How Is Farmland Valued?
Looking at the four indicators.
Investors that invest in farmland in Europe know that the price of farmland considerably varies across different countries.
While arable land costs around €5 500 per hectare in Croatia, it can cost up to €70 000 in the Netherlands.
What explains the difference?
Read on to find out.
1. The Cost of Living
Some countries, like Switzerland, are objectively more expensive than other countries, like Spain.
The reasons that explain this phenomenon are out of the scope of this article. Let’s just consider that this variable is important to value farmland.
Indeed, if the cost of living is higher, the farmer will have to spend more money on energy, employees, seeds, fertilizers, etc.
Therefore, he will have to sell his harvest at a higher price as well.
If his harvest is sold at a higher price, it will earn more money too. Therefore, the price of the land will be generally more expensive.
This rule is observed across most countries, but not all of them.
The land in the Netherlands is much more expensive than the land in Finland for example, despite the fact that Finland is generally more expensive than the Netherlands.
This is due to the productivity of the land.
Farmland isn’t different from a company.
While a factory may produce cars, chemicals, or any other goods, farmland produces food. The more food it produces, the more valuable it is.
The productivity of farmland depends itself on three variables:
- Quality of the land: fertil lands (like in Belgium or Ukraine) grow more food than lower-quality lands.
- Farming techniques: The Dutch have the most advanced farming techniques in Europe, and the yield per square/meter of land cultivated is high.
- Weather: countries where the soil is frozen half of the year (like Scandinavia) will produce less food than countries that can grow food all-year-long like Italy.
There are two reasons why farmland is so expensive in the Netherlands. First, the Dutch are really good farmers.
Second, there isn’t much land available.
3. Supply and Demand for Land
Farmland is bought and sold and its price also varies according to the supply and demand.
When the interest for farmland is low, prices are low as well.
But when demand is higher than the supply, then prices increase.
As the number of people on Earth keeps on growing, we will need more and more farmland, which explains why prices keep on increasing every year.
4. The General Price of Food
Finally, the price of farmland is influenced by the price of the output it produces, namely, food.
The price of food depends on the price of energy on one hand, and on the supply and demand for food on the other.
When a weather event destroys a harvest, for example, the price of food increases.
Since the price of food tends to follow inflation in the economy, this means that the price of farmland increases as well with inflation, which makes it an excellent hedge.
The value of farmland depends on:
- The cost of living in the country where the farmland is located.
- The productivity of the farmland.
- The supply and demand for farmland.
- The price of food.
When we control and understand these variables, we can create reasonable expectations of the future price of farmland which will indicate if farmland is a good investment or not.
To begin your farmland investment journey, go to landex.ai today.
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