Virginia Use Values Decline

Farm Business Management Update, December-January 2002/2003

By Beth Ann Pelletier

The latest use values for agricultural, horticultural and orchard sectors indicate the fourth straight year of declining values. Tax year 2003 use values recently released by the State Land Evaluation Advisory Council and the Virginia Department of Taxation indicate the use value of an average acre of Virginia cropland was $320 for tax year 2003. The average use value was $85 less than the use value reported in October 2001, a 21 percent decrease. Orchard use values also saw steep declines for tax year 2003. For example, an average apple orchard acre with Type 3 soil classification and no risk in Virginia had a use value of $95 for tax year 2003. These values show a decline of $20 per acre or 17 percent compared to tax year 2002 values released in October 2001.

The decline in use values raises several questions. The first of these questions is, "Why are land values declining?" The first and most obvious reason for these declines lies in the cumulative effect of several years of drought in Virginia. Agricultural, horticultural, and orchard use values in Virginia are determined using a capitalization of net income approach: dividing average net returns by the capitalization rate. The net returns are based on an olympic average using the most recent seven years and dropping the highest and lowest net returns and then averaging the remaining five years for an average net return. Usually, this averaging process helps to mitigate fluctuations in the annual use value estimates caused by unusually good or poor years. However, in recent years, Virginia has seen several consecutive years of low net returns influenced by drought, collapse of grain prices, changes in government payments, and an increase in machinery costs. These consecutive years of poor returns have continued to put downward pressure on the use value of land in Virginia. Declining interest rates are captured in the capitalization rate and put upward pressure on use values; however, this upward pressure has been minor compared to the effect of the declining average net returns. Orchard values have suffered for many of the same reasons as agricultural and horticultural values. However, international competition has quickened their declines.

The next question is, "Will land values continue to decline?" The most recent crop season indicates the answer is, "Yes." Low yields, low prices, high fuel and machinery costs, and other high input costs put downward pressure on use values. Large declines in the peanut sector will also negatively affect use values in Virginia. Decreasing interest rates, good yields, and government income support provide positive influences on land values. However, several years of increasing net returns will be necessary before the positive effects can outweigh the negative impacts Virginia agriculture has seen in recent years. Thus, the answer to the question of continuing declining land values is yes for the near future.

Heavy losses by many Virginia agricultural producers, coupled with low interest rates, have put increasing development pressure on producers in many localities using use value taxation. The events of the past several years have caused some agricultural producers to go out of business but have also provided the opportunity for some producers to expand their operations. These events will likely continue in the near future as values continue to decline.

More information on past and current Virginia use values can be found at http://usevalue.agecon.vt.edu.

Background for Use Value
A synopsis of section 58.1-3229 of the Code of Virginia (http://legis.state.va.us/Laws/CodeofVa.htm) declares that "the preservation of real estate for agricultural, horticultural, forest and open space use is the public interest and Š the classification, special assessment and taxation of such property in a manner that promotes its preservation help foster long term public benefits." Virginia law allows for eligible land in any of these categories to be based upon the land's value in use (use value) as opposed to the fair market value of the land. Section 58.1 -3239 of the Code of Virginia establishes the State Land Evaluation Advisory Council (SLEAC) and directs it to estimate the use value of eligible land for each jurisdiction participating in the land use program.

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