I can make an estimate on the revenues / costs per year,
my question is this — what is common in private valuations, are they usually modeled out 5 years then have a perpetuity at year 6, and present value that perpetuity along with the other 5 using 5 yr treasury curve?
how are taxes approached in valuation?
I also understand real estate has an option tied into it, where if value of real estate > farm profit, then real estate trumps cash flow.
This is a simple calculation but I want to be sure I am not missing anything.
I’m no expert but have a few buddies deep in the Midwest ag. The one thing I’d take away from our conversations is that I wouldn’t include that real estate option. It should be based on income and if it’s not, then you’re probably buying overvalued assets
Ok, I’m not going to go into depth here, but you have no business buying farmland for investment purposes. My family does it and has a few million $ in parcels in the midwest. You need to be able to analyze or at least understand output from soil samples, potential land improvements such as irrigation and drainage be able to manage leasing and ensure via soil samples and contract that the land value is not diminished through improper farming, set up tax advantaged entities, beat the highly competitive locals in analyzing the parcels and have a firm feel on the commodities market. If you’re even talking about perpetuities and tax treatments you’re just not in the ballpark. It’s a tricky business with a sophisticated investor pool.
you don’t want your farmland flooded, you want enough water but not too much to ruin the crop
have to rotate crops to keep the top soil from dying
I don’t understand how you wouldn’t have some sort of perpetuity assumption in order to price the crops in future years - are all farmers really modeling out 30 years of crop prices / transportation cost / other cash flows?
what sort of tax advantaged entity is most common for an individual to own? Is there a difference between ownership in actual used farmland and CRP? I assume tax advantaged entity is more useful in case of actual use of land, maybe not though
I’m most interested in the tax implications because it seems to me these are most important (aside from insurance on poor yield years)
Like you read a middle school book on early American farming methods. What’s next, slash and burn? smh
Go for it, I’m not getting into it, but I’ve been watching people successfully do this for 15 years (after growing up on a farm) and you sound clueless AF with your DCF questions and worse when you try to actually talk about farming.
My point is that you should be before you begin tackling land out there, it is an extremely competitive and probably one of the most difficult sectors to invest in with huge barriers tilting the field against you. A DCF without nailing the assumptions (Phosophate and Nitrogen fert prices, corn and soy markets, rents and equipment, land upgrades) is just GIGO. You are competing against local corporate farmers and professional trusts in a highly technical field. As I said, you need to understand the full spectrum of land improvements, their likely return, the current farming backdrop and methods and soil samples. A field can be worth half of it’s neighboring property because of these factors and you’d never know it as an outsider, so you’d pay an even comp. I’ve seen some very experienced people lose their shirts. Buy shares in a corporate farm, which is where all successful REITS wind up eventually. It’s the same exposure but with significantly reduced risks because you have a pro team doing the work.
As a side note BS how did you learn the industry? You said you grew up on a farm and lived in it, but do you think there are any other resources to learn the business? My in-laws are big commercial farmers with millions in land and equipment and I’ve been wanting to learn the industry since it will be in my family for generations.
I learned it by doing, although it was never my main focus. My Dad and his friends do the investing out in the mid-west, I just spectate. The best way is just to be around it and do it and learn unless you’re trying to be serious about getting into a business that scale, in that case you might consider an agriculture degree as well.
My wife and I are inheriting a few hundred acres in North Dakota. Too far east for oil, too far north and west to be good farm land. At least the rent covers the property taxes. I think. I should probably figure these things out before I sign the papers.