Experts tell how water availability affects land values


Issue Date: May 1, 2019
By Steve Adler

One of the most frequently recurring themes of last week's business conference of California agricultural appraisers was the impact the Sustainable Groundwater Management Act, known as SGMA, is having on land values.

A packed audience of rural appraisers and other related professionals attended the three-day conference of the California Chapter of the American Society of Farm Managers and Rural Appraisers in Sacramento, where they heard a detailed presentation on agricultural land values by appraisers Janie Gatzman and Tiffany Holmes.

"Everything is all about SGMA these days," said Gatzman, who runs an appraisal business in Oakdale.

"If a property owner has dual sources of water—surface water and groundwater—both of which are of good quality and low cost, they are going to be at the high end of the value range and will continue to increase in value," Gatzman said. "If they only have well water, they will be at the low end of value and probably decreasing going forward. And that is not going to surprise anyone."

Rural properties situated in a district that typically has lower federal or state water allocations will be of lower value, because buyers of orchards in those areas will generally have to buy additional land to have enough water to irrigate the planted acreage. Those orchards will typically be at the low end of value, even if they are some of the highest-producing orchards, she said.

Another recurring theme was the tight availability of farm employees and the rising costs associated with those employees. One result has been the increase in plantings of nut crops, which require fewer people to tend and harvest.

"Overall, labor costs have gone up tremendously over the past decade, so those lower-labor crops like nut crops are more profitable for growers," Gatzman said. "But of course, water has had one of the biggest impacts that I have seen in the past 10 years, with buyers chasing land with the best water sources and now dual water sources. Typically, row crops require more labor or have greater competition from other countries that don't have the regulatory requirements and labor requirements that we do, and hence have lower costs."

California harvests a large proportion of the worldwide supply of tree nuts, she noted, "so we are a little better at setting those prices and we have lower labor costs. So, they tend to show the greatest profitability of anything that is out there right now."

Because of regulatory issues such as SGMA as well as the increasing employment costs, there has been a slight decrease in land sales in the past year in both the Central Valley and coastal counties.

"There has been quite a bit of consolidation in coastal areas. If you are looking at fresh berries or even winegrapes, it is generally the larger entities that dominate the market," she said. "But, all of the crops grown there are labor-dependent, and that is having an impact. Also, housing is a huge issue there and that will play into land values if it hasn't already. And of course, water is a big issue there too."

Though there are slightly fewer land sales in the Central Valley, there is increasing interest in properties that have dual sources of high-quality water.

Holmes, a senior appraiser for Edwards, Lien & Toso of Hilmar, said the story "is pretty much the same" across the state.

"There are willing buyers out there, but they are only interested in land that will have good water moving forward," said Holmes, who also reported on the value of dairies.

"Economic conditions for dairies have not been good for the past few years due to the cost of operations and low returns. The central and southern San Joaquin Valley are showing fairly stable, with the northern San Joaquin Valley having a slight decrease," Holmes said.

Gatzman explained that there are three approaches used by appraisers to arrive at property values.

One is the sales-comparison approach, in which an appraiser looks at recent sales of similar orchards.

A second is the cost approach, in which the appraiser determines the underlying value of the land and what it would cost to develop an orchard to its current state. After deducting depreciation, a final value is determined.

The final method is the income approach, in which the appraiser comes up with an estimate of the property's long-term income possibility and then applies a capitalization formula to arrive at the property value.

Although the increase in orchard plantings has been the trend during the past 10 years, that could change in the future, Gatzman said.

"There has been a lot of changes in crop dominance over the last 50 years, so there may be something that comes along that is better than nut crops in the next 10 to 20 years. I look forward to seeing it," she said.

(Steve Adler is associate editor of Ag Alert. He may be contacted at sadler@cfbf.com.)

Permission for use is granted, however, credit must be made to the California Farm Bureau Federation when reprinting this item.