In recent years, the dairy industry has experienced a series of fluctuations that have not gone unnoticed by those involved. These changes, including shifts in supply and demand and labor shortages, have impacted more than just the price of milk. They have also influenced the overall production costs and expenses associated with the necessary assets for milk production.
When evaluating new loan requests or reviewing existing credit, various factors come into play, each holding significance. These factors are commonly referred to as the 5 C's of finance: character, capital, capacity, conditions and collateral. Meeting the standards set for these factors is essential for obtaining approval.
In the realm of capital and collateral, the appraised value of dairy real estate, including specialized facilities, takes on great importance. This value serves as a crucial determinant for assessing whether equity and loan-to-appraised values align with established guidelines. So what trends have emerged in this regard?
Appraisal, at its core, examines historical sales for comparative analysis. Keep in mind that several factors contribute to the purchase price of evaluated dairies. These factors include building condition, site improvements, land allocation, design, location, presence of youngstock facilities, manure systems and CAFO considerations.
While looking to the past for sales data is effective during stable times, economic volatility, as observed in 2020 and beyond, introduces lag times into appraisals. This lag complicates new requests. The increase in construction costs due to disruptions caused by the COVID-19 pandemic exemplifies this issue. Appraisals attempting to project the future value of new construction relied on assumptions based on sales that had yet to capture this newfound value. Consequently, projected equity decreased and loan-to-appraised values rose, making it tougher to approve construction requests. This dilemma persisted throughout 2021 and 2022.
Now, in 2023, appraised values are rebounding, considering inflation’s impacts on facility construction and land. A few significant dairy sales in the past two years have generated comparable values more aligned with the current market. These values have experienced a substantial increase. Our benchmark appraisal for large dairies, conducted annually in July, has revealed a 22% value surge in 2023 compared to 2022. This growth surpasses the cumulative 16% increase observed over the previous four benchmark cycles. Additionally, rising construction costs have elevated per-stall values for these facilities. Meanwhile, land values, particularly near dairy facilities, have consistently risen due to competition within the industry and due to external factors such as solar farms. Consequently, appraised values are rising at an accelerated pace, a notable departure from past trends.
In terms of sales, 2022 and 2023 have seen few dairies change hands, with a limited number listed in the Midwest. A notable trend involves larger dairies acquiring or leasing smaller to mid-size counterparts, especially if the dairies come with expansive land bases or share a milk processor. Securing a buyer for the milk remains the number one concern before capital investment. Dairies with respectable facilities, expansion potential and room for growth are particularly attractive to those looking to expand, thereby holding a strong value.
While the possibility of milk price recovery remains uncertain this year, shifts in the valuation of dairy facilities and real estate in dairy-heavy regions may occur. However, current appraised values stand strong. Right now is an opportune time to have the farm appraised.
