CHAPTER XIV

THE ECONOMIC VALUATION OF FARM LAND

The valuing of farm property has received comparatively little attention. It is a scientific problem of great importance to the farmer, banker, capitalist, and investing public. In 1919, in the United States there were roughly about $8,000,000,000 invested in farm mortgages. It must be borne in mind that this figure is from a time of peak prices and prosperity, and that it is quite reasonable to estimate that today, due to the financial depression, reduction in the general price level, foreclosures of mortgages and other causes, the total amount of mortgage loans has declined. It is quite safe to presume, however, that farm mortgages will continue to increase with the development and growth of the Federal farm loan system, which is admirably meeting the financial needs of the farmer by providing long time loans at very reasonable rates with the amortization plan of repayment.

In order to obtain a fairly comprehensive understanding of the valuation problem, a few general rules should be stated at this time.

1. Making a valuation of property involves finding what capital sum a purchaser should pay for it, or what the particular estate or interest is worth at a given date.

2. The general rule accepted by the investing public is that the present fair value of property is determined from a consideration of what it is earning and what it may be expected to earn in the future.1

HENRY FLOY, "Value for Rate Making," p. 61,

3. Value as considered in this case is to be understood from the investment point of view, or for the purpose of making a mortgage loan. The investor's object in buying property or making a mortgage loan then is:

(a) To find a safe security for his capital which he may withdraw again, when he pleases, by selling out. (b) To secure interest on the money he invests, and so make it productive.

4. The price at which a property is selling may only be accepted as a criterion of value when after thorough investigation it is borne out by a proper valuation on the basis of average annual net income. There are properties in plenty which change hands at far more or far less than their value.1 It is a common error to think that the value of a property is necessarily what it will sell for at any particular time. We need rather, as far as it can be: (a) To know the average price at which it will always sell; and

(b) to be satisfied that the average annual net income will always be sufficient to pay the interest on the investment, and, where it applies, provide the annual contribution to the sinking fund.

Ex-Commissioner M. Basset, of the National Association of Railway Commissioners, is quoted as saying: "Different methods of estimating the value of property may properly be employed when it is valued for different purposes." It is unquestionably true that a valuation. determined solely with reference to the specific case and particular purpose for which the valuation is necessary, alone meets the condition, "fair value." The courts have recognized the truth and reasonableness of this statement and they have rendered decisions having in mind whether the valuation is for purposes of mortgage loans, or purchase and sale, or taxation, or rate making, 1 SAMUEL SKRIMSHIRE, "Valuations,” p. 63.

or capitalization. It may happen that the fair value will be found to be the same for one purpose as another, but not necessarily so.1 As has been stated, in this case valuation is considered from the point of view of the investor or for the purpose of making a mortgage loan.

The process by which the capacity to yield a certain annual income is made the basis for the determination of a certain selling price is termed "capitalization." In a country which is growing in population and wealth, and where land rents are consequently increasing, the selling value of land is apt to be somewhat more than a capitalization of the amount of income it is yielding at the time of the sale would justify. This is because the ownership of land carries with it the right to future as well as present incomes, and the prospective larger future incomes are taken into account in the process of capitalization. On the other hand, the durability of land, the variety of uses to which it may be put, and the social prestige attached to land ownership cause the rate of capitalization, that is, the ratio of income to selling value, to be lower in the case of land in old established communities than in most forms of capital goods.2

Before an appraiser can arrive at the fair valuation of a farm, he must take into consideration a number of factors which influence directly or indirectly the value either at the time of appraisal or at a future period. The most important of these factors will be mentioned here and the ways and means of their affecting the value of the property briefly explained.

Soils

In dealing with agricultural holdings, the soil unquestionably forms the chief point for consideration, for while

1 Speech by M. BASSET, Washington, D. C.

2 R. T. ELY, Capitalization of Rent, in "Outlines of Economics," Revised Edition, 1909.

other factors influence the value, it is nevertheless directly controlled by the nature of the soil. Though it is difficult to define the value of a soil from the percentage of its component parts of clay, sand, and calcareous matter, yet it is a recognized geological maxim that the fertility of a soil will be greater the more varied is its tithological character.1

The natural fertility of a soil is comparatively speaking a permanent quality, and is the chief element in determining the value of the land. Acquired fertility or condition is a quality due to the accumulation within the soil of manurial matters applied by the tenant, and may therefore be looked on as his property. If, after analysis of the soil, the four essentials to plant lifenamely, potash, phosphoric acid, nitrogen, and limeare applied in the proper proportions, it is apparent that the yield as a result will be increased for a number of years. If these ingredients have been applied recently, the value of the land will be enhanced thereby for at least a period of five years, and this fact must not be overlooked when making a valuation.

In order to possess the highest degree of fertility, a soil must be sufficiently porous to allow of superfluous water passing away, but at the same time capable of retaining the necessary moisture required for the use of growing crops, even in time of protracted drouth; its texture should be firm enough to afford the necessary protection to root fibers, and yet allow of their passage in search of nutriment.

One of the fundamental principles of valuation of farm land is that the value of the land is indicated, but not necessarily determined, by the capacity of that land to produce. This is very true in a purely agricultural

1 BRIGHT, "The Agricultural Valuer's Assistant,” p. 20.

district. But picture a farm or an estate, a short distance from a metropolis, the value of which is many times the net yielding power of the land in agricultural products capitalized. Thus it is evident that there are other factors which must be considered.

Location

It is obvious that a farm located near a city will demand a higher rental and has a much greater value than one removed from civilization. A tract of land a few miles from Chicago is worth more than a similar tract of land on the plains of Dakota. The convenience for marketing the farm products is an important consideration. Market towns containing from 1,000 to 5,000 inhabitants generally influence the value of land for a distance of three miles, gradually diminishing from about 30 per cent for that nearest the town. Towns containing 5,000 to 50,000 inhabitants affect the value of land for a distance of six miles, from 50 per cent downwards according to its proximity. Cities and large towns containing more than 50,000 inhabitants increase the value of land within ten miles, that in close proximity being worth 100 per cent more in consequence of its situation.1 In the above estimates it has been assumed that a suitable railway station is within easy reach of the various towns; but in cases where farms are situated near a railway station which though placed in a country district, yet affords ready access to some market town, such accommodation has an appreciable effect on the value of the land.

Climate, Elevation and Contour

Whatever the fertility of a soil may be, its vegetation is determined by the climate of the locality in which it is situated. The altitude above sea level makes a difference in temperature. Wheat often refuses to ripen when 1 BRIGHT, "The Valuation of Land," p. 6.