methods of valuation

METHODS OF VALUATION RURAL - INCOME

METHODS OF VALUATION

There are 3 primary methods of valuation which are representative of the 3 major paradigms of value:

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

PRIMARY AND SECONDARY METHODS OF VALUATION

All valuations should consist of at least two methods; the primary and secondary methods. The primary is that method which is most suitable for the particular land use and the secondary method is a check on the primary method. If the secondary method is reasonably close to the primary method then the primary method is accepted. The valuer
never averages the two.

If the secondary method is a long way from the value obtained with the primary method then the valuer should investigate the reasons for the discrepancy. It would generally, indicate a conceptual problem with the primary method.

EXAMPLE

A dairy farm is valued using the income method at $1 000 000. However, the secondary summation method indicates a value of $5 000 000. Upon investigation it is found that the land is near an expanding regional centre and suitable for subdivision into rural allotments. Therefore, the secondary method has alerted the valuer to the fact that the "highest and best" use is not as a dairy but rather, hobby farms.

THE ERRATIC NATURE OF PRIMARY PRODUCTION

Compared with most other land uses forecasting of the expected income of rural properties is most difficult. This is because produce market prices are not steady and vary greatly according to:

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

THE PROBLEM OF AVERAGE MANAGEMENT

The income paradigm assumes that the expected net annual income to be derived from the property in the future is that achievable under "average" or "indifferent" management.

Therefore, if the subject property has above average management, the expected income should be less than the current income and if the subject property has below average management, the expected income should be more than the current income. This is how a potential purchaser of the property would see the investment.

ASCERTAINING THE QUALITY OF MANAGEMENT

The following factors can be used by the valuer to judge existing management. They are the qualities of good management and which should be average management. The farmer should have:

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

The farmer should:

1. Monitor and control the following:
Finance - budgets
Crops, cereals, horticultural
Markets
Inputs.
2. Engage in research and development:
On farm and/or off farm
Read and use trade papers/ departmental brochures
Go to trials, field days, research journals etc
3. Engage outside assessment:
Use consultants
Regular health checks
4. Check:
His/her health
Physical factors - disabilities, age, equipment
Mental factors- stability, alert to new ideas etc
Addiction, drugs, golf, alcohol
5. Evaluate the resource health/condition of:
Livestock
Equipment
Land - pests, weeds, fertility, erosion, pasture
Improvements
6. Evaluate the following performance standards:
Is the farmer living within means?
Appropriate for overall situation?
Reinvestment in capital/stock.

FACTORS USED BY BANKS IN ASSESSING RURAL LOANS

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

See gross margins

NET ANNUAL INCOME

As mentioned, Gross Margins does not take into account fixed expenses and therefore, does not represent the net return to the rural operator. To calculate the net return it is necessary to deduct from the Gross Margin the estimated fixed costs. The fixed costs to take into account are property insurances, property taxes and the rental value of
plant/machinery.

Some analysts include owner's or management reward but there is no need for this. It simplifies the concept when the owner is considered as an investor and the total reward to himself/herself is evaluated on the basis of whether or not it is sufficient return on investment compared with opportunity cost investments. On large company owned
properties the manager's income will be part of the normal cost against labour ie as part of the variable costs. The variable labour costs also include worker's compensation.

Applying opportunity costs of investment to the land and machinery, the rental value is the better measure of annual cost than loss of interest. The rental value of machinery fully takes into account opportunity cost of investment and the depreciation rate. The rental value of land is a more difficult concept and should be offset by any betterment or capital gains. In an expanding economy it may well be determined that
capital gains is more than the annual rental value and therefore, this fixed cost can be ignored.

In any case, if sales are analyzed ignoring the fixed cost of land, the resultant and specialized capitalization rate can be used instead. Therefore, if the valuer foresees capital gains in the immediate future, the fixed cost of land can be ignored in the analysis. This is the assumption for the determination of market value below:

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

MARKET VALUE

Once the net annual income is found it is capitalized at an appropriate rate of interest to find the market value. The appropriate rate of interest is found by analyzing sales of comparable properties but is determined by the riskiness of the enterprise. It is a specialist rate which cannot be used for other than the valuation of comparable rural lands. It is not a full measure of return on investment as it is capitalizes the initial yield
income only.

The capitalization formula is:

MV = AI * 100/CR
Where: MV = market value
AI = net annual inome
CR = net capitalisation rate

ANALYZING RURAL SALES FOR THE CAPITALIZATION RATE

When rural sales are analysed for a net capitalization or discount rate, that rate generally, is comparatively low. This is because:

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

NET CAPITALIZATION RATE

The capitalization method assumes that the market value of a rural property is the present value of all the expected future income and benefits to be derived from owning that property in perpetuity. The capitalization rate is the net capitalization rate, as the annual income which is used in the capitalization formula is the net annual income. The capitalization formula is:

MV = AI * 100/CR

The above formula is used to analyze the net capitalisation rate from sales:

CR = AI/SP * 100

Where:

CR = capitalization rate as a percentage
AI = annual net income
SP = sale price

DETERMINING MARKET VALUE

After the capitalized value of the property is found it is still necessary to add the value of improvements which do not directly contribute to the net income. This is normally the value of the homestead and other domestic buildings. The value of domestic buildings is in inverse proportion to distance from the nearest urban centre. For example, a house on a dairy farm on the outskirts of town will approximate the value of an equivalent house in the town boundaries.

CAPITALIZATION OF MARKET RENTS

The income approach so far has only considered the direct income from production to the rural operator. However, a better income method if available, is the capitalization of net rental value of the property. In practice this method is rarely used because of the dearth of rents of rural properties particularly large rural properties. Often the method of licensed occupation is share farming but this is not particularly useful from a valuation point of view because it is really, an income approach and therefore the net annual returns may as well be used and because of the personal nature of a share farming agreement.
However, if rural rents are available, they are a better measure of annual value than the income method because they do not include as many variables and therefore, there is less error in its determination.

DETERMINING MARKET VALUE RENTS

In determining the market rent of a crown tenure all those factors applicable to a lump sum valuation are considered plus those factors particular to the crown tenure. For pastoral properties in the arid regions there are few sales and rents. Therefore, where there is a dearth of comparable sales or rents, comparison will have to be made with arid regions in other states or difficult adjustments made from nearby freehold properties in the central region.

EXAMPLE

When determining the market rents of pastoral leases, crown controls on use are taken into account. The market rent of pastoral lease is determined almost entirely by the carrying capacity of the subject property. The carrying capacity is found by:

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

Invariably, the first factor will be higher than the second factor but if the second factor is more than the third then, that should be the carrying capacity used. The crown rent is for the land only as the improvements belong to the lessee. The value of improvements can be found by analyzing sales of comparable properties, even those interstate and on
freehold lands.

THE MAXIMUM RENT

The maximum rent payable is set out in the relevant legislation. For example, for pastoral leases in South Australia the maximum rent is:

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls. METHODS OF VALUATION RURAL - INCOME

METHODS OF VALUATION

There are 3 primary methods of valuation which are representative of the 3 major paradigms of value:
Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

VALUATION PRINCIPLES

The valuer looks at rents of comparable properties. Commonly, direct rents are not available and the best evidence is derived from subleases. These are adjusted for the rental value of the improvements by discounting (for example, about 9%) the market value of the improvements. The residue is the market rental value for the land.

PASTORAL LEASE EXAMPLE

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep METHODS OF VALUATION RURAL - INCOME

METHODS OF VALUATION

There are 3 primary methods of valuation which are representative of the 3 major paradigms of value:

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

METHODS OF VALUATION RURAL - INCOME

METHODS OF VALUATION

There are 3 primary methods of valuation which are representative of the 3 major paradigms of value:

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

METHODS OF VALUATION RURAL - INCOME

METHODS OF VALUATION

There are 3 primary methods of valuation which are representative of the 3 major paradigms of value:
Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

NET CAPITALIZATION RATE

The capitalization method assumes that the market value of a rural property is the present value of all the expected future income and benefits to be derived from owning that property in perpetuity. The capitalization rate is the net capitalization rate, as the annual income which is used in the capitalization formula is the net annual income. The capitalization formula is:

MV = AI * 100/CR

The above formula is used to analyze the net capitalisation rate from sales:

CR = AI/SP * 100

Where:

CR = capitalization rate as a percentage
AI = annual net income
SP = sale price

DETERMINING MARKET VALUE

After the capitalized value of the property is found it is still necessary to add the value of improvements which do not directly contribute to the net income. This is normally the value of the homestead and other domestic buildings. The value of domestic buildings is in inverse proportion to distance from the nearest urban centre. For example, a house on a dairy farm on the outskirts of town will approximate the value of an equivalent house in the town boundaries.

CAPITALIZATION OF MARKET RENTS

The income approach so far has only considered the direct income from production to the rural operator. However, a better income method if available, is the capitalization of net rental value of the property. In practice this method is rarely used because of the dearth of rents of rural properties particularly large rural properties. Often the method of licensed occupation is share farming but this is not particularly useful from a valuation point of view because it is really, an income approach and therefore the net annual returns may as well be used and because of the personal nature of a share farming agreement.
However, if rural rents are available, they are a better measure of annual value than the income method because they do not include as many variables and therefore, there is less error in its determination.
METHODS OF VALUATION RURAL - INCOME

METHODS OF VALUATION

There are 3 primary methods of valuation which are representative of the 3 major paradigms of value:

Capitalization or the income paradigm - for clearly investment properties for example, feedlots.
Stock area or the carrying capacity paradigm - usually used as a check method for 1 and 3. However, in pastoral areas, the primary method.
Cleared hectare or the summation paradigm - for properties which are large and not clearly investment farms. For example, family run properties in the traditional pursuits of wheat, sheep and cattle.

In this part we are concerned with the income method of valuation. This is generally, an unreliable method because of:

The erratic nature of primary produce markets, particularly those dependent upon overseas markets.
The problem of average or typical management. It is common for a number of properties within the same locality to have different management and development policies.

Climatic factors both overseas and in Australia. For example, a major determinant of the world's price of wheat is the success or not, of the Russian wheat crop.
Economic and political policies of overseas competitors in regard to their own rural markets. For example, the dumping of wheat by the USA and the protectionist policies of the EEC.
The degree of protection of the Australian producer. For example, the use of marketing boards and a guaranteed price for the product. The income from some "protected" land uses can be forecasted with reasonable certainty. For example, the expected income from dairy farms within a "milk zone" who sell their quota to the local milk producing plant. The value of such a farm is almost wholly a function of the quota and in such a case the capitalization method may be used as the forecasted cash flow is reasonably certain. Other protectionist measures may also make the forecast of future income more reliable. For example, the use of government bodies which guarantee the price of the product such as wheat and barley.

Long term plans for example, 5-10 years. If so are they reasonable?
Short term plans for example, 1 year
Financial and/or physical plans.

Personal factors
Ability to repay
Security (collateral)
Purpose of the loan
Amount and term of loan
Collateral advantage - new accounts etc.

QUALITY OF MANAGEMENT

The farmer should be evaluated in general and specific that is, at both micro and macro levels, according to the following:

Aims and objectives of the farmer
Why farming? Why the current location? Where will he/she be in 5, 10 years time?
Are there physical and financial plans to indicate how they will meet these aims/objectives in both the short and long terms?
Do they know where their true position at this point in time?
Financial, physical and knowledge stock
Has finance performance been to budget?
Crops - crop measurement, inspection
Livestock measure for example, lambing %, death rates and calving ratios.
Market and market methods - alternatives, "lockin" prices and market trends
Futures investment
Inputs - quality, alternatives and prices.

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

VALUATION PRINCIPLES

The valuer looks at rents of comparable properties. Commonly, direct rents are not available and the best evidence is derived from subleases. These are adjusted for the rental value of the improvements by discounting (for example, about 9%) the market value of the improvements. The residue is the market rental value for the land.

PASTORAL LEASE EXAMPLE

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

DETERMINING MARKET VALUE RENTS

In determining the market rent of a crown tenure all those factors applicable to a lump sum valuation are considered plus those factors particular to the crown tenure. For pastoral properties in the arid regions there are few sales and rents. Therefore, where there is a dearth of comparable sales or rents, comparison will have to be made with arid regions in other states or difficult adjustments made from nearby freehold properties in the central region.

EXAMPLE

When determining the market rents of pastoral leases, crown controls on use are taken into account. The market rent of pastoral lease is determined almost entirely by the carrying capacity of the subject property. The carrying capacity is found by:

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

VALUATION PRINCIPLES

The valuer looks at rents of comparable properties. Commonly, direct rents are not available and the best evidence is derived from subleases. These are adjusted for the rental value of the improvements by discounting (for example, about 9%) the market value of the improvements. The residue is the market rental value for the land.

PASTORAL LEASE EXAMPLE

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

VALUATION PRINCIPLES

The valuer looks at rents of comparable properties. Commonly, direct rents are not available and the best evidence is derived from subleases. These are adjusted for the rental value of the improvements by discounting (for example, about 9%) the market value of the improvements. The residue is the market rental value for the land.

PASTORAL LEASE EXAMPLE

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

VALUATION PRINCIPLES

The valuer looks at rents of comparable properties. Commonly, direct rents are not available and the best evidence is derived from subleases. These are adjusted for the rental value of the improvements by discounting (for example, about 9%) the market value of the improvements. The residue is the market rental value for the land.

PASTORAL LEASE EXAMPLE

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

VALUATION PRINCIPLES

The valuer looks at rents of comparable properties. Commonly, direct rents are not available and the best evidence is derived from subleases. These are adjusted for the rental value of the improvements by discounting (for example, about 9%) the market value of the improvements. The residue is the market rental value for the land.

PASTORAL LEASE EXAMPLE

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.

plant/machinery.

Some analysts include owner's or management reward but there is no need for this. It simplifies the concept when the owner is considered as an investor and the total reward to himself/herself is evaluated on the basis of whether or not it is sufficient return on investment compared with opportunity cost investments. On large company owned
properties the manager's income will be part of the normal cost against labour ie as part of the variable costs. The variable labour costs also include worker's compensation.

Applying opportunity costs of investment to the land and machinery, the rental value is the better measure of annual cost than loss of interest. The rental value of machinery fully takes into account opportunity cost of investment and the depreciation rate. The rental value of land is a more difficult concept and should be offset by any betterment or capital gains. In an expanding economy it may well be determined that
capital gains is more than the annual rental value and therefore, this fixed cost can be ignored.

In any case, if sales are analyzed ignoring the fixed cost of land, the resultant and specialized capitalization rate can be used instead. Therefore, if the valuer foresees capital gains in the immediate future, the fixed cost of land can be ignored in the analysis. This is the assumption for the determination of market value below:

The advantage of ignoring the land component is that the use of gross margins is solely
concerned with agricultural viabiity and the analysis is not distorted by urban influences.
Whether or not the urban influence is such that agriculture is not the highest and best
use, canl be revealed by use of the secondary (cleared hectare) method of valuation.

DETERMINING NET ANNUAL INCOME

The net annual income for the above examples of gross margin can be found as follows:

TABLE NET ANNUAL INCOME

	WHEAT	BARLEY	MERINO	POULTRY	PIGGERY	DAIRY
	/ha	/ha	/dse	/mixed bird	/sow	/dse
GROSS MARGIN:	98.82	74.47	20.81	3.46	614.00	31.00
FIXED COSTS
Property Insurance	(0.90)	(1.00)	(0.40)	(0.10)	(15.00)	(0.10)
Property Taxes	(1.50)	(1.80)	(0.70)	(0.30)	(50.00)	(0.35)
Rent plant/ machinery	(4.50)	(3.60)	(2.40)	(1.20)	(95.00)	(0.80)
NET ANNUAL INCOME:	91.92	68.07	17.31	1.86	454	29.75

The farmer expects high capital gains in land value largely through some urban influence, for example, a demand for the hobby farms
Primary production enjoys certain income tax advantages particularly for professional income earners who wish to offset their high urban income with the comparatively low returns and losses from farming.
The ability to use produce from their land or day to day living.

Determining the carrying capacity of the land, assuming no controls
Determining the average number of stock carried over the last 5 years
Determining the current carrying capacity under crown controls.

A starting rent of 80c per sheep and 2.40 per head of cattle; and then;
A maximum increase at the CPI + 10% each year.

The assessment is based on:

A 20 year average stocking level; or
The current stock numbers from the stock return as at 30 April whichever provides the lesser rental value.

VALUATION PRINCIPLES

The valuer looks at rents of comparable properties. Commonly, direct rents are not available and the best evidence is derived from subleases. These are adjusted for the rental value of the improvements by discounting (for example, about 9%) the market value of the improvements. The residue is the market rental value for the land.

PASTORAL LEASE EXAMPLE

Two subleases in the pastoral zone of South Australia were analysed showing a gross rental value of $9-10/sheep. Interstate evidence shows subleases of about $4.6-12/sheep and 5.85-12/sheep. The following are typical benchmark rental values adopted by the Department of Lands in South Australia:

BENCHMARK PROPERTIES

TABLE REGIONAL BENCHMARK RENTS IN SOUTH AUSTRALIA

Cattle country outside the dog fence: 2.80/head
Gawler ranges .54/sheep
North east country .65/sheep
North west country .53/sheep
Flinders ranges .58/sheep

In analysing sales for rental evidence of the land a rental rate of 9% on improvements was used. Gross rents (land plus improvements) were between 5-7/sheep. When comparing a subject property to the rental evidence available, the following valuation factors were taken into account:

PRODUCTIVITY DISABILITIES – PASTORAL LEASES

Lease area - square kilometres
Distance from markets
Maximum allowable stocking
Freight costs
Rated stocking
Lack of permanent water
Average stocking
Poor quality water
Average carrying capacity
Poor location of water (animal per square kilometre)
Poor distribution of water
Average bales produced
Animal pests
Bales per square kilometre
Plant pests
Average rainfall
Mustering problems

Other factors for example, the dog fence. When the market rental is determined it is compared to the maximum rental allowed under the Act.