How Lenders Value Farm Assets
To ensure that a lender provides loans to the right borrowers and minimizes the risks of default, ag lenders must evaluate the assets of the farm enterprise. The primary assets of most farms include land, equipment, livestock, and inventories. This article explores the ways agricultural lenders value these assets.
Valuating Farm Real Estate
Land and improvements are generally the most significant asset of a farming enterprise. Because of that, a lender will rely on a 3rd party appraiser to establish value. If the real estate is being used as collateral for the loan in question, a lender will have a new appraisal completed. Otherwise, they will rely on the most recent appraisal to establish value.
An appraiser will assess your property's value based on its location, size, best use, soil quality, and access to water and electricity. If your land is in a prime location with high-quality soil and excellent land use, you can expect a higher appraisal value. There are several established methods that appraisers will use to establish value, including:
Sales comparison approach – This approach involves analyzing recent sales of similar properties to determine the land's fair market value.
Cost approach – This approach involves estimating the value of the land based on the cost of replacing the improvements on it.
Income capitalization approach – This approach involves calculating the net operating income from the property and dividing it by the appropriate capitalization rate.
For agricultural real estate, the most common approach is comparable sales. If the property has a lot of improvements, like a dairy, an appraiser may use the cost approach.
Valuating Machinery and Equipment
Farm equipment includes tractors, harvesters, planters, and other machinery used in agricultural operations. There are two ways that lenders often value machinery and equipment on a balance sheet – the market value or the cost approach.
Market value – Lenders establish the market value by evaluating it based on age, condition, and functionality. They will also examine how well the equipment has been maintained and any current or past issues. Then they will compare it to similar equipment currently on the market.
Cost Approach – In this approach, the lender estimates the value of the equipment by determining the cost of purchasing similar new equipment and then making deductions for depreciation based on the equipment's age, condition, and usage.
Valuating Livestock
Livestock refers to the breeding stock, like mother cows, bulls, and young heifers kept for breeding, and the marketable livestock, like the calves that will be sold. A lender will valuate each separately using a market approach.
Breeding Livestock— Lenders will assess the value of your breeding livestock based on their current market value, given their age, breed, and health status. They may also consider production records of your herd, like milk production or pregnancy rates.
Marketable Livestock – Lenders will evaluate marketable livestock based on the current market price for your species. They will rely on the national price set by the commodity traders or the prices at a local sale barn.
Valuating Inventories
Inventories refer to the goods produced on the farm or purchased for resale, such as crops – like grain stored to market later, feed – like purchased hay to feed cattle, and inputs – like fertilizer used in the following season. Agricultural lenders use either the cost or market value methods to evaluate inventories.
Cost method – The lender estimates the cost of producing or purchasing the inventory and makes allowances for unsold or spoiled items. They will likely rely on your records to help estimate costs.
Market value method – The lender analyzes the current market price of the inventory and multiplies it by the amount of inventory held.
As an agricultural producer, obtaining financing from lenders is often critical to your success in the industry, and you will need assets to be used as collateral for that financing. It can be challenging to determine how lenders value your assets and if they’ve given you a fair price.
Now that you have a better idea of how your lender establishes value, help your lender by providing the necessary data about your farm assets, farm management, and the competitive landscape. Help yourself by maintaining your equipment, caring for your livestock, and improving your property. Overall, keep a realistic approach when valuing your farm assets, as they fluctuate over time.
