Have you ever wondered why multipliers of 25 and 33 years are used in the valuation of rural properties? These figures are not chosen at random. They are the result of an in-depth analysis of the market, reflecting the real behavior of farmland prices. But why the distinction between perennial and non-perennial crops, and what do these multipliers really mean?
In this article, we explain how and why these factors are applied when pricing land for different types of crops.
How were the multipliers determined?
By observing the agricultural land market, we have identified that when dividing the value of land by the annual value of leases, consistent patterns emerge. These patterns indicate that the market tends to value properties based on an expected return of 25 years for perennial and semi-perennial crops, and 33 years for non-perennial crops.
Although there are regional and seasonal variations, these multipliers represent a solid average, used as a reference in the market. They indicate the expected return that the market considers fair for each type of production.
The Financial Logic Behind Multipliers
To understand this better, let’s look at implicit rates of return:
- 25-year multiplier: Applied to perennial and semi-perennial crops such as eucalyptus, coffee and sugar cane, this multiplier reflects an annual rate of return of approximately 4%.
- 33-year multiplier: For non-perennial crops such as soya, corn and cotton, the associated rate of return is around 3% per year.
An interesting point that may arise is: why does the market accept these relatively low rates of return, especially when other investments, such as government bonds, offer higher interest rates, often close to 6% per year?
Why does the market accept lower rates of return?
There are two main reasons for this difference:
- Productivity Growth: Agricultural productivity has been growing by 2.5% to 3% per year, thanks to technological advances and new management practices. This incremental gain offsets the nominally lower rate of return, making investment in farmland still attractive in the long term.
- Inflation protection: Like gold, agricultural land is seen as a safe asset against inflation. Although they don’t generate direct interest, they tend to preserve and even increase their real value over time, providing investors with security, especially in times of economic uncertainty.
Why Do Non-Perennial Crops Use a Larger Multiplier?
The difference between the 25-year and 33-year multipliers is directly linked to the growth potential of each type of crop. In the case of non-perennial crops, such as soybeans, productivity can be higher for a number of reasons:
- Multiple Crops: In the same area, it is possible to plant soybeans, off-season corn and even raise cattle in the off-season, significantly increasing the profitability of the land.
- Crop Diversification: In addition to the main crops, new options such as cotton, sesame and sorghum have been integrated into the rotation system, further boosting production and earnings.
This scenario of greater flexibility and productivity means that non-perennial crops generate faster returns, justifying a higher multiplier and a lower discount rate.
Multipliers: What They Really Reveal About the Value of Rural Property
The multipliers of 25 and 33 years are not just arbitrary numbers; they reflect a well-founded market logic that takes into account the productive potential and the function of land as a store of value. Perennial crops tend to offer more stable returns over time, while non-perennial crops, with multiple harvests and technological innovations, have greater dynamism and growth potential.
Understanding this logic is fundamental for those who wish to correctly assess the value of land and make more informed decisions when investing in rural properties.
