Computing Agricultural Land Use Values

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Computing Agricultural Land Use Values

Farm Management Update, April 1997

By Jack Dunford

In the current discussions of whether to adjust land use values for agricultural land in many Virginia counties in 1997, Virginia Tech has frequently been mentioned as the source of suggested rates that Commissioners of the Revenue must consider. Without meddling in local politics or being partial to any group, this summary briefly discusses the origin of the land use values which are computed at Virginia Tech in the Agriculture and Applied Economics Department on a contractual basis for the Virginia Department of Taxation. The Code of Virginia establishes the SLEAC Committee (representatives are assigned from the Department of Taxation, VDACS, VA Department of Forestry, VA Department of Conservation and Recreation, and College of Agriculture and Life Sciences) and SLEAC establishes the policies and procedure that VA Tech personnel must use in computing land use values.

The land use values are recalculated annually; however, local governments normally choose to adjust the values only when there is a general reassessment in the locality (every five years in most cases). Without getting into a maze of numbers and formulas here is a brief synopsis of the process.

The basis for the calculations is a five-year, running average, net return computation for the major crops produced in a given locality based on secondary data (for example, the Census of Agriculture and VA Agricultural Statistics Service). For most counties, the major crops used are based on cropland harvested acreage for the locality reported in the most recent Census of Agriculture. Cash crops such as, corn, small grains, hay crops, soybeans, orchards, etc., are used in this analysis. Pastureland is excluded from calculations of land use values. Factors including county yields, average commodity prices, cost of production estimates, and government payments (for program crops) are used to determine a net return for each crop.

Next, a composite, or typical, farm is determined for the county by including a given number of acres for each of the major crops based on the proportion of acreage devoted to each crop in the county census. Following a series of mathematical calculations, an "average net return per acre" is derived which is divided by a capitalization rate (based on 10-year average of Federal Land Bank long-term interest rates) to determine the agricultural use value of all participating agricultural land in the county. Then, a weighted average soil index factor is used to determine the use values of Class 3 land The values of the other seven land classes are then computed by multiplying the Class 3 value by appropriate indices reflecting the relative production potential of the respective land classes.

In a nutshell, the land use value reflects what a farmer could theoretically afford to pay for land based on the capitalized net returns of commodities grown on the land over the last five years. This amount is based on the "typical" composite farm and does not include net returns from livestock, dairy, or poultry enterprises. The intent of the land use computation is to find a value of the land based on potential productivity.

Livestock revenues are not included since they are considered as "adding value" to the land. The unfortunate situation in the current agricultural economy is while net returns from beef cattle are near all-time lows coupled with suffering dairy and poultry net returns due to high feed costs. Meanwhile, net returns from crops have risen in recent years as the result of strong prices and higher average yields in many parts of the state during the last five years. In livestock producing counties most of the crops are not sold but are fed to the livestock. There are times when the computed changes in land use values may not accurately reflect the actual profitability of farms in a community. However, the methods used are based on the assumptions that farmers make the choice of either to sell crops on the cash market or to feed them to livestock.

The current land use formula is not a perfect tool, it is the best we have. It is a widely accepted method, stated in the Code of Virginia as an approved process, and is used statewide in developing land use values for some 86 Virginia jurisdictions.

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