining a value. Notice should also be taken of any regulatory requirements applicable for operating a specialized improvement such as health and occupation certificates etc. Without such certificates a specialized improvement might be operated illegally, therefore only representing the value of a class B improvement.