How is farmland valued?

Let's say I have a 100-acre land that is used to cultivate wheat. The wheat is harvested and sold once a year. We assume that wheat is the profit-maximizing crop for this land.

Theoretically speaking, what is the most effective way to value this farmland so it is distinguishable from any other 100-acre wheat field? The point is to factor in the price the yield of the land and the cost of cultivating wheat on it (maybe the other land has some nasty hills making farming more difficult).

I'm thinking about doing a DCF, since using valuation multiples would require to know the value of comparable farmlands.

This question is purely theoretical, as I assume that in reality farmland is just valued based on price per sqft and geographic location. What I'm trying to do is find a way to value farmland without taking into account the location of the land but simply by assuming its value is equal to all the future value of the crops cultivated on it.

 

I would imagine your way of looking at it is more applicable to a corporation looking to acquire farmland as an operating asset. If you’re a financial sponsor looking to buy it as a financial asset, the competitive market leasing rental terms will dictate what you can rent-set at, and value is a function of that. Now if you’re a first mover in the market, then it could be useful to understand the value of the asset as it pertains to the user whose cultivating cash crops on it. You can use that and the target user’s cost of capital to back into what you can rent set at, and then use anticipates rental income and opex to back into value. Hard to back into reversionary value if there isn’t a market for it so I’d imagine maybe you go about it using an NPV of NOI with a target discount rate, sort of as I would imagine you do with a ground lease, versus using an exit multiple.

 
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Two years late on this- but here is the actual answer in my experience for anyone who might happen upon this thread. In Iowa, there is something called the Corn Suitability Score, which was developed by Iowa State University back in the 70’s to rank farmland based on soil profile, slope of the ground (as you mentioned), and weather conditions. Score can range from 0-100, with 100 being best. CSR2 is a version of the suitability index that was developed more recently.

Anyways, the score of your farmland actually determines what kind of property taxes you pay in Iowa. Investors and other interested parties will heavily rely on this score and other factors like location when bidding in a land auction.

I’m not sure exactly how it works across the country (I have only bought land in the Midwest) but I would assume other they have somewhat similar systems. Hope this helps someone

 

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