North Dakota Agricultural Land Valuation Model

Dwight Aakre/Ron Haugen

Farm Management Specialists

March 2012

Valuation and Assessment of Agricultural Land

Agricultural value is defined as the “capitalized average annual gross return”

Annual gross return for: Cropland growing sugar beets or potatoes equals 20

percent of annual gross income produced Cropland growing all other crops equals 30 percent of

annual gross income produced Irrigated production is reduced by 50 percent before

applying the 20 or 30 percent calculation Land used for grazing equals 25 percent of annual

gross income potential based upon animal unit carrying capacity of the land

2

Valuation and Assessment of Agricultural Land (continued)

Data for the most recent ten years are used with the high and low years dropped and the remaining eight years averaged (Olympic average)

Average landlords share of gross return is divided by the capitalization rate to derive land value

3

Cropland

The data needed to estimate gross revenue for cropland in each of the state’s counties are:

1. acreages for each of the crops grown and fallow in each county

2. yield per acre for each of the crops, and

3. price for each of the crops

The source of data is the National Agricultural Statistics Service (NASS) of the United States Department of Agriculture, for years 2001-2009. Risk Management Agency (RMA) of the USDA was used for 2010 data.

4

Cropland (continued)

The procedure for estimating gross revenue from crop production in each county is, for each crop, as follows:

4. acreage X yield per acre = production5. production X price = value of production in the county

for each crop6. acres of summer fallow, prevent plant and all crops

are summed, and7. values of production for all crops are summed

The results of steps 6 and 7 provide total value of crop production and total cropland acreage for each county

5

Change in Average Crop Revenue2011 to 2012

6

Year 2011 Analysis 2012 Analysis2000 $ 118,892,249 2001 $ 111,850,008 $ 111,850,008 2002 $ 117,900,205 $ 117,900,205 2003 $ 135,366,650 $ 135,366,650 2004 $ 106,952,599 $ 106,952,599 2005 $ 137,595,742 $ 137,595,742 2006 $ 139,725,338 $ 139,725,338 2007 $ 227,944,552 $ 227,944,552 2008 $ 243,999,184 $ 243,999,184 2009 $ 185,589,994 $ 185,325,345 2010 $ 330,430,546

Olympic Average $ 146,858,092 $ 162,463,378

Landowner Share $ 45,403,733 $ 50,127,426

Landowner Share of Average Returns per Acre, 2011to 2012

7

2011 Analysis 2012 Analysis

Landowner Share $ 45,403,733 $ 50,127,426

Cost of Prod. Index 1.393382353 1.473039216

Revenue/C of P $ 32,585,265 $ 34,029,933

Average Acres 762,605 769,070

Landowner Share ofGross Returns/acre $ 42.73 $ 44.25

Capitalized Average Value per Acre for Cropland, 2011 to 2012

8

2011 Analysis 2012 Analysis

Landowner Share of Gross Returns/acre $ 42.73 $ 44.25

Capitalization Rate 0.074 0.05864

Capitalized Value $ 577.43 $ 754.60

Estimating the Value of Native Rangeland and Pasture

Estimating the value of native rangeland and pasture involves estimating the value of calves and cull cows produced per acre of those lands. These estimates are based on the livestock carrying capacity, measured in animal unit months (AUMs). One AUM is assumed to be enough grazing capacity to support a 1,000 pound cow and her calf for one month.

9

Non-cropland

The data needed to estimate gross revenue for non-cropland in each of the state’s counties are:

1. acreages of rangeland and pasture in each county

2. carrying capacity (in AUMs) for rangeland and pasture in each county, and

3. price calves and cull cows

The source of data is the National Agricultural Statistics Service (NASS) and the Natural Resources Conservation Service (NRCS) of the United States Department of Agriculture

10

Non-cropland (continued)

The procedure for estimating gross revenue from non-cropland in each county is as follows:

4. rangeland acres X rangeland AUM factor, plus5. pasture acres X pasture AUM factor = 6. total AUMs for the county7. revenue per AUM is calculated by using production

factors and prices for calves and cull cows8. total non-cropland revenue is total AUMs X revenue

per AUM

The results of these steps provide total value of non-cropland production and total non-cropland acreage for each county

11

Conservation Reserve Program (CRP) Data

The data for CRP are from the Farm Service Agency (FSA), USDA and consists of the number of acres enrolled in the CRP program, by county, and the total payments made in each county for the CRP program

One-half of the total CRP payments are entered as gross revenue from CRP

12

Government Program Payments Data

These data are also provided by FSA and consist of the government payments made in each county for all commodity programs (exclusive of CRP)

13

Capitalization Rate

The data used to develop the interest rate used to capitalize the landlord share of gross revenue is the set of annual average interest rates. The interest rate that is developed is based on the last 12 years, with the high year and the low year dropped (Olympic average), so the rate that results is the average of the ten remaining years.

14

(Senior Asset/Liability Analyst, AgriBank, FCB, St. Paul, MN)

Minimum Capitalization Rate

The 2003 Legislature amended the capitalization rate formula, setting a minimum rate of 9.5 percent to be used when the formula rate falls below this level

The 2005 Legislature amended the formula again, setting the minimum rate at 8.9 percent for 2005 and 8.3 percent for subsequent years

The 2009 Legislature amended the formula, setting the minimum at 8.0 for 2009, 7.7 percent for 2010 and 7.4 percent for 2011, and back to the legislated formula for 2012 and beyond.

15

Historical Capitalization Rates

1994 11.40% 2004 9.50% (8.10%)

1995 11.11% 2005 8.90% (7.73%)

1996 10.76% 2006 8.30% (7.426%)

1997 10.47% 2007 8.30% (7.325%)

1998 10.14% 2008 8.30% (7.178%)

1999 9.77% 2009 8.00% (7.008%)

2000 9.45% 2010 7.70% (6.627%)

2001 9.18% 2011 7.40% (6.25%)

2002 8.91% 2012 5.86%

2003 9.50% (8.53%)16

Note: Numbers in parenthesis are formula rates not used

Cost of Production Index

An index of prices paid for items used for production, interest, taxes and wage rates

From the Economic Research Service (ERS) of the USDA.

Reduces the landowners share of gross return

Reduces calculated land values Added to the model in 1999

17

Cost of Production Index (continued)

1998 n/a

1999 102.5

2000 103.9

2001 105.2

2002 107.2

2003 109.8

2004 112.0

2005 113.8

2006 116.1

2007 118.4

2008 121.4 18

2009 125.7

2010 131.4

2011 139.3

2012 147.3

What Changes Cropland Values?

Capitalization Rate Cost of Production Index Crop Revenue

Crop mix Crop yields Crop prices Government payments CRP payments

19

Change In Cropland Values For 2012 Is Attributed To:

Capitalization Rate (all counties)

= up 26.19%

Cost of Production Index (all counties)

= down 5.41%

Crop Revenuevariable by countyup 5.9% to 17.4%

20

What Changes Non-Crop Land Values?

Capitalization Rate Cost of Production Index Livestock Revenue

Cull cow price Calf price

21

Change In Non-Cropland Values For 2012 Is Attributed To:

Capitalization Rate (all counties)

= up 26.19%

Cost of Production Index (all counties)

= down 5.41%

Livestock Revenue(all counties)

= up 1.88%

22

Thank you Any Questions?

23

Contact Information:

Dwight Aakre 231-7378Ron Haugen 231-8103