By Marie Coffin
Economists often say that the value of a good or service is what the buyer is willing to pay and the seller is willing to accept at the same point in time. This is a useful academic definition, but not very helpful to either the buyer or the seller in a transaction. In contrast, Warren Buffett said, “Price is what you pay. Value is what you get.”
In the face of this dichotomy, how should we think about the valuation of land — which is especially important given that the total value for land transactions and related services in the U.S. is a $400 billion industry? Multiple criteria come into play when determining valuation. For starters, the buyer’s intentions matter — and fluctuate depending on their role. The flipper cares about price trends, the long-term investor cares about land quality, the lessor cares about location and rates, the grower-owner cares about the cost of production, and the hobby-owner cares about price and location. (To learn more about the different types of purchasers, click here.)
It is no surprise, then, that each of these investors might arrive at a different dollar amount as the “value” of a given parcel of land.
But that’s just one factor in setting land value. There are also factors particular to an individual investor, such as family considerations and sentimental or historical attachments. To complicate the picture further, a single individual may be assessing a parcel from several viewpoints: they may plan to grow crops on some acres, lease other portions, and enjoy the recreational possibilities of a third portion. For such an individual, the “value per acre” of the land is some aggregate of different valuations for different subsets of the parcel.
In other words, determining land value quickly becomes a complicated process. To get a better picture, it can be helpful to think of a stock market analogy: because of noise in the market and short-term fluctuations, it’s nearly impossible to accurately predict the price of a stock from one day to the next. However, one can use objective criteria such as earnings to estimate a “fair value” for the stock, to use as guidance in buying and selling. Again, different classes of investors (day traders vs long-term buy-and-hold investors) might use those objective criteria in different ways and arrive at different decisions.
At CIBO, our goal is twofold:
● to offer an objective “value per acre” for farmland that a variety of purchasers and renters can use to make informed decisions,
● and to provide objective measures of valuation inputs, such as productivity, soil quality, and yield stability, to inform buyers and sellers as they assess land.
By creating an objective “language” around value, we can standardize the valuation process and ensure everyone involved in land transactions is getting the right value for their role.
About Marie Coffin
Marie Coffin is the VP, Science and Modeling at CIBO, a science-driven software startup. She has focused on being a biostatistician at agriculture companies. Prior to CIBO, she worked for Monsanto, Icoria, Paradigm Genetics, and was an assistant professor at Clemson University. She holds a BS in Mathematics from South Dakota State University and a Ph.D. in Statistics from Iowa State University.