Method for Calculating Agricultural Capitalised Earnings Value Level Refined

The capitalised earnings value level is an important basis for assessing the value of farms, e.g. at the time of their handover. Agroscope refined the historically developed calculation method using company valuation methods.

Farmers are meant to be owners of the land and of the farm. The agricultural capitalised earnings value according to Article 10 of the Swiss Federal Act on Rural Land Rights plays a key role in achieving this property policy objective. It is relevant when agricultural businesses and agricultural parcels are handed over to the next generation, when a farm is encumbered with mortgages, and when farm leases and property taxes are determined. The agricultural capitalised earnings value is estimated using an estimation manual published by the Swiss Confederation and adjusted at regular intervals to changes in the agricultural capitalised earnings value level. It is therefore very important that it be calculated according to current methods and in a comprehensible manner.

Examining how the agricultural capitalised earnings value level is calculated

The current calculation method developed historically, but has become inconsistent in parts as well as being strongly influenced by the book values. Using the data from the Farm Accountancy Data Network, Agroscope examined the potential implications of a stronger focus on company valuation methods for the agricultural capitalised earnings value level in the valley, hill and mountain regions as well as for various farm types.

Stronger emphasis on cashflows instead of book values…

In company valuation, capitalised-earnings value methods are based on anticipated future free cashflows. Hence, agricultural earnings were derived from agricultural cashflow. By combining information from the ‘income situation’ and ‘farm management’ samples, cashflows associated with the residence can be considered separately. The farm manager’s residence can thus be valued on the basis of the market rent saved.

…leads to lower values for farms in the hill and mountain regions

For a value-level comparison, the capitalised-earnings value of the leased land (not contained in the new method) must be deducted from the current value level, and the value of the farm inventory (contained in the new method) must be added to the latter. In the valley region, the value level of the farm without the farm manager’s residence is similarly high for both methods, i.e. around CHF 640,000. In the hill and mountain regions it is markedly lower according to the new method, viz., CHF 407,000 and CHF 265,000, respectively, instead of CHF 506,000 and CHF 474,000. In terms of farm types, the value level according to the new approach lies between CHF 1 million for the ‘arable’ and ‘speciality crops’ farm types, and at around CHF 60,000 for the ‘mixed dairy and beef’ farm type.

… as well as higher values for the farm manager’s residence in all regions

According to the new method, the value level of the farm manager’s residence is markedly higher in all regions, ranging between around CHF 330,000 and CHF 420,000 – and hence significantly impacts the overall value level of the farm and residence taken together.