Farm Valuation Issues

Overview

It is not uncommon for farmers to encounter the need to have their farm assets valued.  Lenders, for instance, have a keen interest in understanding the value of assets utilized in the farming operation.  Also, valuation is an issue when estate, business and succession planning is engaged in.  What are the valuation issues that are associated with estate and business planning for farmers and ranchers? 

Valuing farm and ranch assets – it’s the topic of today’s post

Real Estate Valuation

Number of acres.  Farmland is typically the asset of largest value in a farmer’s estate.  That makes it important to arrive at an accurate measure of market value.  The starting point is to correctly denote the number acres.  What are the total acres?  What are the taxable acres?  What are the tillable acres?  Often “total acres” defines the total area within a legal description and makes no reference to quality or any restrictions on title, such as easements.  “Taxable acres” is tied to assessed acres, and “tillable acres” are those that are used in crop production.  Recent developments in technology have made it easier to more accurately determine tillable acres, and certifications to the USDA can also determine tillable acres.  But, “tillable acres” does not include areas that can’t be farmed – waterways, fence rows, timber land, creeks etc.  Make sure that the valuation is accurately measuring the type of land at issue and breaks it out properly. 

Legal descriptions.  Make sure that legal descriptions are accurate.  Local government offices such as the County Recorder and County Auditor can be helpful on this.  They can review a legal description and should be able to determine if any part of the legal description has been transferred.  They can also help to determine how the land at issue is owned – individually, in some form of entity, in fee simple, in life estate, etc. 

Zoning.  For farmland, zoning issues are usually not much of an issue.  But, if an airport is nearby there could be issues that come into play that would restrict the height of structures on the property.  That could impact the ability to erect a cell tower, aerogenerator, or even impact the use of drones on the property. 

Some rural counties do have zoning rules that separate farm uses from non-farm rural homeowners.  When those rules apply, they can impact large-scale confinement operations.  However, each state has a right-to-farm law and in some states, counties do not have the authority to zone “agriculture.”  Of course, the key to that issue is what constitutes “agriculture.”  That’s an issue that either state law defines, or the courts have determined the parameters of in judicial opinions. 

Appraisal.  Getting some type of formal valuation of farmland is critical to gaining a proper understanding of the land’s worth for planning purposes.  One approach is to use a certified appraisal, while another approach is to use an estimate of selling price based on comparable sales.  In any event, some attempt needs to be made to get an accurate view of the land’s fair market value.  Land markets are tricky, and appraisals have their drawbacks and may need to be supplemented with additional data that might not be incorporated into the appraisal, such as local buyer strength, distance to local markets and similar features.  There can also be some unique situations that provide inaccurate data about land values.  Discount the reliability of data involving individual sales and look at larger pool of sale data from your area or region.  The state land-grant university ag land sale/survey data is a good place to start.  That data is typically broken down by region of the state and by land type and whether the land is irrigated or not.  The USDA/ERS (Economic Research Service) also provides survey data of land values on its website.  

Livestock

Valuing livestock is usually not as difficult as valuing land.  Daily market prices exist for just about all types of livestock.  The key is to make sure to understand and properly note differences in livestock with respect to gender, and whether the livestock are to be used for breeding, dairy or meat production purposes.  So, if you know your categories and weight ranges in those categories you will get an accurate picture of value.  Also, livestock can be affected by health issues and catastrophes that can wipe out value very quickly. 

Crops

It is easy to come up with an accurate value for most agricultural crops.  They are valued in a similar manner to that of livestock.  There is a daily market price that is readily accessible.  But, factors that can influence the bottom line regardless of the daily market price include quality and the cost to deliver the commodity to market. 

Valuing fruits and vegetable can be a bit trickier.  Most of those types of agricultural crops do not have any reliable daily market price, and there may not be any type of reasonable guarantee that the fruit or vegetable can be sold at its highest valued use.  Many of these crops are sold via production contract, so that can determine value, but there are risks associated with production contracts that can affect value, such as the contracting processor terminating the contract. 

Also, valuation issues can arise when growing crops need to be valued, perhaps because of the death of the farmer.  Some states, such as Iowa, have specific regulations that apply to establish the value of growing crops.  The IRS also has regulations that provide guidance in this area.  Relatedly, predicting harvest yields is highly speculative.  But it might be possible to use the amount of the potential harvest that is insured as a basis for determining a yield when valuing a growing crop.

Discounting

Under the Obama/Biden Administration, the Treasury Department issued proposed regulations that that would have denied minority discounts in family-controlled entities.  Thankfully, the Trump Administration directed the Treasury to repeal those regulations.  But, there is a much greater likelihood now that those regulations will come back.  If they do, that will be problematic for many farming and ranching operations – particularly so if the exemption from the federal estate tax is reduced significantly as is currently proposed.

In recent decades, discounts for minority interest and lack of marketability have been recognized by the courts as a necessary element in arriving at the true fair market value of a gifted or inherited interest in a family business.  But, if the valuation regulations return they would foreclose many, if not all, of those planning opportunities.  Those regulations represent the Treasury’s attempt to redefine value in just about any manner it desires, and is a movement away from the time-tested (and judicially validated) willing-buyer/willing-seller test.  If the Treasury does resurrect those rules and finalize them in the form they had previously been in, you can expect court challenges that will take years to arrive at a final determination on their validity.

Conclusion

Valuation issues arise often in agriculture. Land is the big item to determine value accurately to the best of one’s ability.  Crops and livestock are usually fairly easy to get an accurate valuation, at least for Midwest type agricultural crops.  But, as always, good valuation numbers will help for financial, tax, and estate, business and succession planning purposes.  Valuation issues will become a bigger issue if the federal transfer tax rules change significantly.