The Capitalization Rate and Real Option Value of Farm Real Estate

Analytic models are developed to value farm real estate and a seller’s (buyer’s) real option to delay its sale (purchase). The model clearly shows the economic and financial fundamentals making up the capitalization rate for farmland, as well as the linkage between two asset classes: farm real estate and traded equity. Further, the most significant driver of farm real estate cap rates appears to be the risk-free rate of interest (analytically) and the yield on 10-year Treasury securities (empirically). Application of the model suggests that observed farm real estate values tend to be closer to the buyer’s rather than the seller’s real option threshold value