Asset Valuation In Ag Lending Should Built on Geospatial Data
Asset valuation is a process that financial institutions use to determine the value in their portfolios and decide whether or not to approve loans. Ag lenders may rely on data such as a farm balance sheet to determine the value of a parcel of farmland or a farming operation. This report may include assets such as crops (both growing and harvested), as well as livestock, machinery, and permanent infrastructure.
But with so many factors influencing the viability of a farming operation – including water rights, soil and water quality, and changing weather patterns – it’s no longer enough for ag banks and lenders to rely on static measurements of a farm’s value.
Asset valuation must be based on robust, un-siloed datasets that take into account the dynamic and geospatial nature of risk as it impacts an agricultural lending portfolio.
This article will explain why proper asset valuation is so important, and how it can be improved by using the right geospatial data management tools.
Why Proper Asset Valuation Is So Important in Agriculture
The agricultural industry relies on a complicated mix of financial factors, including loans, subsidies, and crop insurance to finance its operations. Proper asset valuation ensures that borrowers, lenders, and investors are on the same page about a farm’s value. But as this report by the International Valuation Standards Council explains, a farm’s value can be assessed in different ways, with varying degrees of accuracy:
“Robust valuations are vital in order to unlock the investment required to support a sustainable economy; to promote the productive use of agriculture property (including land) in sustainable economic growth; to maintain the confidence of capital markets; and to meet the requirements of financial reporting.”
According to the U.S.D.A., farm assets are relatively stable, with “the 2021 farm assets forecast of $3.18 trillion represent[ing] a 1.8 percent increase from 2020.” The average value of U.S. farmland is $3,160 per acre, with real estate making up around 80% of total agricultural assets, and cropland valued much higher than pastureland in most areas – four times as much on the West Coast.
Asset Valuation in a Loan Portfolio
When it comes to ag lending, it’s important for financial institutions to truly understand what’s in a loan portfolio to build financial resilience and protect their bottom line. This includes physical assets such as inventory and infrastructure, as well as less tangible assets such as water rights and access to water resources.
Nuveen, a company that invests in farmland, notes that:
“As water becomes increasingly scarce, farmland with sustainable water resources, including surface and groundwater, should see enhanced valuations.”
But in order to make accurate valuations, ag lenders need access to a greater number of data points, from current groundwater levels to historic water delivery information. By breaking down data silos, and aggregating multiple data sources into a single GIS platform, ag professionals can be empowered to answer the questions they need about water risk.
Challenges of Farmland Asset Valuation
Investing in farmland presents some unique challenges that differ from that of other investments, and modern asset valuation practices haven’t caught up. As the Grains Research and Development Corporation of Australia points out:
“The decision to invest in agricultural land … has traditionally been made without accurate historical knowledge…. Purchasers base their decisions on direct comparison with sales of other, similar farming properties.”
While this particular assessment is in reference to Australia, the same is true for many other agricultural regions, including the American West. Asset valuations don’t always take into account factors such as historical water availability or existing water rights/access to viable water resources, which can render one parcel of land more valuable than a neighboring parcel.
Furthermore, they may not account for infrastructure investments, such as expanded water storage or more efficient irrigation methods, which may lower a parcel of land’s ROI in the short term, but make it more sustainable in the long term.
As the AGree Economic and Environmental Risk Coalition writes:
“The operator and owner have separate and sometimes competing interests…. A given investment may increase the land’s asset value but not enhance the tenant’s income potential. This misalignment of incentives can affect both the adoption of conservation practices and the management of externalities.”
Because of this, it’s important for ag finance institutions to ensure that farmland and other agricultural investments are properly valued, and to communicate that value with stakeholders. In the absence of actionable data-driven intelligence, AGree notes,
“Many farmers view the costs of conservation as not directly linked to revenue… This perception is a major barrier to behavior change and a significant challenge that needs to be considered in structuring credit for conservation investments.”
At the other side of the asset valuation hurdle, there is a true understanding of a lending or investment portfolio’s risk, which empowers accurate asset valuation in agricultural finance.
Asset Valuation Should be Accompanied By Geospatial Data Management Tools
Lenders can improve the accuracy of agricultural asset valuations with geospatial data management tools and use that information to reduce portfolio risk. These assets may include the crop, equipment, and inputs (such as seed and fertilizers), as well as the land itself, and they all should be considered in a dynamic, geospatial context.
Modern GIS tools make it possible for ag banks and lenders to view loan, asset, and appraisal data all in one place, in an intuitive, map-based format that’s convenient to navigate and to share with other stakeholders.
This allows users to compare different assets and value them accordingly, taking into account regional and seasonal variations in water availability, water costs, and other factors. Users can also identify physical risks on a parcel-by-parcel basis, providing opportunities to reduce the overall risk of a loan portfolio.
As the ag finance industry adapts to a new era of climate uncertainty, improved asset valuations and portfolio analytics will be key to protecting lenders’ bottom lines. They will also allow the industry as a whole to mitigate transition risks and reduce barriers to sustainable agriculture adoption, and de-risk its businesses.
The Bottom Line
Asset valuation plays a major role in agricultural finance, allowing lenders to assess the value of farmland and other assets in their portfolios. But without taking into account the dynamic, geospatial nature of risk, ag lenders may not have all of the data they need to make an accurate assessment of an asset’s value.
By aggregating data using geospatial data management tools, lenders can save time and money, and bring their decision-making process into the 21st century
AQUAOSO’s products are purpose-built to help ag finance professionals understand and monitor their water risk, thereby improving their asset valuation process.
The GIS Connect platform allows users to integrate third-party data sets with their own data in a secure GIS data management platform. View loan, investment, supplier, and appraisal data in a single geospatial view. Integrate data with best-of-breed land and climate data through secure APIs. Manage board and regulatory requirements with automated geospatial data management, information collection workflows, and reporting.
21st-century data and risk management technologies in agricultural finance are kingpins of optimizing loan portfolios. One example of this is the enhancement of a business’s ability to track a portfolio footprint. It’s becoming more and more common for businesses and...
Financial institutions have a job to do: manage risk. Managing and reducing risk requires resilience planning, a practice that becomes increasingly easier with better access to the right risk datasets. The fluidity of data usage and utility also plays a key role. ...
Both inside and outside the agricultural sector, enterprise data management is changing rapidly. Each year, Farm Credits and banks are being introduced to new technologies to assess and monitor risk, and regulators increasingly expect that data to be reflected in risk...