Spotlight on Economics: Valuation of ag land for tax assessment in ND

Farm Forum

The valuation of agricultural land in North Dakota is determined by capitalizing the value of the landowner’s share of gross return from production. Market value is not used for assessed valuation. Assessed valuation is about one-third of the estimated market value.

Gross revenue for each county is estimated by multiplying the acreage of each crop by the yield per acre by the marketing year average cash price. Twenty percent of the revenue for sugar beets and potatoes, and 30 percent of the revenue for all other crops is considered the landowner’s share.

Revenue from irrigated land is reduced by 50 percent. The landowner’s share of gross return is divided by the cost of production index. This index reflects changes in the prices paid for items used for production, interest, taxes and wage rates. The cost of production index reduces the value of the landowner’s share of production, with the end result being lower calculated land values.

After the landowner’s share of gross returns for the county is reduced by the cost of production index, this value is divided by the total number of reported planted and nonplanted acres to determine the landowner’s share of gross returns per acre. This is an average value for an entire county. The resulting value is divided by the capitalization rate to estimate the average value per acre for cropland in each county.

The capitalization rate represents the average retail rate of loans priced by AgriBank associations during the year to borrowers in North Dakota. The rate is the average of various products that range in duration from short (two-to three-year reset) to long (fixed to maturity of 20 or 30 years). The average is weighted by loan amount. Twelve years of data are used. The highest and lowest values are dropped and the remaining 10 years’ data are averaged.

The value of noncropland is estimated by calculating the value of calves and cull cows produced per acre of grazing land. Grazing land is identified as native rangeland and improved pasture. The production of grazing land is measured in animal unit months of carrying capacity and is held constant from year to year.

The average value per acre of all agricultural land in North Dakota increased by 7.22 percent from 2014 to 2015, based on the value of production. Cropland value increased 7.69 percent and noncropland value increased by 4.1 percent. The formula capitalization rate was 4.95 percent.

The increase in the values for cropland and all agricultural land was primarily due to increased value of crop production. The value of production for most counties has been considerably higher since 2007 than in prior years.

This increase in value of production is a combination of increased yields, higher prices and a change in cropping mix. The capitalization rate change increased land valuations by 4.85 percent in all counties, while the cost of production index decreased land values in all counties by 6.17 percent. The value of production increased cropland valuation from 4.48 percent up to 16.33 percent across individual counties.

Non-cropland values increased by 4.1 percent, all due to an increase in the price received for calves and cull cows.