Among the many factors that impact the decision to purchase farmland is anticipated return on investment. The more confident a potential owner is in their ability to generate an ROI, the more likely they are to buy.
As you’re supporting farmland buyers in their decision-making process, GroundOS’s proprietary CashRentstimate algorithm can be a valuable tool to demonstrate the profit potential of a piece of farmland. Let’s walk through what a CashRentstimate is exactly, how it works, and how to integrate it into your advising process.
Or, skip ahead and see for yourself: get a CashRentstimate for your client’s farmland now.
CashRentstimate is GroundOS’s proprietary algorithm for calculating the true value of a piece of farmland. It takes into account over fifty demographics to make this calculation, including:
GroundOS then leverages a multiple linear regression algorithm, a machine learning technique that identifies the most impactful and relevant variables and weights them more heavily. Because different states have different priorities, the CashRentstimate takes state-specific conditions and predominant crops into account.
For example, North Dakota produces more canola and winter wheat than Illinois. As such, canola and winter wheat weigh more heavily in the North Dakota CashRentstimate than they would in Illinois.
After weighting variables, the CashRentstimate correlates each of those 50 variables with cash rental rates for the given region, generating a single formula that provides the most accurate estimate possible.
Rather than calculating rental rates based on 10-year county average, the CashRentstimate takes into account all relevant factors that could impact land value and profitability. This enables GroundOS to recommend a cash rental rate that more accurately reflects the value and profit potential of the land in question.
For more information on how the CashRentstimate stacks up against USDA published county averages, check out this article.
As you advise farmland buyers, you want them to go into the purchase with the best possible information about the value and ROI potential of the farmland. USDA figures won’t provide you that level of certainty and comprehension.
Here are some ways that the CashRentstimate gives you the best information to assess whether the asset in question would be a good investment.
USDA published figures are based on a single demographic: cash rental rate. While this could give you a good sense of fair market value for the region, you don’t really get accurate information about that specific piece of land.
There are a number of factors specific to your farmland that could justify higher rental rates:
While USDA published figures don’t take these land-specific demographics into account, the CashRentstimate does. That way, you lease your farmland at a rate that reflects its true value.
USDA figures are based on ten-year county averages. This means that even if your land value spiked this year, odds are your cash rents aren’t keeping up—because USDA is still factoring ten-year-old prices into their averages.
This is especially important to consider this season. Farmland values have increased consistently year-over-year for decades. Specifically, over the last decade, the average piece of farmland has increased its value by 50%. But in the last three years, that rate of increase has skyrocketed.
To illustrate this phenomenon, let’s compare a ten-year average with a three-year average to see how drastically different it changes the value of the land:
That’s an over $500 per acre difference! As farmland value is a significant driver of cash rental rates, charging based on 10-year averages won’t help you realize the true value of that land based on up-to-date figures.
As an advisor to a potential farmland buyer, this can help them have a clearer picture of the land’s cash flow potential, helping to demonstrate a faster ROI. In fact, we’ve found that CashRentstimates nearly always lead to higher rates than USDA published figures.
In one case, a landowner we work with was able to realize a positive ROI two years sooner than originally anticipated!
The fact that farmers report cash rental payments to the USDA, which are then used as the basis for determining the fair value of a cash rental agreement in following years, runs the risk of creating a positive feedback loop.
This is especially true if you newly acquire a piece of land, and find out the previous owner gave the farmer a sweetheart deal. They could be charging $200 per acre, when the value of the land is now $350. This drives down the county average, which is then used to justify future similar prices.
Because a CashRentstimate provides a more accurate picture of a piece of farmland’s financial value, it can significantly impact their decision to purchase farmland—and even be the deciding factor.
But how do you use the CashRentstimate to drive those decisions? Here are some steps to consider:
When you do all of this, it demonstrates your interest in the landowner’s success in their overall business. This can help strengthen the relationship between the owner and your brokerage over the long term.
Using a CashRenstimate can help you support your landowner as they make a number of key operational decisions. The most important and impactful is obviously the decision to purchase new farmland and understand the potential ROI on that piece of land, but there are others, as we’ve listed above.
If you’re interested in seeing how this tool helps your farmland owner clients specifically, get a CashRentstimate for the various parcels in your portfolio today.
