Open Collections

UBC Theses and Dissertations

UBC Theses Logo

UBC Theses and Dissertations

A basis for the tax assessment of orchards in the Okanagan valley of British Columbia Stewart, Earl Walker 1959

You don't seem to have a PDF reader installed, try download the pdf

Item Metadata

Download

Media
[if-you-see-this-DO-NOT-CLICK]
UBC_1959_A4 S8 B2.pdf [ 6.96MB ]
Metadata
JSON: 1.0106126.json
JSON-LD: 1.0106126+ld.json
RDF/XML (Pretty): 1.0106126.xml
RDF/JSON: 1.0106126+rdf.json
Turtle: 1.0106126+rdf-turtle.txt
N-Triples: 1.0106126+rdf-ntriples.txt
Original Record: 1.0106126 +original-record.json
Full Text
1.0106126.txt
Citation
1.0106126.ris

Full Text

A BASIS POR THE TAX ASSESSMENT OP ORCHARDS IN THE OKANAGAN VALLEY OP BRITISH COLUMBIA by EARL WALKER STEWART B.S.A., University of B r i t i s h Columbia, 19j?6  A THESIS SUBMITTED IN PARTIAL FULFILMENT OP THE REQUIREMENTS POR THE DEGREE OP MASTER OP SCIENCE IN AGRICULTURE i n the Department of A g r i c u l t u r a l Economics We accept this thesis as conforming to the standard required from candidates f o r the degree of MASTER OP SCIENCE IN AGRICULTURE  Members of the Department of A g r i c u l t u r a l Economics THE UNIVERSITY OP BRITISH COLUMBIA April,  1959  ii Abstract The methods of valuation that are available for r e a l property i n general have not been f u l l y adapted to the p a r t i c u l a r problem of farm land assessment  f o r taxation purposes. The main  method upon which the assessment of farms i s based i s an analysis of the prices received f o r comparable properties i n market.  the  Although t h i s method i s x^idely used f o r property other  than farm land, because of several inherent weaknesses i n the method i t i s usually supplemented by, i f not subordinate to, the income c a p i t a l i z a t i o n method which bases value on the income producing a b i l i t y of the property.  This method, however,  found l i m i t e d use i n farm valuations.  has  The present study i s con-  cerned with the adaptation of the income c a p i t a l i z a t i o n method to farm lands as a basis f o r tax assessment with a detailed analysis of the s p e c i f i c problem of orchard assessment. A review i s made of the basic concepts of value and  the  underlying p r i n c i p l e s of property valuation which have been i n f l u e n t i a l i n the development of the present valuation methods. The application of these methods as they are found i n various countries i s also reviewed. The analysis involves the construction of y i e l d , price and cost schedules f o r two main apple v a r i e t i e s , Red Delicious and Mcintosh.  Prom these schedules the annual net incomes of  a tree are calculated; these i n turn are c a p i t a l i z e d to obtain the present value of a tree at d i f f e r e n t ages i n i t s l i f e cycle. The present l e v e l of prices for Mcintosh apples i s found to be too low to r e a l i z e a p o s i t i v e net income from these trees.  Under these circumstances  the only value of such an orchard  l i e s i n i t s basic s i t e value for alternative uses.  Por the  Red Delicious variety p o s i t i v e net incomes are obtained after the trees reach fourteen years of age.  The annual net incomes  are discounted back from f o r t y years of age to the various age groups within Ttfhich the trees are commonly placed.  This pro-  cedure provides a l e v e l of values based upon the earning power of the trees. In order to apply these values i t i s necessary to adjust them for variations i n the p h y s i c a l c h a r a c t e r i s t i c s of the orchards such as s o i l types, topography, erosion and f r o s t . The use of t h i s method of valuation as a basis for tax assessment would provide a more sensitive r e f l e c t i o n of the r e a l differences i n value between v a r i e t i e s and kinds of f r u i t as well as those attributable to the variations i n the physical c h a r a c t e r i s t i c s of the orchard.  This would r e s u l t i n a more  equitable d i s t r i b u t i o n of the property tax.  In p r e s e n t i n g  this thesis i n p a r t i a l fulfilment of  the requirements f o r an advanced degree at the U n i v e r s i t y of B r i t i s h Columbia, I agree that the L i b r a r y s h a l l make it  freely  agree that  a v a i l a b l e f o r r e f e r e n c e and study.  I further  permission f o r extensive copying of t h i s  thesis  f o r s c h o l a r l y purposes may be granted by t h e Head .of my Department or by h i s r e p r e s e n t a t i v e s .  I t is.understood  that  copying or p u b l i c a t i o n o f t h i s t h e s i s f o r f i n a n c i a l  gain  s h a l l not be allowed without my w r i t t e n  Department of stf?s^ux££*zS The U n i v e r s i t y of B r i t i s h Vancouver 8\ Canada. Date  j t  permission.  ^ ^ ^ g ^ ^ d ^ Columbia,  /<?<$~<?  iv Preface The methods that are used i n assessing property for taxation purposes have certain advantages and disadvantages which make them suitable to a greater or lesser degree depending upon the severity of the l i m i t a t i o n s under p a r t i c u l a r circumstances. In view of this s i t u a t i o n i t seems desirable to employ the method which has the least number of l i m i t a t i o n s as a basis for assessment and to employ other methods as checks on the f i r s t . In most cases, however, only one method i s used to indicate the l e v e l of values.  When this i s done, the l i m i t a t i o n s of t h i s  method undoubtedly play an important part i n the f i n a l determination of value although the effects of such l i m i t a t i o n s may not be evident because of the absence of checks. The present study explores the p o s s i b i l i t i e s of adapting another method of valuation, the income c a p i t a l i z a t i o n method, to the assessment of orchard lands for taxation purposes.  The  reason for the adaptation of this method i s to supplement or replace as the main basis, the sales analysis method which i s presently i n use.  I t i s f e l t that the income c a p i t a l i z a t i o n  method would e s t a b l i s h more equitable assessments because of t  i t s greater s e n s i t i v i t y to value determinants than that which can be obtained by the sales method because of the lack of a s u f f i c i e n t number of representative sales of orchard properties. The author wishes to express sincere appreciation to  Dr.W.  J. Anderson, Chairman of the Department of A g r i c u l t u r a l Economi c s for h i s assistance and suggestions i n the development and writing of this thesis. He also wishes to thank the members of the  V  Committee, C.C.  Dean B . A . E a g l e s ,  Gourlay,  Professor  P. H . White,  Professor  D r . C . A . Hornby and D r . J . J . R i c h t e r f o r  guid-  ance and c r i t i c i s m . The a u t h o r  is  also  i n d e b t e d t o members o f  the  Summerland  E x p e r i m e n t a l S t a t i o n and the Economics D i v i s i o n o f the Department o f A g r i c u l t u r e , Horticulture  the B r i t i s h Columbia Department  and to o r c h a r d i s t s  ment o f much o f  the b a s i c  Canada  data.  who a s s i s t e d  i n the  of  establish-  vi TABLE OP CONTENTS LIST OP TABLES LIST OP ILLUSTRATIONS  Page vii viii  Chapter I  II  THE BASIC CONCEPTS OP VALUE  1  Property Value  6  THE GENERAL THEORY OP ASSESSMENT AND VALUATION . . .  10  Appraisal Theory  12  Purpose and Function of Appraisal I I I METHODS OP ASSESSMENT IN OTHER COUNTRIES IV METHODS OP VALUATION IN CANADA V A BASIS POR ASSESSMENT OP ORCHARD LAND  llj. 18 23 29  Determination of Actual Value  35  Determination of Yields  37  Determination of Prices  I|.6  Determination of Cost of Production  hi  C a p i t a l i z a t i o n of Net Income  52  Calculation of Present Values  Sh  APPENDIX  62  BIBLIOGRAPHY  69  vii LIST  OP  TABLES  Table 1  S o i l P r o d u c t i v i t y R a t i n g s f o r t h e Summerland A r e a o f the Okanagan V a l l e y o f B r i t i s h C o l u m b i a . . . .  2  Adjustments Topography  to S o i l  Productivity  Ratings  3  Adjustments Erosion  to S o i l  Productivity  Ratings f o r  Productivity  Ratings f o r  l\. A d j u s t m e n t s t o Blossom F r o s t  Soil  for  5>  C a l c u l a t i o n o f P r e s e n t V a l u e s f o r Red A p p l e T r e e s By Ages  Delicious  6  Summary o f W e i g h t e d by Years f o r Apples V a l l e y , B.C  7  E x p e c t e d N o r m a l Revenue P e r T r e e f o r A p p l e s b y Age G r o u p s a n d V a r i e t y  8  Cost o f Apple P r o d u c t i o n Per Acre i n D o l l a r s by Age o f T r e e s f o r t h e Summerland T r e e F r u i t A r e a o f t h e Okanagan V a l l e y  9  C a l c u l a t i o n o f Net Revenue P e r Groups . . . . . . . . . .  A v e r a g e P r i c e s P a i d t o Growers P e r P a c k e d Box, Okanagan  T r e e by  Age  viii  LIST OP FIGURES Figure 1  Normal Y i e l d f o r Mcintosh Apples . . .  2  Normal Y i e l d f o r Red Delicious Apples  3  Expected Normal Income and Costs f o r Re Delicious Apple Trees  l± Expected Normal Income and Costs f o r Mcintosh Apple Trees 5>. Present Value of Future Income Per Red Delicious Apple Tree . . . . . . .  1 CHAPTER THE B A S I C The even  i n  thing its  word value an  is  economic  quite  CONCEPTS  different.  to  command o t h e r  expressed  i n  terms  "price"  of  specifically, "market  a  price"  i t s  as  power  to  refers It  a name f o r  a  synonym f o r  sometimes  "value"  exchange.  is  is  VALUE  of  a  commodities  commodity  i n  i t  The  power  The  OF  commonly u s e d  context  of  I  i n  i t s  can be  market  to  mean  exchange for  power  said  value  to  then  to  a n d may  goods  or  expressed  the  i n  be  money.  command  that  but  some-  commodity r e l a t e s  exchange to  used  price  money, term  terms  of  money. In that  value  Since ion  reference  depended  producers  of  the  duction  as a  costs  of  wages,  of  commodity rent  commodity must  w i l l  upon  be  value the  to  valuable  a basis  of  the  tended  more  price  a  to  to  p r o p o r t i o n to  scarcity  or  to  the  the  of  rare  depended 1  190lf, ^ ation  upon  the  quantity  paintings, In  the  commodity  resources  when  and p r o f i t s . I t useful  the  have i t s  of  case  "comparative  that  i t  is  usefulness  of  of  Nations  of  pro-  "natural"  Ricardo but  obtain  believed  reproducible  quantity  the  rather  to  product-  "natural"  by  value, but  he  cost  the  said  produced. the  covered  required  example,  Adam S m i t h , The W e a l t h o f B o o k 1, C h a p t e r 5.  i t s  value  to  i t s  i t .  that  commodities,  that  In  scarcity value  l a b o u r e x p e n d e d o n e a c h "f  (1776).  David Ricardo, Principles of P o l i t i c a l London, MacMillan, C h a p t e r 2.  (l8l£).  i n  stated  exchange  labor  for  Adam S m i t h  Smith emphasized  determined  i n  value;  of  and maintained  be  determined  commodity,  their  product  not  case  a  amount  employ  value was  of  London, Methuen,  Economy  and  Tax-  2 Jevons, of the "marginal u t i l i t y " school, emphasized the p r i n c i p l e that cost of production affected value only as i t affected supply.  He said that cost was derived from price and  was not the cause of p r i c e , that the e f f e c t i v e use value of any commodity decreased as the supply expanded, and that i t was use value of the l a s t or marginal unit which determined of the entire supply.  the  the value  The "marginal u t i l i t y " of a commodity,  then, was the usefulness of the l a s t u n i t added to the supply which presumably would be put to the l e a s t important use of a l l the units available.  Since a l l the units were interchangeable,  however, competition would reduce the value of a l l of them  to  the value of the l a s t or marginal unit.3 From the standpoint of value theory, Marshall merged the cost of production and marginal u t i l i t y concepts. Not  utility  alone, nor cost of prodiiction alone, but both of these factors were necessary to explain value according to Marshall. "We might as reasonably dispute whether i t i s the upper or the under blade of a p a i r of scissors that cuts a piece of paper as whether value i s governed by u t i l i t y or cost of production."^- A further r e f i n e ment was provided by dividing the problem of value and price determination Into d i f f e r e n t periods of time; the short-run, the long-run, and the very long-run periods during which secular trends were involved.  He placed the greatest emphasis on  the  "long-run normal" s i t u a t i o n . 3 W.S. Jevons, The Theory of P o l i t i c a l Economy, 2nd ed., London, MacMillan, I 8 7 9 , p. 201 f f . ^ Alfred Marshall, Principles of Economics. 8th ed.,London, Macmillan, 192$, p. 3l+8.  3 Marshall t r i e d to f i n d the point of equilibrium or tendency toward equilibrium of the prices (and values) of s p e c i f i c commodities.  By considering one commodity only i n a s t a t i c s i t u a t i o n ,  he said that the value of that commodity could be defined as the point of balance between the supply and demand forces.£ Most of the references to value, by the c l a s s i c a l economists at least, centre around the term "exchange value" rather than "market value".  John Stuart M i l l declared this tendency,  "The  word value, when used without adjunct, always means,in political economy, value i n e x c h a n g e . T h i s may be because the adjunct "exchange" expresses more c l e a r l y the concept of value than the adjunct "market" which i t s e l f i s often not c l e a r l y defined. The acceptance of exchange value as the basic concept by the e a r l i e r economists has been expressed  somewhat d i f f e r e n t l y by  various a u t h o r i t i e s . This i s i l l u s t r a t e d by the following quotations. The value, that i s exchange value, of one thing i n terms of another at any place and time, i s the amount of that second thing which can be got there and then i n exchange f o r the f i r s t . Thus the term value i s r e l a t i v e , and expresses the r e l a t i o n between two things at a p a r t i c u l a r place and time. Instead of expressing the values of lead and t i n , and wood, and corn and other things i n terms of one another, we express them i n terms of money i n the f i r s t instance and c a l l the value of each thing thus expressed i t s p r i c e . . . .7 3  Ibid., Bk V, chap. I l l , IV,  XV.  ° John Stuart M i l l , P r i n c i p l e s of P o l i t i c a l Economy, ed. Asley, New York, Longmans, Greene and Co., 1926, Bk. I l l , Chapter 1, Section 2. Alfred Marshall, Principles of Economics, 8th London, Macmillan, 1927, p. 61. 7  ed.,  The value of a commodity means i n economics i t s power of commanding other commodities i n exchange. I t means the rate at which the commodity exchanges for others. . . .By the price of a commodity i s s i g n i f i e d the amount of money which i t w i l l command; i n other words i t s value i n terms of the accepted medium of exchange.8 Value i s the power which an a r t i c l e confers upon I t s possessor irrespective of l e g a l autho r i t y or personal sentiments, of commanding, i n exchange for i t s e l f , the labor, or the products of labor, of others.° These d e f i n i t i o n s are not widely divergent i n t h e i r intended meanings but the exact implications of each are subject to i n t e r p retation.  In a discussion of value definitions Bonbright states  that Marshall's d e f i n i t i o n i s the l e a s t s a t i s f a c t o r y i n that i t seems "to imply that the value of a commodity i s the physical tiling for which i t can be exchanged.  This violates the accepted notion  of the nature of value, which regards value as an attribute  or  quality of an object rather than as an object i t s e l f . " 1 0 He says that Taussig's d e f i n i t i o n , although preferable i n this respect, implies that the commodity possesses the power to exchange Itself. Walker's d e f i n i t i o n avoids this implication by stating that such exchange power l i e s with the possessor of the commodity. Bonbright points out that i n defining exchange value i n terms of the price for which a s p e c i f i c commodity can be sold, Walker's d e f i n i t i o n is the most s a t i s f a c t o r y . Another explanation of exchange value i s the current price Frank W. Taussig, Principles of Economics, 3rd York, Harper, 1922, v o l . 1, pp'. 111-113.  1886,  ed., Hew  ^ Francis A. Walker, P o l i t i c a l Economy, New York, Crofts, p. £. :  James C. Bonbright, The Valuation of Property, New York, McGraw-Hill, 1937, v o l . 1, p. lj.5ff.  5  per unit, m u l t i p l i e d by the number of units included i n the commodity to be valued.  Fisher defines price as the quotient of  two quantities exchanged f o r each other and further states: Having obtained the p r i c e of any kind of wealth, we may compute the value of any given quantity of that wealth without supposing that p a r t i c u l a r quantity to be exchanged. The value of a given quantity of wealth i s found by mult i p l y i n g the quantity by the p r i c e . In other words, the value of a certain amount of one kind of wealth i s the quantity of some other kind for which i t would be exchanged, i f the whole amount were exchanged at the price set upon i t . H  1  This d e f i n i t i o n of value i s the one accepted by s t a t i s t i c ians who  attempt to f i n d the value of the nation's wealth, or  the value of the wheat supply.  However, to use the value of any  given commodity o f f the market as determined by the current sale prices of similar commodities on the market to represent the true value of the commodity would be misleading; i t i s rather an Imputed value. In economics, objects have value i n accordance with t h e i r capacity to perform services.  In r e l a t i o n to property, then, i t  may be assumed to have value i n accordance  to i t s capacity to  perform services for the people who use i t through ownership. An object of wealth such as property has the c a p a b i l i t y of giving d i f f e r e n t advantages to d i f f e r e n t owners.  I f this i s accep-  ted then i t i s not accurate to speak of the value of property i n general but rather of i t s value to a s p e c i f i c person or group of persons. H Irving Fisher, The Nature of Capital and Income, New York, MacMillan, 1 9 1 2 , p. 1 3 .  6 "Property Value The c l a s s i c a l economists are p r i m a r i l y r e s p o n s i b l e f o r the i d e n t i f i c a t i o n o f value w i t h market p r i c e . This may r e f l e c t t h e a s s o c i a t i o n s they had and the c o n d i t i o n s under which they were a c q u a i n t e d w i t h v a l u e , such as t h e stock exchange i n R i c a r d o ' s case.  I t I s necessary t o r e c o g n i z e , however, t h a t two r a t h e r  d i s t i n c t concepts o f p r o p e r t y value have a r i s e n , one r e f e r r i n g to  the s a l e o r market v a l u e and the other r e f e r r i n g to the v a l u e  to  a s p e c i f i c person or group o f persons. I f the value o f p r o p e r t y i s to be i n t e r p r e t e d to mean the  p r i c e a t which the p r o p e r t y i n q u e s t i o n can be s o l d o n the market 1  there are many questions which must be asked i n r e l a t i o n to the  12 market c o n d i t i o n s . One  o f the f i r s t important  c o n s i d e r a t i o n s i s t h e time  ved i n the n e g o t i a t i o n o f the s a l e .  invol-'  The market c o n d i t i o n s under  which the concept o f market v a l u e xras e s t a b l i s h e d was probably one  i n which trade took p l a c e r a p i d l y such as w i t h g r a i n s and  stocks w i t h no s i g n i f i c a n t l o s s o f time between the o f f e r f o r s a l e and the completion o f the t r a n s a c t i o n .  Such c o n d i t i o n s are  not t y p i c a l o f p r o p e r t y t r a n s a c t i o n s . Under u s u a l c o n d i t i o n s a p r o p e r t y w i l l b r i n g the owner a h i g h e r p r i c e on the market x^hen he experiences a time l a p s e betxraen the o f f e r f o r s a l e and i t s completion than i f he i s r e q u i r e d by circumstances p r o p e r t y immediately.  to s e l l the  Value has been d e f i n e d e a r l i e r as the  power to command a p r i c e , n o t as a power to command a p r i c e o n l y a f t e r an I n t e r v a l o f time has passed 1  vol.  2  1,  s i n c e the owner's d e c i s i o n  James C. Bonbright, The V a l u a t i o n o f P r o p e r t y (N.Y. p. lj.9ff.  1937)  7  to s e l l the  and the c o n c l u s i o n o f the s a l e .  conditions of property Another  to  A property  the v e n d o r may r e a l i z e  erty  s a l e r e f l e c t market  c o n s i d e r a t i o n i s the exact  ment o f t h e p r o p e r t y .  By t h i s  time  definition  value.  o f d e l i v e r y and pay-  s o l d on c r e d i t x ^ t h a mortgage  a much h i g h e r p r i c e  t h a n t h e same  s o l d f o r c a s h w i t h i n a few days. Both o f these  may be u s e d a s m a r k e t v a l u e s ies value  prop-  sales prices  under the d e f i n i t i o n which  identif-  w i t h power i n e x c h a n g e .  Other c o n s i d e r a t i o n s i n r e l a t i o n whether  both  the p r i c e  i n the market  to market  conditions are  i s t h a t a t w h i c h t h e owner o f t h e  p r o p e r t y would r e p l a c e i t o r the p r i c e  a t w h i c h he w o u l d  sell i t .  Also,  the pressures  other  i n their  are important.  The m a r k e t  value  o f p r o p e r t y may o r may n o t i n c l u d e s e l l i n g  commissions  and o t h e r  t h e b u y e r a n d s e l l e r may b r i n g u p o n e a c h  bargaining process  expenses.  I n view o f the v a r i o u s q u a l i f i c a t i o n s on any f o r m a l d e f i n i t i o n o f m a r k e t v a l u e ,  t h a t must be p l a c e d t h e one u s e d i n c l a r -  i f y i n g p r o p e r t y m a r k e t v a l u e must be r e a s o n a b l y result  the conditions of the sale are l e f t  accordance  value fer  lies  I t i s assumed t h a t t h e r e  i s related  takes p l a c e .  restricts  t o be s e l e c t e d i n  i n i t s r e f e r e n c e t o exchangei s a n ownership t r a n s f e r and  t o the p r i c e a t which the r e a l T h i s f e a t u r e o f market value  I t s useage  the s p e c i a l  o r assumed t r a n s considerably  i n t h e v a l u a t i o n o f p r o p e r t y . Many t y p e s o f  m a r k e t a b l e p r o p e r t i e s w o u l d have a v e r y of  As a  w i t h t h e p u r p o s e f o r w h i c h t h e v a l u a t i o n i s t o be made.  The b a s i s o f m a r k e t v a l u e ability.  flexible.  adaptability  s m a l l market v a l u e  and d e s i r a b i l i t y  to the present  e r s . T h i s i s n o t t o s a y , however, t h a t t h e v a l u e  because own-  of;property to a  8 p a r t i c u l a r owner i s necessarily a f a i r basis for i t s valuation. In c e r t a i n cases, such as for taxation, the market value may  be  the f a i r e r basis because I t can be argued that the value for tax purposes should not exceed the p r i c e that the owner could r e a l ize for his property. Once the intended usage of value has been established the problem of how  to estimate i t a r i s e s .  Marshall's writings i l l u s -  trated the three basic methods of estimating value which are i n use today: replacement cost, market comparison and c a p i t a l i z a t i o n of i n c o m e . H e states ". . • the aggregate "site value" of any piece of building land i s that which i t would have i f cleared of buildings and sold i n a free market. The  "annual site value". . .  i s the income which that price would y i e l d at a current rate of interest".  He also says". . . the c a p i t a l i z e d value of any p l o t  of land i s the a c t u a r i a l "discounted" value of a l l net incomes which i t i s l i k e l y to afford. . . "-^  Marshall also  recognized  the problem of over improvement and under improvement of land and the d i f f i c u l t y of segregating joint returns to land and buildings. Fisher expanded on the views of Marshall that the value of durable goods i s represented urns. ^  by the present worth of future r e t -  He also discussed the discounting process and i t s place  i n the income theory of v a l u e . ^ This has since become one of the main techniques i n modern appraisal. Marshall, op.cit., Book V,Chapters V, XI, XV, Marshall, Principles of Economics. Chapter XI. ^ 1 6  Fisher, op.cit., p. l 8 8 f f . Ibid., Chapter XIII.  Appendix H.  9 Another s i g n i f i c a n t contribution of economic theory from the "neo-classical" economists has been the p r i n c i p l e of substitution.  As applied to property i t states that "when property  i s replaceable, consumers w i l l o f f e r no more on the market than the cost of replacing the property I t s e l f , stitute.  or a comparable sub-  I f replacement costs are below market p r i c e s , produc-  ers w i l l be induced by prospective p r o f i t s to construct b u i l d ings f o r sale.  These tendencies w i l l bring market prices i n  l i n e with new construction costs. "-  L7  This p r i n c i p l e has formed  the basis f o r the valuation of improvements under present appraising methods.  Paul E. Wendt, Real Estate Appraisal, Hew York, Henry Holt and Company, 19£6, p. 50'  10  CHAPTER I I THE GENERAL THEORY OP ASSESSMENT AND VALUATION Weimer states that at the present time there are two important approaches to the study of economic problems: (1)  the i n s -  t i t u t i o n a l - h i s t o r i c a l , and (2) the t h e o r e t i c a l or p o l i c y forming. 1 The f i r s t approach aids i n understanding how the present economic system evolved with p a r t i c u l a r emphasis being placed on those gradual h i s t o r i c a l changes which have brought economic i n s t i t u t i o n s to their present stage of development. The second or theoretical approach i s concerned with a study of the economic system for the purpose of determining the p r i n c i p l e s which explain i t s operation. In order to understand value i t i s necessary to follow both approaches. We need to understand the i n s t i t u t i o n a l framework within which the value of a commodity or a property i s to be determined. Of even greater importance, however, i s an understanding of the economic forces which determine value or changes i n value at a given time. I f value  i s considered as a r a t i o of exchange be-  tween goods and services, price and value may be considered as synonymous, except i n cases where circumstances cause goods to be sold f o r greater or lesser amounts than would be established under conditions  which approximated  a p e r f e c t l y competitive s i t u a t i o n .  In order to understand the forces xtfhich a f f e c t value and price i t i s necessary to divide the value problem into several areas. Arthur M. Weimer, "History of Value Theory for the Appraiser", Appraisal Journal, Amer. Inst, of R/S Appraisers,Jan.1953, v o l . XXI, No. 1, p. 19.  11 I n the ther  they  forces  first  a r e a , goods c a n be  a r e u s e d up r a p i d l y  which a f f e c t  t h e p e r i o d o f time must be ity  or s l o w l y . I n the  are o f v a r y i n g importance  w h i c h i s under  social  T h e r e i s no case  value commun-  wide v a r i a t i o n b e t w e e n m a r k e t p r i c e s a n d  o f goods w h i c h a r e  consumed f a i r l y  rapidly.  since  to r e f l e c t  i t i s necessary  sent value  or p r i c e  is  i t i s necessary  through  future probable  the p r o c e s s to d e t e r m i n e  period of Its productive  the  f o r c e s must be In a r e l a t i v e l y  returns i n pre-  amount w h i c h w i l l  Thus an  g i v e n greater or l e s s e r short period,  in  the  to t h e  short  to note  s u c h as a y e a r  the  de-  property i t i s impossible  to  quantity available  than  or l e s s ,  of  during such  a short  i s of prime importance  d i r e c t i o n o f changes i n p r i c e s , r e n t s and  time.  in values  run.  factors  such  as  are  considered,  c o s t o f p r o d u c t i o n have r e l a t i v e l y  e r w e i g h t . Over a p e r i o d o f s e v e r a l y e a r s , just  var-  weight.  However, when l o n g e r - r u n p e r i o d s o f t i m e supply  that  dif-  forces  a n a l y s i s o f demand f a c t o r s  pointing  be  the  w i t h r e s p e c t to  i t i s also necessary  s i n c e f o r m o s t goods l i k e  a l t e r m a t e r i a l l y the  That  life.  mand f o r c e s a r e o f much g r e a t e r i m p o r t a n c e supply  goods  complicated  of c a p i t a l i z a t i o n .  When c o n s i d e r i n g t h e p r o b l e m o f v a l u e f e r e n t p e r i o d s o f time,  values  Por  d e r i v e d from the p r o p e r t y under c o n s i d e r a t i o n throughout  ious  on  system.  t h e v a l u e p r o b l e m i s much more  say,  the  depending  consideration. Third,  of greater d u r a b i l i t y  to  t o whe-  second area,  c o n s i d e r e d w i t h r e s p e c t to the o b j e c t i v e o f the  or the  i n the  value  classed according  to market changes. Given  supply  a sufficiently  factors  greatcan  long period of  ad-  time,  price  "will  must be to  tend to  noted,  the  extent  Por essary include  knowledge  legal  to  of  and c o m p o s i t i o n o f  the  p r o d u c i n g a commodity.  affect  price  relative time,  and value  of  our  changes  of  It  only  supply.  a decade  o r more,  i n s t i t u t i o n a l and other  framework  development  of  costs  affect  and t e c h n o l o g y ,  the  cost  that  they  weight  12  the  long periods  give  the  people,  however, that  very  to  equal  economic i n the  new p r o d u c t s ,  changes  i n the  In  necThese  and wants  changes  p o p u l a t i o n and changes  is  factors.  system,  tastes  i t  the  in  of  number  property  concept. In the  a d d i t i o n to  type  of  considering  commodity and the  dards  and o b j e c t i v e s  mind.  The  jectives some  concepts  of  of  the  value  the  period of  economic are  of  which a community s e t s  things  assume  greater  for  value  Appraisal The  development  N o r t h America has mainly  concerned  concept the  the  there  necessity itself  other  Hurd,  of  appraisal  value.  theory  ob-  stages,  used  as  the  the procedure  In H u r d was  central  in  obtaining value  He e x t a b l i s h e d  obtain land  the  certain  He a c c e p t e d ,  t h i s method.  to  to  in  stages.  sales  difficulties  returns  stan-  kept  Mertzke and Babcock.  income method o f  r e s i d u a l r e t u r n to  the  to  Theory  some p r a c t i c a l  the  related  and at  were  culating  involved,  community must be  w i t h e s t a b l i s h i n g market  and the main evidence  problem according  time  than at  present  been l e d by  c a p i t a l i z a t i o n of  ized by  of  value  theory, but  real-  in calculating  values  used  today  l a n d and c a p i t a l i z i n g  for  cal-  these  value.^  ^ R i c h a r d M. Hurd, P r i n c i p l e s o f C i t y Land Values, New Y o r k , R e c o r d a n d G u i d e , 1911, p . 122ff.  3rd  ed.,  M e r t z k e , by making use idea of  "normal v a l u e " ,  encies.  He  felt  e q u i v a l e n t and  that i s , value  t h a t the  d e r i v e d by  the  as  evidence  idea that value  income method as As  of value  the  a result  tendwere  i d e a to a p p r a i s a l theory.3 represents  sent worth o f f u t u r e r e t u r n s from p r o p e r t y . prices  the  long-run  three b a s i c approaches to value  adapted t h i s  Babcock d e v e l o p e d  13  o f F i s h e r ' s t h e o r i e s , adapted  and  advocated  He  the  the  pre-  r e j e c t e d market capitalization  of  s o l e r e l i a b l e method o f o b t a i n i n g value.^-  o f t h e work o f M e r t z k e ,  three approaches to v a l u e , replacement  Schmutz, May  e t a l , the  c o s t , market p r i c e s  and  c a p i t a l i z e d income, have b e e n c o n s i d e r e d e q u i v a l e n t a t l e a s t  in  theory. The elation  use  o f the  techniques  This allows the  it  is felt  estimates  o f the  three  to o b t a i n c l o s e r  equivalence  give a misleading  o f the  This  Wendt p o i n t s o u t  averages.  has  t h a t because similar  c o r r e l a t i o n on  adjus-  of differences" for-  a p p r o a c h e s a n d may  a p p e a r a n c e of a c c u r a c y  frequently  t o an a p p r a i s a l estimate. ^  3 Arthur J . Mertzke, Real E s t a t e A p p r a i s i n g . N a t i o n a l A s s o c i a t i o n o f Real E s t a t e Boards, 1927.  Chicago,  ^ F r e d e r i c k M. B a b c o c k , The York, McGraw-Hill, 1932.  Estate,  Wendt, o p . c i t . ,  p.  71•  the  agreement w i t h a p r e f e r r e d  "compression  three  corr-  approaches as  three approaches should y i e l d v e r y  estimate.  of  a p p r a i s a l problem. T h i s  t h e r e i s a tendency to use  data i n order  the  l e d to the use  d i s s a t i s f a c t i o n with  for a particular  t h a t the  method o r v a l u e ces  of the  a l w a y s l e d t o a d e s i r a b l e end.  value ted  because  s e l e c t i o n o f one  most s i g n i f i c a n t not  t h r e e a p p r o a c h e s has  Valuation of Real  New  Ik Purpose and Function of Appraisal The main purpose of an appraisal i s to estimate the value of goods. The c l a s s i c a l purpose i s stated by Marenghi that "appr a i s a l has for i t s fundamental object the study of the processes of valuation of those economic goods for which the market does not express a price i n e x p l i c i t form."^ Medici f e e l s that this d e f i n i t i o n includes only those goods that do not enter into market transactions or only to a l i m i t e d extent.7 He says that t h i s i s u n r e a l i s t i c because the appraiser may be asked to determine the money value of goods such as grain, which, although they have a regular market quotation, w i l l not be available u n t i l a f u t u r e date. He states that the main object of an appraisal i s to provide a method which the appraiser can use i n order to express judgement on the value of any goods. An appraisal of a property  i s made f o r several reasons, the  nature of which determines the approach or procedure that w i l l be involved and as a r e s u l t several types of appraisal have been developed. The p r i n c i p a l types are loan, purchase and sale, condemnation and tax assessment. These types of appraisal are basica l l y similar and the differences that do e x i s t are mainly due to the emphasis placed on a p a r t i c u l a r factor In accordance with the desired end. The main feature of a loan appraisal i s the emphasis on the long-range future prospects. The money lender i s much concerned, ^ E. Marenghi, Lezioni d i Estimo, Milano, L i b r e r i a E d i t r i c e Politecnica, 1925, p. 2 1 . 7 Giuseppe Medici, P r i n c i p l e s of Appraisal. Ames, Iowa State College Press, 1953, P« lq-ff.  15 before making a loan committal, with the p r o b a b i l i t y of complete repayment. I f the lender knows l i t t l e or nothing about the mana g e r i a l a b i l i t y of the borrower, i t i s necessary  f o r him to  guard against this imperfect knowledge by careful consideration of the p r o d u c t i v i t y of the farm, the general outlook of prices for the products produced, and the p o t e n t i a l sale value of the farm. The appraiser's problem of estimating future farm producti v i t y would be considerably s i m p l i f i e d i f the same farmer was to continue to operate the farm throughout the period of the loan. Since i t i s possible, e s p e c i a l l y during long-term loans, that a new owner or manager may take over the operation of the farm, the appraiser must r e l y on the p r o d u c t i v i t y of the t y p i c a l operator i n any given area. This may provide an overvaluation or undervaluation of any p a r t i c u l a r farm. Lending agencies are p a r t i c u l a r l y concerned about the r i s k from price declines. When farm prices decline they tend to do so more as the distance from the consuming center increases because of the f i x e d nature of freight and other handling charges. The depression period provided lenders with an extremely clear record of the r e s u l t s of p r i c e declines.  The number of foreclosures  that occurred at that time may be attributed In part to f a u l t y appraisals. This, coupled with adverse natural and economic conditions, placed both the borrower and lender i n much d i f f i c u l t y . As a r e s u l t of this experience more caution has been taken i n loan appraisals.  16  The most prevalent mistake made i n loan appraisals has been the overvaluation of poor lands. When periods of low prices occur the owners of these lands are unable to meet the payments to which they have committed themselves. Upon closer observation i t i s often found that loans should not have been made on these properties or at l e a s t to a much lesser extent. Purchase and sale appraisals are made as an a i d to prospective buyers or s e l l e r s of farm land. The choice of value i n d i cators and d i f f e r e n t points of emphasis w i l l usually r e s u l t i n d i f f e r e n t appraised values depending upon whether the farm i s being appraised for purchase or for sale. An appraisal made for a prospective buyer w i l l emphasize farm productivity because i t i s i n t h i s that the buyer i s prima r i l y interested. This e n t a i l s a study of the crop and l i v e stock income p o s s i b i l i t i e s of the farm as well as a detailed inventory of the land and buildings. The proximity to markets, schools and other non-income features w i l l be of importance. An appraisal for sale purposes, on the other hand, w i l l emphasize the most favourable of the income and non-income features of the farm and may tend to overlook undesirable characteristics. Another type of appraisal which i s more s p e c i a l i z e d  and  r e s t r i c t e d i n use than the others i s that of condemnation. I t i s used for the valuation of farm lands to be purchased  for govern-  mental projects such as roads, airports or m i l i t a r y purposes. A condemnation appraisal usually uses market value as i t s base but i n order to do justice to the s e l l e r who i s often forced to  17 r e l i n q u i s h the property, a value somewhat above the e x i s t i n g market value may be used. In the appraisal f o r tax assessments the assessor i s mainl y concerned with the achievement of uniformity i n property values.  This i s a necessity i f the d i s t r i b u t i o n of the tax load  i s to be equal among a l l property owners. The assessor, unlike the valuers f o r other purposes, i s faced with the task of mass appraisals and l e g a l deadlines. These place continual pressure on the assessor and he may not have the time to study economic trends as they may affect h i s area. I t i s this method of appraising that i s the main concern of t h i s  thesis.  18 CHAPTER I I I METHODS OP ASSESSMENT IN OTHER COUNTRIES The land tax, as i t was determined i n the western countries "before the i n d u s t r i a l revolution and as i t i s s t i l l i n force i n a great part of the primary producing areas of the world, i s a general tax on land with the base being both i t s c a p i t a l value and i t s income. As they system of taxation evolves, the taxation o f the c a p i t a l value of the land i s d i f f e r e n t i a t e d from the taxation of land income. The former i s subject to property taxation and the l a t t e r to income taxation. In theory, the objective of land taxation has been to tax the actual Income from the land; i n practice, i t has been extremely d i f f i c u l t to r e a l i z e this goal. The d i f f i c u l t i e s of cost ; accounting  f o r a g r i c u l t u r a l enterprises as compared with indus-  t r i a l enterprises are many. Cost, p r o f i t or loss  estimations  are d i f f i c u l t to arrive at with the same p r e c i s i o n as for an i n d u s t r i a l enterprise. Not withstanding  the development of com-  mercial farming I t i s often c a r r i e d on as a way of l i f e rather than as a business enterprise. In most parts of the world the farmer's family and the farm are so c l o s e l y integrated that i t i s almost impossible  to d i s t i n g u i s h the household income and  expenses of the farmer from those of the farm. Also, where household consumption i s high one cannot use the volume of produce available at the marketing stage as a r e l i a b l e measure of farm output. As a r e s u l t land income has been assessed presumptively i n most countries.  19  I n I n d i a and P a k i s t a n , the assessment o f l a n d i s based upon the v a l u e  o f t h e p r o d u c e o f t h e l a n d . T h i s may be e i t h e r  gross or net produce ive  depending upon the systems used i n  states or p r o v i n c e s .  i n the  the crop i s  adjustment  The r e m a i n d e r i s t h e  taxable  I n some o t h e r c o u n t r i e s r e n t i s u s e d as ssment.  T h i s method i s  subject  the r e n t i s  net  value  produce.  the b a s i s  of  asse-  to  The n e t r e n t a l i n c o m e a c c r u i n g t a x and i n the  case o f  to  owner-cultiva-  imputed presumptively through comparison w i t h  similar properties.  In practice  t a x b a s e may be e i t h e r  the net  the deduction o f the p r o d u c e r ' s r e c e i v e d by the  when t h e c r o p  w i d e l y u s e d i n the L a t i n A m e r i c a n and  Middle Eastern c o u n t r i e s . landowners i s  to  The c o s t o f t r a n s p o r t i n g a n d h a n d l i n g o f  deducted from p r e v a i l i n g p r i c e s  calculated.  tors  an  respect-  f o r m o f p e r c e n t a g e s o f g r o s s o u t p u t i s made i n o r d e r  a r r i v e at net output.  is  I f gross produce i s used,  the  the r e n t w h i c h i s t a k e n as annual value of  the l a n d  f a i r share or the  actual  the  after rent  landowner  The a s s e s s m e n t o f l a n d I n Communist C h i n a i s made o n a p r o gressive  scale  based on "normal annual y i e l d " . T h i s i s T O r k e d  out a c c o r d i n g to the  quality of  power,  the n a t u r a l c o n d i t i o n s o f c u l t i v a t i o n s u c h the s o i l ,  number o f h a r v e s t s  the l a n d i n  question.  weather,  i r r i g a t i o n , manpower,  and o t h e r s ,  for a normal season  as  animal for  2  1 Papers and p r o c e e d i n g s o f t h e Conference on A g r i c u l t u r a l T a x a t i o n and Economic Development, e d i t e d by H . P . Wald,Cambridge, M a s s . , 195*1*.. Chao K u o - C h i i n , " C u r r e n t A g r a r i a n R e f o r m P o l i c i e s i n Comm u n i s t C h i n a " , The A n n a l s o f t h e A m e r i c a n Academy o f P o l i t i c a l a n d S o c i a l S c i e n c e s , P h i l a d e l p h i a , 1 9 5 1 » P« 1 I 4 .  20  The tax rates range from three percent when annual t o t a l income per capita of a peasant household i s 15>0 c a t t i e s (approximately 1^0 pounds) of grain to I4.2 percent when the annual t o t a l income per capita reaches 3^+11 pounds of grain or more. The minimum tax base of 1 5 0 pounds may be lowered to 1 2 0 pounds i f i n any one year less than ninety percent of the farming populace pay tax. Taxes must not exceed eighty percent of income. Another feature of the system i s that i f income i n excess of  the normal annual y i e l d i s obtained through more intensive  c u l t i v a t i o n or improvements i n management no extra tax i s l e v i e d . If the harves f a l l s short of the normal annual y i e l d due to the t i l l e r ' s negligence no tax deduction i s made; but i f y i e l d i s decreased by natural phenomena p a r t i a l or t o t a l tax exemption may be granted. Tax exemption i s made for three to f i v e years on newly claimed land. Three alternative methods of c a l c u l a t i n g taxable income are used. Por income from rented land, a hundred pounds of grain are calculated as eighty; from rented-out land, one hundred pounds are  calculated as one hundred and twenty and for self-cultivated  land one hundred pounds are calculated as one hundred. The tax burdens on the various r u r a l classes are approximately as follows: on landlords f i f t y percent, r i c h peasants twenty to twenty-five percent, middle-class f i f t e e n percent and the poor eight percent. Agricultural tax i n the form of public grain formed 3 7 . 2 percent of  the total state revenue of Communist China i n 195>0.3 In I t a l y the most important method of property valuation i s 3  Ibid., p. 1 1 6 .  21  that of income c a p i t a l i z a t i o n . I t i s stated by Medici that " t r a d i t i o n and theory had long agreed that a r a t i o n a l appraisal judgement could be only expressed through the c a p i t a l i z a t i o n of i n come. Moreover they had agreed i n distinguishing a synthetic appraisal method, based upon the synthetic appraisal of the probable market value of the goods to be appraised, from an analyt i c a l method, more correctly known as the c a p i t a l i z a t i o n of i n come. . . . "^ He..recognizes the use of market prices as value indicators but states that such p r i c e s to be v a l i d require d i s t r i c t s within which the farms are uniform i n physical characteri s t i c s . This condition i s r a r e l y found i n h i l l y and mountainous areas which predominate .in Italy-' Areboe's method of appraisal has been widely used i n Germany for many years.^ His method presupposes the a v a i l a b i l i t y of large quantities of data consisting, i n part, of the a l l possible market p r i c e s . Uniform d i s t r i c t s , each representing one type of farming are used as models to e s t a b l i s h basic values. The farms within a given d i s t r i c t for which sale prices are available are analyzed f i r s t apart from the buildings,  equipment  and stock. To do this the value of such improvements are deducted from the market value of the farm.  The bare farm i s then  divided into l o t s according to the kind of crops produced, and a ^ S. Medici, Principles of Appraisal, Ames, Iowa State College Press, 1953, P« 69. ^  Ibid.. p.  I67.  Ibid., p.  16J+.  6  22 value i s assigned to each. This value i s calculated from the sale prices of farms having only one kind of crop i n production. The farms i n a given d i s t r i c t are c l a s s i f i e d according to woil c h a r a c t e r i s t i c s , size of farms and economic conditions such as markest. I t i s from this c l a s s i f i c a t i o n that average prices are obtained for each class. A farm to be valued w i l l have a class assigned to each crop section into which i t has been divided, and since each class has a predetermined  value the  t o t a l value of the farm i s calculated. To this value i s added the value of buildings, equipment and stock. Any necessary additions or deductions for i n d i v i d u a l c h a r a c t e r i s t i c s of the farm are made to the f i n a l value. The American system of property valuation uses three d i s t i n c t approaches i n c a l c u l a t i n g value and then by c o r r e l a t i n g the three resultant values a single f i n a l value i s obtained. The approaches u t i l i z e data obtained on sales, income and costs of given properties. This system has been adopted i n Canada and for most property valuations at least one of these approaches i s used and where adequate data are available a l l three are used. The details of the system w i l l be expanded i n a l a t e r section. This system of the three approaches to value has had acceptance  little  i n European theory or p r a c t i c e , B r i t i s h appraisers  r e l y heavily on the income c a p i t a l i z a t i o n method although the other approaches have been used to a lesser extent.  23  CHAPTER IV METHODS OP VALUATION IN CANADA The valuation methods presently i n use i n Canada were developed at the same time as those i n the United States. As a r e s u l t the p r i n c i p l e s behind the methods and their applications are similar i n both countries. The process that has been establ i s h e d i n the use of these methods i s carried out i n a systemati c order. I t commences with an i d e n t i f i c a t i o n of the problem. This includes a description of the property and the purpose of' the appraisal. The next step i s a preliminary survey to determine the r e l a t i v e importance of each o f the valuation approaches and the a v a i l a b i l i t y of data f o r each. The data to be c o l l e c t e d for the f i n a l analysis w i l l be governed by the r e s u l t s of the preliminary survey. When the data have been c o l l e c t e d the next step i s the analy s i s . This can generally be done by three methods:  the sales  method, the cost method and the income method. In farm valuation, the sales and income methods are used because land does not lend i t s e l f to a cost valuation. The place of the cost approach i s i n farm b u i l d i n g appraisal. One of the methods that can be used i n the analysis, then, i s the sales method, sometimes c a l l e d the comparative or market data methods. I t i s based on the proper selection of a representative sample of property  sale values  which, when they are analyzed, w i l l r e f l e c t the existing market value of similar properties that are not i n the market. The merit of the sales method depends upon i t s compliance  2k  with four main assumptions.^ The f i r s t i s that a market e x i s t s for property at a l l times. The  second i s that persons entering  the market do so v o l u n t a r i l y . The t h i r d i s that a l l persons i n the market are f u l l y Informed as to the p r e v a i l i n g market conditions. The fourth assumption i s that market bids are based  on  estimates of the future use of the property. I t i s very rare i n practice, however, that these conditions w i l l be found together i n the same r e a l estate market. In areas where the land use and s o i l types are r e l a t i v e l y uniform, the sales method provides an inexpensive  and e f f e c t i v e  means of establishing land values. The method i s e a s i l y understood and accepted by the public and the courts and i t i s one &>r which the basic data are e a s i l y c o l l e c t e d i f they are a v a i l a b l e . The sales method i s accurate  i n r e f l e c t i n g market value,  however, only to the extent that the above assumptions are filled.  ful-  The most important of these i s that the market Is  r e l a t i v e l y active.  This i s necessary i n order to provide  method with s u f f i c i e n t l y comprehensive s t a t i s t i c a l  the  data to make  the d i s t i n c t i o n s i n value that are required i n farm valuation between the various s o i l types as well as between the land use c h a r a c t e r i s t i c s . In order to have such d i s t i n c t i o n s r e f l e c t e d by an analysis of sales, there must be enough sales available having these various conditions of s o i l and land use i n order to show the r e l a t i v e importance of each i n the property market. The proper Interpretation and s e l e c t i o n of representative G.C. E l l i o t , "Theoretical Considerations on Rural Appraisal", Journal of the Appraisal Institute of Canada. December l§lj.B, p. 106.  2  £  market sales i s important. Individual land sales d i f f e r widely i n the nature of the properties, i n the circumstances and terms of the sale and i n the nature of the buyers and s e l l e r s themselves. Pew sales are e n t i r e l y free from s p e c i f i c  circumstances  that may be unknown to the assessor. The variations i n p h y s i c a l and economic factors among properties are complex and there i s danger of error i n trying to r e l a t e a l i m i t e d sale sample to a wide area of d i s s i m i l a r l y productive acreages. The second method of analysis involves the use of the net income of the farm. I t i s based on the theory that the net i n come when c a p i t a l i z e d at an acceptable rate of interest results i n an amount of c a p i t a l i z e d earnings representative of the Hsvel of value which can be supported by the income from that farm. Theoretically, the value of a property r e s u l t s from the c a p i t a l i z a t i o n of i t s entire money stream both tangible and i n tangible. It i s only the stream of tangible and measurable i n come, however, which lends i t s e l f to the c a p i t a l i z a t i o n process. The intangible s a t i s f a c t i o n s of a location, home s i t e and others are included here and escape c a p i t a l i z a t i o n . I t has been suggested, i n view of t h i s , that t h i s method arrives at only part of the value namely that which i s measured i n money terms. I t has been contended, however, that over a period of time a given level of values can be supported only by the money earning power of the property. The long time average l e v e l of values must, therefore, closely approximate the amount of the c a p i t a l i z e d long-run money earning power. There are two procedures  i n use for determining the probable  26 net earnings. One procedure measures the t o t a l net income of the property by estimating the gross income and subtracting a l l the cash and non-cash expenses. The other procedure considers net income from the standpoint of a landlord's share. The landlord i s assumed to have a c e r t a i n c a p i t a l investment i n the farm that he leases and his share of the returns, then, represents the return on his investment. From this share of returns i s subtracted the landlord's expenses such as taxes, insurance, depreciat i o n , r e p a i r s , et cetera, and the resultant figure i s the estimated net income to the landlord. This i s comparable to the net income figure obtained by the f i r s t procedure. The two procedures have advantages  and disadvantages. The  f i r s t which seeks to c a p i t a l i z e the entire net income has the disadvantage of requiring a much greater number of estimates. A l l the s p e c i f i c items of income and expense for the property must be estimated as accurately as possible. One way to avoid misleading calculations i s to have access to data on farm income and expenses for a large sample of farms i n the area under consideration. Another way i s to obtain r e l i a b l e estimates of norma l l y expected expenses for t y p i c a l farm operations within the area. In spite of the disadvantage mentioned this procedure does arrive at an estimated figure for the t o t a l income and the l e v e l of value from i t s c a p i t a l i z a t i o n i s based on a l l income rather than only a selected part of that income. The procedure u t i l i z i n g the landlord's share of the income has the advantage  of having a market rate which represents net  income. I t i s easier to estimate the landlord's net income, but  27  there i s doubt as to whether the c a p i t a l i z a t i o n of this figure results i n a correct l e v e l of value. The assumption i n the use of the landlord's share as the net income of land i s that the rate of return to the landlord from his investment i n land and buildings i s equal to the rate of return to the whole investment i n farming. The competitive bidding of tenants for farms i s presumed to r e s u l t i n a landlord's share return comparable to the rate of return which a l l farmers get. Also, i t i s presumed that,since the landlord can either rent the farm or farm i t himself, farmers would not rent farms when the rate of return from farming i s greater than the rate of return from renting.  Conversely, i t i s assumed that  farmers would cease farming and rent their farms when the return from renting becomes greater. These assumptions do not accurately r e f l e c t the landlordtenant s i t u a t i o n i n p r a c t i c e . In Western Canada, at least, most renting i s done on a crop share basis. The share r e n t a l assumes that i t i s possible to obtain the f a i r share of the crop to the landlord and tenant by taking the usual share of the d i s t r i c t . The share of the crop going to the landlord should vary c l o s e l y with the productivity of the land but, i n p r a c t i c e , such share i s determined l a r g e l y by custom. I t i s doubtful i f adequate recognition of the differences i n grades of land i s accounted for i n the usual crop share leases. The predominance of onet h i r d share i n some areas continuing year a f t e r year would appear to suggest that there i s no close r e l a t i o n s h i p between the landlord's rate of return and the return to the whole farming  28  investment. The c a p i t a l i z a t i o n of the t o t a l net earnings despite i t s disadvantages of requiring a larger number of estimates and more d i f f i c u l t procedure would seem to give a closer approximation. It Is more representative of farming as a whole especially i n areas where tenancy i s of minor importance; i t i s based upon an estimate of the entire income and i t i s more sensitive to l o c a l conditions of s o i l , climate, et cetera, a l l of which have direct bearing on farming returns.  a  29  CHAPTER V A BASIS POR ASSESSMENT OP ORCHARD LAND Property assessment i s a major problem i n every country which uses land as a basis for taxation. The objective of assessment i s to provide an equitable base to which tax rate l e v i e s may be applied. Assessment i s a special form of value appraising which i s an attempt to approximate market value at a given time or over a period of time.  Assessment for taxation purposes  however, i s l e s s concerned with absolute value than with a r e l ative scale of property values which w i l l best serve as a base for taxation. A method of assessment often used i s the market value or sales method. The reason that t h i s method has been widely used i s probably because the assessors i n the various d i s t r i c t s do not have the time necessary to study and".prepare schedules of values based on the productivity of the land. Also, the basic data for the required analysis are not usually r e a d i l y a v a i l a b l e . It i s often necessary for someone other than the l o c a l assessor to c o l l e c t and analyze the necessary data and provide i t to him i n a usable form whenever changes i n assessment are necessary. As a r e s u l t , the method used w i l l usually be the one for which the basic data are most easily obtained. In the Okanagan v a l l e y of B r i t i s h Columbia the sales method has dominated the assessment of orchard lands. The method has not been used, however, without i t s inherent weaknesses being evident. The growth and development of an orchard i s a long-term undertaking as i t takes at l e a s t f i f t e e n years from the time of planting to bring the trees i ^ e l ! into production and another  f i f t e e n to twenty years w i l l elapse before the productive l i f e i s ended. In view of this characteristic.. of "orchard production, sales information tends to be somex^hat unreliable because buyers and s e l l e r s lack the necessary information about the market. Furthermore, the sales tend to be clustered among the farms of small acreages. While the values derived from an analysis of these sales would probably approximate the market value with r e spect to the small farms, i t could be quite misleading to apply such values to larger farms, since there i s considerable evidence that many of the small farms are being purchased for purposes other than to provide a source of income The sales method, although i t has been the main one used i n orchard assessment, has not been used i n past assessments i n the sense that the method implies. The average sale value for an acre of orchard was determined by an analysis of the available sales i n a given d i s t r i c t . This value was the a r b i t r a r i l y d i v i ded into the parts which were thought to make up t h i s value. One-third of t h i s value was thought to be contributed by trees and the other two-thirds by the other factors such as s o i l and topography. The one-third portion of. the sale value figure contributed by trees was deducted  from the t o t a l figure to arrive  at the indicated sale value f o r bare land only. This, then, removed the influence of trees from the orchard valuation. The reason for doing t h i s was that the Taxation Act states that trees are not taxable and therefore i t was f e l t that they should not enter into the valuation. Yet, i t i s conceded by the above calculations that they do have an influence on value. The point i n question i s not whether the trees can be taxed  31  but whether they can be assessed along with the land on which they are standing. The assessor does not determine what s h a l l be taxed nor the rate of taxation, h i s sole function i s to esta b l i s h a value to be used as a basis for taxation. The p o s i t i o n of f r u i t trees i s similar to that of farm buildings which are assessed but not taxed under the Taxation Act. The orchards i n the Okanagan are not homogeneous within themselves with respect to age, variety and kind of f r u i t produced. Each orchard usually has several kinds of f r u i t  (e. g.  apples, pears, cherries etc.) as well as d i f f e r e n t v a r i e t i e s of each kind of f r u i t . Also, there i s usually a wide range of tree ages within the orchard. Since this heterogeneity e x i s t s ,  the  value of an orchard cannot be accurately determined by the quali t y of the land alone but must a l s o include the composition of the orchard i n respect to the age, variety and kind of trees grown. The assessment of land and trees together on orchard prope r t i e s should lead to a more accurate r e f l e c t i o n of value.  One  might strongly question the use of an a r b i t r a r y percentage  to  represent the contribution of trees to t o t a l land value.  This  contribution would be most d i f f i c u l t to estimate accurately, but even more important, the contribution would not be uniform on each acre of any given farm l e t alone for a complete due to the heterogeneity of an orchard acre.  district  To t r y to draw a  d i s t i n c t i o n between land and trees i n the composition of orchard value would assume a degree of p r e c i s i o n not found i n assessment procedures.  32  The i n c l u s i o n of trees i n the orchard land values would immediately  raise the property assessments.  This should not  cause concern, however, because as long as the assessments are uniform the tax burden w i l l be no greater than before.  The  m i l l rate of taxation w i l l be correspondingly lower under these circumstances. An assessment method for orchards including both land and trees would provide more equitable valuations than those obtained by the sales method.  The small number of orchard sales  available i s not s u f f i c i e n t to r e f l e c t the price differences paid for orchards that have bearing or non-bearing  trees. Obvious  value differences do exist because of the difference i n earning power of each.  Also, there are differences i n earning power  between d i f f e r e n t kinds of f r u i t trees and d i f f e r e n t v a r i e t i e s as well as between different ages of trees.  I f the available sales  were s u f f i c i e n t i n number they would undoubtedly show s e n s i t i v i t y to these factors.  Since t h i s Is not the case, however, i t  i s proposed that a method of orchard assessment be established which i s r e l a t e d to the earning power of the orchard. Since i t appears that the problems facing assessors arise from the procedures used i n the determination of the assessed value of land, any improvement must be directed at those procedures.  This i s the main consideration here.  The r o l e of farm  buildings i s omitted and attention i s paid solely to the determination of the value of orchards alone. An e f f e c t i v e improvement i n the method of assessment must possess certain c h a r a c t e r i s t i c s :  1.  In accordance  33 with the Taxation Act a l l taxable prop-  erty i n B r i t i s h Columbia must be valued and assessed at i t s actual value.^ er  This means that where two parcels of land d i f f -  i n quality there must be a corresponding difference i n  the  assessed or actual value. It i s undoubtedly the sincere desire of the assessment o f f i c i a l s to f u l f i l l t h i s c h a r a c t e r i s t i c but even though an assessor might succeed i n establishing the proper relationship between the i n d i v i d u a l farms within h i s d i s t r i c t , he has d i f f i c u l t y i n assigning values to the properties that w i l l be i n l i n e with the values assigned i n other d i s t r i c t s .  The designers of the prop-  erty tax system apparently were aware of these d i f f i c u l t i e s and established tax equalization boards whose duties were, among other things, to review assessed values within and between d i s t r i c t s i n the Province.  The results that such a board can ob-  t a i n are necessarily l i m i t e d , however, i n that i t cannot determine the difference i n value of two neighboring farms without taking over the duties of the l o c a l assessor. Any improved.method must possess an administratively feasi b l e means of making adjustments i n assessed values to account for material changes i n economic conditions.  The time and exp-  ense involved i n determining the appropriate actual value  for  a l l properties within a d i s t r i c t w i l l not permit complete r e v i s ion  of assessments very frequently.  I t must be possible, there-  fore, to use the values determined under an assessment method  Revised Statutes of B r i t i s h Columbia, Section !{..  195"0,  Chapter  72,  32+  long enough to j u s t i f y the necessary r e v i s i o n expenditures without a decline i n the v a l i d i t y  of the assessments.  Since the act-  ual values, i f they have been properly determined, may also  be  considered to be the proper r e l a t i v e values, i t appears that  a  general change i n economic conditions or an equalization adjustment may be accounted for by making a necessary percentage adjustment. 2.  An improvement i n one phase of property tax administra-  t i o n must not be made at the expense of another.  The cost of  making an improvement i n the method of determining the assessed value must not be so great that i t o f f s e t s any advantage derived from the improvement.  Any plan proposed should be of such  a  nature that i t i s administratively f e a s i b l e . 3. licated  Any improved method of assessment should not be so compthat i t cannot be r e a d i l y understood by the landowner. I t  i s quite l i k e l y that the adoption of a new method of r e a l estate assessment would lead to the taxes on some land being lowered, on some they w i l l remain the same, and on the r e s t the taxes w i l l be increased.  This would be e s s e n t i a l l y the reason for the  change i n method.  The farmers i n the f i r s t two categories w i l l  say l i t t l e but the ones who have experienced the tax increase w i l l immediately want to knoxtf why.  I f the method used meets the  c h a r a c t e r i s t i c s mentioned before and has been accurately administered, and i f the l o g i c behind the change can be understood by the landowner there should be few serious objections to such increases.  35 The Determination of Actual Value The f i r s t requirement prescribed that, i n accordance with the Taxation Act, a l l property i n B r i t i s h Columbia subject taxation must be assessed a t i t s actual value. that arises i s what i s actual value.  to  The question  The Act states that " i n  determining the actual value, the Assessor may give  considera-  t i o n to present use, location, o r i g i n a l cost, cost of replacement, revenue or r e n t a l value, and the price that such land and improvements might reasonably be expected to bring i f offered for sale i n the open market by a solvent owner and any other circumstances a f f e c t i n g value."  The way that the actual value  of farm property may be determined by the assessor i s not well defined. The sense i n which actual value i s used i n the present work may also be termed productivity value.  The p r i n c i p l e under which  the term i s used here i s that i f a man wishes to invest a sum of money wisely i n property, he i s w i l l i n g to be s a t i s f i e d with an average or normal annual net return equivalent to a reasonable rate of i n t e r e s t on this sum of money.  Normal annual net return  i s determined by taking into consideration normally expected costs and receipts over a s p e c i f i e d period of years.  On  this  basis, the actual value of a parcel of land i s the sum equivalent to the normal annual net return from that land, c a p i t a l i z e d at the p r e v a i l i n g rate o f i n t e r e s t on investments of sirdlar risks. In general, actual value i s dependent upon two f a c t o r s : (1) normal annual net return, ( 2 ) p r e v a i l i n g i n t e r e s t rate on investments of similar r i s k s .  The determination  of normal  36 annual net return i s , i n turn, dependent upon three f a c t o r s : (1)  y i e l d or production. (2)  prices received for f r u i t . ( 3 ) c o s t  of production. In the analysis done i n this work a l l factors are considered on a "per tree" basis.  I t was f e l t that this was  the most  accurate way to describe the actual f i n a n c i a l structure of orchards.  The absence of basic data necessitated the e s t a b l i s h -  ment of a schedule of expected normal costs of production. This schedule was constructed for a twenty-acre  orchard which, while  i t does not represent a large or small orchard, i s considered by people i n the industry to be an economic u n i t .  The costs  that are contained i n the schedule represent those that would be normally expected under t y p i c a l namagement practices for the area.  Also, because of l i m i t e d y i e l d data only two v a r i e t i e s of  one kind of f r u i t are considered. Red Delicious apple v a r i e t i e s .  These are the Mcintosh  and  As the y i e l d data becomes avai-  lable the analysis can e a s i l y be extended to include other varieties. In order to consider other types of f r u i t i t w i l l be necessary to construct cost of production schedules for each type separately and obtain the necessary y i e l d data.  There i s also  a  s i g n i f i c a n t v a r i a t i o n In y i e l d s and costs of production between different d i s t r i c t s i n the Okanagan Valley.  These, too, w i l l  have to be given attention i n the extension of the analysis. The l e v e l of investment w i l l vary between farms of d i f f e r e n t s i z e . In small farms factors such as custom work become a more important item of expense whereas large farms are more s e l f s u f f i c i e n t  with respect to machinery. to  37  These things would have to be studied  f i n d out i f there i s a s i g n i f i c a n t difference i n o v e r a l l costs  of production between farms of various s i z e s . The assessment of orchards presents problems that are considerably d i f f e r e n t than those encountered ing.  i n other types of farm-  In the case of a new orchard or newly planted tree, i t s  value i s small because i t has no income.  As i t increases i n age  i t receives increasing amounts of inputs i n the form of labour and materials but i t s t i l l y i e l d s no income. experiences a negative net income.  In this phase i t  As the tree reaches a cer-  t a i n age, i t starts to bear f r u i t and during t h i s period net: income w i l l change from negative to positive at an increasing rate. ing  During the f i n a l stage net income increases at a decreas-  rate u n t i l eventually i t becomes zero again at which time  the tree i s replaced. ard  The problem i n the assessment of an orch-  i s to determine i t s value at any point i n i t s l i f e cycle. The  value of the orchard w i l l be based upon the anticipated net i n come over the remaining l i f e o f the orchard.  Since an orchard i s  composed of trees of varying ages i t i s necessary to discount the anticipated net incomes of a l l the trees back to the date of assessment. sis  This i s the method that Is used i n the present analy-  to e s t a b l i s h a basis for orchard assessment.  corresponds  The data  used  to that of owner-operator orchards. Determination of Yields  The f i r s t  determinant  y i e l d of apples per tree.  of net income to be considered i s the The y i e l d not only influences the  l e v e l of net return but also causes much of the difference i n  net returns between orchards.  38  One of the important factors  a f f e c t i n g apple y i e l d s i s the variety that i s grown.  Different  v a r i t i e s have different patterns, hence, i t i s necessary to make a d i s t i n c t i o n between v a r i e t i e s i n order to measure the income of an orchard.;-:'. Another important determinant of y i e l d i s the age of the tree.  In order to determine the y i e l d pattern throughout the  l i f e of a tree i t i s necessary to e s t a b l i s h a y i e l d curve, that i s , a schedule of normally expected annual y i e l d s .  This curve  shows the expected y i e l d s for each age of the tree and i s r e quired to estimate the expected income at any given time. Ideally age intervals of one year would provide the most complete imate of a tree's p r o d u c t i v i t y .  est-  I t i s d i f f i c u l t , however,  to  obtain tree ages more accurately than at five year intervals because of the lack of records kept by the orchardist and lack of any rapid f i e l d measurement of age.  the  As a r e s u l t tree  ages have been divided into eight groups containing f i v e years, each. (Figures 1 and 2 ) . Physical c h a r a c t e r i s t i c s such as the type of s o i l , the percent of slope, the degree of erosion and the incidence of winter injury from f r o s t also influence y i e l d .  Tree f r u i t s are less  dependent upon d i s t i n c t i o n s between s o i l types and more dependent upon a favourable climate than most other crops.  They  are  able to produce s a t i s f a c t o r i l y on shallow, gravelly s o i l s which might be regarded as poor or non-arable for crops which have a more l i m i t e d root system.  This feature to some extent reduces  the importance of the soil-crop relationship which would be. more  + 4-  1  J, -+. + --,  i+ t  -r-f-  4 * 4-  -i—t 4 4-  —  l4-h  iG  • 4-r f-  u R:E  ORMAL:  4"  r •• Yi  :  t  r ~r -  -'-  -f-i  ~  —  t  t•  41—T  -  i  -1  "TT  i  t  ---4--+- +  t  T 4-  -rH-f-  1-r-  it  4"t  i UJ/f *\  1  !  -  -  1  i  • —(--_J_  l  I  ...  f\  f  ^r  •-•  4.4--  - i  1! 1  i  .  1 1 '  i  4 i i i  • i i  l  I  —•—i—  1  i  ]  ^ 1 !  :  i  11  -+•-  t  ---  —  4— i  •  s 0 1[jr _c  .1.  4 t  !  !  —  i  i;  -t  |  U  1 :  1  1  | j  Ml!  1 L.  !  i  1 1  !  1  . ! , .  1  1  : i j.. i  4 i i  1 !  1  !  _  + J  1  1  M. j  I! i  |  -  -  I |  I! 1 1 C n m m In r r . m l i i i 1 111!' 11\ ! !  :  < t  1  1  :t!i!.  — -  :  -  1  . . .  !  |  i—  1  r -r 1 1t 1  : i  -  _i  ... ...  n 1 r_ee_ Aae in.. i Ye a r.s  ! ;  1  1  ii  •M  4  ;i i  .  1 : '.  1  .  4-  --  -  : !  1  1  !  1  1  1  j |  1  i  1 | 4  iIj t -  i  1  3  5  n  )j  i-  1 1  * 4 I  { 1  0d3  CJ  Dj  | 1  1 i  l  1 1  1  1  • i  I t  —  ; i jl !T  H-H rV — E cor l O t n c.s Di\ i 0 5 E X D e ri rrle n 1 tion T r 1 1r 11 r IT LL 1 1 I fOre nor as. O k a n a a a n Vail ey, 1 I I| 1I ' | 4 ill! J i 4 t r t I" I it 1 T ; 4 4 t + I i !  i  1 I  .  1  !  0  n me r a n d  ...  I  >4  >-  0  -  i i  I  > T4 1  R  i  4 "  T  1  1 1  1 i  1  i  !  1  i  : I  -  r-^— 1 r—r 1—i j1  . . . ...  -  I  -4-  —i  1  i '  r  T ^ ^  i  + i  I !  i  ~r  i i  -4  i  r I :  i i  i  i i . [_ J |  • r  —  '1  . 1 -  I  i  i  i i  i -+ .4.-4-  --  -  i •  -  |  1  :T Hi 1  1  i - 4--  i r  -  —*—;—  i  1  i  -  i  4. •  l ;  1  i  j hi IITi  i* e  !  j  J.-  -  •-  1  -  4+ —.::.t  [  — i —  •- i  -  -  r r l  1  --  '  i  4  -  tit 4-4-  -LHll-L-  !  -  r  i-f  14  | 1 - :f--  - 4 —  i  11  -  •  -|-t-  4-.  Tl "t  -4-  PPLES  —r  I?  -  -  r-!-f 4-  - -H-j-  eiKiTos  —r—T—  II 1 rr ( 3i 0  t-  i  .i\  -  ;X+; L o o s e  —i—-t— 4 —" T  \  ~r- T  i n r Tree i in  LI  T  > C  i! hr 1  r M Per  j  -  4-  —I— i -  -  FOR: M  -+1-  -t-  16  4 . -  II-:  4  t  rr  YIELD: :  2CT  tt  T4 .4-4 ^-4 +-  -r +.444  rrrftf  4  44  R  - 4 ( 1  1  4  +  -+-4- -  —r  4  t•• ! 1  35  c r trn ei1.1 i  r ! 1 ! J 4 {-  t.  45  f  ir.IC•u1 r e 1  1  I  |  • i ' ifI 'f  I  i  i  •-  1  — — 1  --  H'H  i! -  I--4 1 T  T  i._ _!  -  ; i J.  i L _I  - 4  ; |  i  .  1-4- .  -  T  -  11  -  ...  -  2D  1 .  | i  Al  Y erc  15  -  n  1  ;;i,  !  - . 4 4 -  - 4  .:1 t :  1  -  r  ,  12  L  1  ..If  || OXRS  -4 i!  J 3-  :  ,  ! I  -  i  1  i i  !  1  \  -  1 1  *  t  1  t  I 1  1  i  .1 li 1  4  f 4-  t 1  1  4"  -  l  4  -  .4.1.  ...  I  —  1  1  \  I 0 u F GE  d Siimme 1 1 1 r an Comme.r_ciai: •  Li-  1  1  i .11, •1  J-. -L 4 I T  - 4 -  -  0  1  -  i  !  1  -  r -  ...  1 - ^  -  -4-  4  4+4 •r t • * t-  1 +-  •4  - 1. J— - -  1. ]  T  - + -  . 4  r  t —  4-| " T  -L-  —  . 4 -  i  -1 - -  ._L r  1  O --4-4--  -1- 1  -  J  i  -  11  i  \ .  1  4-  1  .  1  -i .  1  1  a  _4_  -  _  -1-4-  .f.j_u  --  :  --  i i ' 4-. i I  r  -  ! i  1  1 x  4  1 •-  -  4  --  T  -  -  { .  -  j  1  -:-|  1  ---  ... ', \  -  -  Z  -  —  1  1i r  -  D  J Canada  1 -4  •!4"  -  1 L ! 1  i  •-44 4 [4. 1I4_  -  1  i  - 4—  „ i.  .Deoar.1 mentJ_0f Aaticu. Hit e  •>  -  -  !  i  4-  1 1  4-1-4  I  f  tut:  1+  4  t .  _  44-Ttt  -  1  Y.e.o.rs  h  4 T  L  j  1  -  :  •»-  .4-  -  l ;  4 i  j  *  •i  i" — t•  .1  1  . i.  —  II 4~T :  -  . .  I JT  ;  i  4.^4.  1  J  11 .411.. 1  i t'  .-  - --  i  1  t •  -  4 1. 4  t  i  ^  .  i *  ]  .1 _ \  ....  -4  1  [ I  i -  ... . 4 . 4 , -  1  ...  I j  I  en cT s:t afi .0 Economics Division.J | I | | - Ok, j j ct: icia Orchards Vfl 1e 1  1  1 1 l t -4- —1 . .j\—  t  —4..  -  +  | -  ~~~  -4- •  1  |  i  .  -1  | J 1  1  ii  |  -  f"  j  +  -  Tree-- A . )e-  i i -- i 1 I i  i4  1  Ut L.J4-  ii  -4 -  i  4-  xaer 1T I 4  1 4  ;j 4 4  . 4.  ]  -  T: T i  .  i  I"  t  h -  4  1 1  ! ;  1  |  ,  : i  - 1  •- -  1  *  1  -  +  ]I  -  -  -(  *•  i i  1  i  —  -  -  -  '  ti  -4.  t  4  I.  i  1 '  4  -  4  -  i •  , i  1  1  4 - -j— j - r -  i  i  1  l-j-4- t 1l4f : i I ! 1 14 4 4 1 i ! i 4 ... 4  1 1  4  t  f- '  !  i  ; j  r H .!; i ; I! I 1 4i 11 t ; ' ! 4  ',  :  ...  !  t  i  T  :  +  ! " " X'  ; T  i  1  » I -  —  I  -  4 i  i p •  _  , i i i i . . . .  i  !  Mi  !j  4  1  - 4-  t i l t  t j  -  1  1 ! TtU:  -  i  i  4  1 I  t  1  4T  i  it.i  I  1  4  f-H  -  L-  Trnini;14-  4  •1 i : t t 1  i  * t +  t  u  Ti  1  | i  i-r I Wl f 4 4•Ur -  t  ii i ri :• :\:r\ \.\-  : : 4i  i  -Li  1  i  .  I •  4.1  4  j  r  X-  t  I I I : :  .  - p - ,  -  i i n i i * f i  i:  1  1  .  1  ] • i ~ • 1 • | ^—  1  --  f\ fr  • t  ; )  T T T  1  i  i !  1 *  .  . :  T- t  i  ii 4-74-  Iv —r  1 i, ,4- r 4  .i 1.  -  /i  1  4 »  T  j.  TTT-t .; ii 4 4 T  '  • -t  1  -  ]  T  i  i ,  i  i  4'  -  i 4 4  1  '  1 -41414.!:  i-4/>  Li  j .i i; i IT -  , ,  J 4-  1 :. ; i:4  1 -  i  1  i  £  J. [  :J ; i j  -  i  J  ...J  I | i  1  1  i  :  • - + -  -  i :  i  i  \  4  r  : ;  1  ~r-i • :  -  i—,—  !  1  .  —1-4  r  ' 1  4 -| 4 J  f  +•  j i! i : : ;  4  lit-  -  i  1  -  ; i i  !  4 .  :i  4  T T  1 :  i  -  L -P-i  1  -  ! 1 | I  ; 4 + - . . | . ; . 4  : T ! i- i. i | 4 .4 4"  -  •4!  |J  t|i-T  I  ! i 1. 1. . i I DEL CIO US APP Li ES. 1  ED  114  1  --  "j j "  -  I -.  LOOS.e  fS'GT  I  . _— i  --  1 ! 1.  1  1  L 1  \  -  !  —  a i_e.  Treei  -  ! i  J i Ij ' 1  j  -  —4  i:ELD:FOR  i  -  i .  !  1 1  t 1 1- 1 _ i ! 4i i  4.  -  4  --  T  4  - L . L • 1  -  • 4  f  n- _ii |  G J ET2  f -  r ir j j  (  ! -  -  1  1 ~y  !  I TIT  I <  -  Tt 1 1 ; 11  t  4  • 4! • • • * » • } L _i . 1 ! ! l A _i_ : i ! I | I 1 . _  ! !. l  Hi tit 4 4  lUUHt .uU;U.  •tt  ... -  -  !-4--  --  -  • • ' 1  4--.  4 u  li-! c l e a r l y defined i f the same s o i l s were used i n the production of f i e l d crops and vegetables.  Certain s o i l types do, however, pro-  duce one tree f r u i t crop better than they do another.  Each s o i l  type i n the Okanagan Valley has been rated according to i t s s u i t ability  for the production of a l l tree f r u i t s .  Over forty s o i l  types of the four major s o i l zones have been assigned i n d i v i d u a l productivity ratings on this basis.  The most productive s o i l  types have received a rating of 1 0 0 and less,-productive s o i l types are rated as a percentage of this maximum figure. The prod u c t i v i t y ratings for the s o i l s of the Summerland area are given i n Table 1 . The e f f e c t of the percent of slope upon the productivity of the s o i l i s well known.  The difference i n moisture absorption on  slopes i s due mainly to the more rapid run-off.  The Okanagan  Valley i s t y p i c a l of the rough mountainous topography generally found i n B r i t i s h Columbia.  Changes i n elevation are often rapid  and t h i s leads to the frequent occurence of slopes approaching or exceeding the maximum f o r a g r i c u l t u r a l use.  Slope i s a factor i n  the cost of farm operation and since s o i l types may cover a v a r i ety  of slopes a reduction i n the productivity ratings of s o i l s  according to the precent of slope i s necessary. (Table 2). The degree of.erosion also influences s o i l productivity and, hence, y i e l d s especially i n areas of adverse topography. Extensive erosion may cause patches of unproductive land to appear i n some orchards where the trees are smaller or are not able to grow all.  at  The type of s o i l influences the rate of erosion and i n the  Okanagan Valley where i r r i g a t i o n i s required throughout most of the growing season i t has been recommended that cover crops  of  TABLE 1 SOIL PRODUCTIVITY RATINGS FOR THE SUMMERLAND AREA OF THE OKANAGAN VALLEY OF BRITISH COLUMBIA Soil  Type  Apples  Pears  Plums  Prunes  Cherries  Peaches  Apricots  1 0 0  1 0 0  1 0 0  1 0 0  90  90  5 5  50  4 5  4 5  4 0  6 5  4 5  Osoyoos Sandy Loam ( t e r r a c e phase)  80  80  80  80  8 5  9 5  80  Osoyoos Loamy Sand ( k e t t l e phase)  5 0  3 0  3 0  3 0  6 5  6 5  5 0  6 5  4 0  4 0  4 0  6 5  4 5  4 5  Nisconolith S i l t Loam  6 0  7 0  6 0  6 0  5 0  70  7 0  Nisconolith Sandy Loam  6 0  70  6 0  6 0  5 0  7 0  7 0  Rubble  7 5  7 0  7 5  7 5  8 5  7 5  6 5  Penticton S i l t Loam Skaha G r a v e l l y Sandy Loam ( k e t t l e phase)  Rutland Gravelly Sandy Loam ( t e r r a c e phase)  SOURCE:  B r i t i s h C o l u m b i a Department o f A g r i c u l t u r e , Committee, Kelowna, 1 9 5 2 , B r i e f no. 1 5 .  Proceedings  90  of the Reclamation  1*3 TABLE 2 ADJUSTMENTS TO SOIL PRODUCTIVITY RATINGS POR TOPOGRAPHY Per Cent Slope  Per Cent Deduction  0-10  Nil  11-15  5  16 - 20  15  21 - 25  30  26 - 30  50  over 31  80  Source: B r i t i s h Columbia Department of Agriculture, Proce:e.dings of the Reclamation Committee, Kelowna, 1 9 5 2 , B r i e f no. l b . be planted on c e r t a i n s o i l types to retard both erosion and runoff.  In orchards where s o i l erosion i s present i t has been rec-  ommended that adjustments be made to the productivity r a t i n g of the s o i l s i n accordance with the degree of erosion.  (Table  Another physical c h a r a c t e r i s t i c that can greatly f r u i t tree y i e l d s i s winter i n j u r y .  3).  influence  The occurrence of t h i s type  of injury, generally, i s not frequent, however, when i t does occur i t can have a marked e f f e c t on y i e l d and i n severe cases many trees may be k i l l e d .  Injury i s usually a r e s u l t of extremely low  temperatures or other abnormal temperature e f f e c t s and i s confined for the most part to c e r t a i n l o c a l i t i e s .  A micro-climatic  factor which reduces the severity of winter injury i s the moderating effect of lakes near tree f r u i t growing areas.  In such  areas the f r o s t - f r e e period i s extended thus benefiting the f r u i t v a r i e t i e s which experience late dormancy or early blossoming.  TABLE 3 . A D J U S T M E N T S TO S O I L P R O D U C T I V I T Y R A T I N G S POR E R O S I O N Condition  Percent  (a)  No e r o s i o n  (b)  S l i g h t E r o s i o n : m o r e t h a n 10% a n d u p t o o f h o r i z o n A , has been removed.  (c)  N i l  50% 25  E x c e s s i v e E r o s i o n : m o r e t h a n 75$ of h o r i z o n A , has b e e n r e m o v e d . H o r i z o n B, and p a t c h e s o f h o r i z o n Bp a r e e x p o s e d a n d h o r i z o n B - D has been p a r t l y removed.  Source:  In  some  cases  the  lakes  influence.  stream v a l l e y s  entering  bottom.  This  main v a l l e y of  higher  adversely  at  It  also  80-100  affects of  i n these  pour  orchards  these  areas.  have  started  ious  to  the crop  to  appear.  trees for  Blossom f r o s t s  themselves  the  can cause  coming year.  to  most  valley in  injury tree  winter months.  while  In view of  The blossoms  not usually  loss  of  this  the  withstand  s p r i n g when t h e  the  the  and w i n t e r  sufficiently  early  tributary  located  In general,  c o n d i t i o n s i n moderation d u r i n g the i n the  are  tributaries  "hardened o f f "  period is  cold into  that  these  susceptible  thereby m u l l i f y i n g  significant that air  varieties  most  have  is  over  the m a i n v a l l e y  the mouths  incidence  may f r e e z e  fruit  the  $0  B r i t i s h Columbia Department o f A g r i c u l t u r e , Proceedings o f t h e R e c l a m a t i o n C o m m i t t e e . K e l o w n a , 1 9 5 2 , B r i e f n o . 16.  any p r o t e c t i v e  of  10  S e v e r e E r o s i o n : m o r e t h a n $0% a n d u p t o 75$ o f h o r i z o n A, has been removed. In places h o r i z o n B, o r h o r i z o n B-D are e x p o s e d .  (e)  is  25$  M o d e r a t e E r o s i o n : m o r e t h a n 25$ a n d u p t o o f h o r i z o n A, has been removed.  (d)  Deduction  a l l or  injurpart  situation  i t  - il-5 has been recommended that there be a reduction i n the producti v i t y ratings for orchards located i n areas which are subject to blossom f r o s t .  The amount of the reduction i s based upon  the  expected frequency of such frosts during the blossom period.;:..::' (Table l\) • These s o i l productivity ratings and the various adjustments that can be made to them for the conditions mentioned could be extremely useful i n the a p p l i c a t i o n of basic land values to indi v i d u a l orchards.  I t would be through the use of these ratings  that inter-farm differences i n production  conditions would  be  r e f l e c t e d i n the assessed values. TABLE l|. ADJUSTMENTS TO SOIL PRODUCTIVITY RATINGS POR Occurrence  BLOSSOM FROST Per Cent Deduction  Every year  10  Every second year  8  Every t h i r d year  6  Every fourth year Every f i f t h year  l± 2  Source: B r i t i s h Columbia Department of Agriculture, Proceedings of the Reclamation Committee, Kelowna, 1 9 5 2 , B r i e f no.16.  p Wilcox states that there also can be a marked reduction i n i n tree y i e l d s due to b i e n n i a l bearing. This i s of more * J.C. Wilcox, "Some factors Affecting Apple Yields i n the Okanagan Valley", S c i e n t i f i c Agriculture, Ottawa,December, 19l4l-,p205»  I m p o r t a n c e among some v a r i e t i e s t h a n o t h e r s .  He p o i n t s  out that  been  to  some e x t e n t  t h i s feature  years by the p r a c t i c e  has r e d u c e d i n importance  o f spray  i n recent  thinning.  Determination o f Prices Each v a r i e t y o f apples obtains This  reaches the market b u t u s u a l l y  consumer's p r e f e r e n c e  fairly  c o n s t a n t i n the s h o r t - r u n ,  consumer's t a s t e s  over a longer  Mcintosh v a r i e t y had r e c e i v e d apple market, b u t during  major f a c t o r ly  large  causing  period.  ten years  contributing,  to t h i s ,  low r e t u r n s  prices  i s one. A  This  i s presently  a normal o r average p r i c e p e r box f o r to study the h i s t o r i c a l p r i c e was o b s e r v e d between  prices.  To c a l c u l a t e a n a v e r a g e o v e r a l l p r i c e  was n e c e s s a r y t o w e i g h t  pat-  individ-  due t o f l u c t u a t i o n s i n t h e s i z e o f t h e c r o p .  Since  i n the  for this variety.  Considerable v a r i a b i l i t y  sources.  the  however, h a s b e e n t h e e x t r e m -  however, i t was n o t d i f f i c u l t  all  to s h i f t  i t has been d i s p l a c -  general,  it  change i n  P o r many y e a r s  volume o f M c i n t o s h b e i n g p r o d u c e d .  years  remains  however, t h e g r a d u a l  one o f t h e h i g h e s t  the past  each v a r i e t y i t i s necessary  ual  by t h e o r c h a r d i s t  o t h e r v a r i e t i e s o f w h i c h Red D e l i c i o u s  In order to o b t a i n  terns.  The d i f f e r e n c e  as new v a r i e t i e s a r e d e v e l o p e d t e n d s  relative prices  ed b y s e v e r a l  i t i s i n f l u e n c e d more b y  for a certain variety.  i n p r i c e s between v a r i e t i e s r e c e i v e d  the  i n the market.  p r i c e may be d e t e r m i n e d b y t h e t i m e o f t h e s e a s o n t h a t t h e  variety the  i t s ovm p r i c e  In  to e s t a b l i s h a t r e n d i n  the p r i c e s p a i d  each v a r i e t y r e c e i v e s  f o r each v a r i e t y  t o t h e grower  from  s e v e r a l grade p r i c e s  as well as a manufactured price the weights for these prices were determined by the respective volumes of each produced by the whole industry.  The c o l l e c t i o n of the prices received by  the growers i s greatly f a c i l i t a t e d by the fact that a l l f r u i t i s sold through a central s e l l i n g agency.  This means that a l l  growers throughout the Okanagan Valley receive the same price for each grade of apples that they produce. The weighted o v e r a l l average price f o r each variety was calculated for each year from 19^4-2 to 1957.  In order to r e f l e c t  the recent changes In r e l a t i v e p r i c e s of d i f f e r e n t v a r i e t i e s a ten-year moving average price was chosen instead of an average p r i c e for the whole period. (Appendix, Table 6).  The tree  y i e l d s as indicated by the y i e l d curve f o r each variety were converted from a loose box to a packed box basis by multiplying the former figures by 0.70 price was determined.  since i t i s on this basis that the  The expected gross income was then c a l -  culated by applying the average price to the y i e l d i n packed boxes for each of the age groups. (Appendix, Table 7). Determination of Cost of Production Although production costs are seldom the same f o r any two orchardists the influence of the i n d i v i d u a l operator upon costs must not be considered i f differences In net income are to be based e s s e n t i a l l y upon differences attributable to the trees and s o i l .  Instead, t y p i c a l production practices which are f o l l -  owed by the average operator must be used so that the outstanding operator w i l l not be penalized for his managerial a b i l i t i e s  and so that the i n e f f i c i e n t operator who foresight w i l l not be  lacks i n i t i a t i v e  and  subsidized.  The cost of production figures used i n this analysis are based upon the estimates of people i n the industry and checked against data obtained by the Economics Division, Canada Department of Agriculture (Appendix, Table 8 ) .  They represent  the  normally expected costs of operating a twenty acre all-apple orchard under average management.  The fact that many orchards  contain several kinds of f r u i t does not s i g n i f i c a n t l y affect the cost of apple production.  In general, other kinds of f r u i t  would merely s h i f t a portion of the t o t a l production costs to a d i f f e r e n t part of the growing season. The main factor causing differences i n the costs of product i o n of apples i s the age of the trees.  The difference i n costs  between v a r i e t i e s of apples i s mainly associated with y i e l d d i f f erences.  This can be r e a d i l y determined by the shape of the  respective y i e l d curves.  In order to examine the age increment  i n the cost of production of a tree as i t moves from one group to another i t was  age  necessary to obtain data on each expense  item for each of these groups throughout the l i f e t i m e of the tree. for  In the f i r s t age group, (1-5 years), data were obtained  each year i n order to show c e r t a i n changes that take place  during that period with respect to costs and income. The costs are higher during the f i r s t year because the young trees have to be set out and require extra attention at this time.  These costs decline as the tree grows older but  are  k9 replaced by the increase i n other costs such as pruning and spraying.  When the trees start to y i e l d the income r i s e s and  for the Red Delicious apple variety the annual income equals the costs when the trees reach fourteen years of age at the given l e v e l of prices and costs.  Above this break-even point,  positive net income i s r e a l i z e d which continues  a  to increase un-  t i l the trees reach maximum production at about twenty-seven years of age.  After this point, a decline i n y i e l d and net  income takes place. (Figure 3)«  \  For the Mcintosh v a r i e t y the cost curve i s s l i g h t l y than for the Red Delicious.  higher  The reason for this i s that the  higher y i e l d of Mcintosh trees increases the cost per tree of handling the f r u i t .  The present l e v e l of prices for Mcintosh  apples i s not s u f f i c i e n t to cover the costs of production at any age of the tree.  (Figure 1}.).  The low prices f o r this  variety i s undoubtedly a r e s u l t of over-production of increasingly r e s t r i c t e d markets.  i n the face  At the time when the pres-  ently producing trees were planted the price-cost r e l a t i o n s h i p was quite favorable.  Since World War I I , however, the demand  has slackened but the supply has remained high because of the long-term productivity of trees.  Nothing can be done to curb  production short of p u l l i n g the trees out, once they have started to produce.  The r e s u l t , then, i s extremely low prices  which does not allow the orchard!st are  considered.  to break-even when a l l costs  £  2  C a p i t a l i z a t i o n of Met Income The expected net income i s calculated by subtracting the t o t a l cost per tree from the gross revenue per tree (Appendix Table 9 ) . The maximum net income i s reached i n the age group 26-30 years for Red Delicious.  For Mcintosh this age group  provides the lowest negative net revenue. Since the value of an orchard i s to be based on the a n t i c ipated net income over the l i f e of the tree, i t i s this figure for each age that i s discounted back to the present date.  How-  ever, before t h i s can be done the rate of c a p i t a l i z a t i o n to be used for t h i s purpose must be established. Some objections have been raised concerning  the use of the  c a p i t a l i z a t i o n method because of the d i f f i c u l t i e s involved i n establishing the rate.  While t h i s i s true, i t i s not an argu-  ment against the use of the c a p i t a l i z a t i o n method which i s sound i n p r i n c i p l e , being based upon the productivity of the asset. There are several methods by which the c a p i t a l i z a t i o n rate may be determined.  One of the most common ways i s analpgous to  the sales analysis method of c a l c u l a t i n g value.  I t involves  determining the net income from properties that have been sold and dividing the net income by the s e l l i n g price or o f f e r i n g price.  This method i s subject to the l i m i t a t i o n s of the sales  analysis method of valuation, the most important of which i s the d i f f i c u l t y of obtaining a s u f f i c i e n t volume of sales. Another method of establishing the c a p i t a l i z a t i o n rate i s to use the market rate for competitive  investments.  The principle  on which t h i s method rests i s that r e a l estate can be expected  53  to attract c a p i t a l at a similar rate of return to that which can be obtained by c a p i t a l i n other investments of similar r i s k s . A t h i r d method involves the summation of different rates which have been weighted according to their r e l a t i v e importance to the property i n question.  This could be the combination of  f i r s t and second mortgage rates and a rate of return on the r e maining equity weighted by the percentage of the t o t a l investment that each constitutes.  The sum of the products thereby  calculated would provide an o v e r a l l rate f o r the property. In the valuation o f farm property, assessors have often adopted a c a p i t a l i z a t i o n rate equal to the f i r s t mortgage i n t e r est rate on this type of property.  The main c r i t i c i s m of accept-  ing the mortgage interest rate i s that i t represents a return to an investment with less r i s k than that represented capital invested i n the farm property.  by the equity  I t would be reasonable to  think that I f the f i r s t mortgage rate was 5 per cent and the second mortgage rate was 6 per cent then the return on the equity of the owner would be at least 7 or 8 per cent.  On this basis I t  might be thought that the c a p i t a l i z a t i o n rate should always be higher than the mortgage interest rate because of the difference i n r i s k s involved between owning the mortgage and owning the whole farm.  I t has been shown, however, that the rate of return  on land has often been below the mortgage interest rate.3  This  relationship probably stems from a generally held b e l i e f that  -> M.M. Regan, P.A. Clarenbach, and A.R. Johnson. "The Farm Real Estate Situation", U.S.D.A. Circular no. 721, W^b^-l^, p. 20.  land w i l l become r e l a t i v e l y scarce as population grows and that land ownership i s a useful hedge against i n f l a t i o n as well as a source of security i n depression. The c a p i t a l i z a t i o n rate tends to be lower when the conveniences offered by the farm are important.  These include  the  a v a i l a b i l i t y of business centres, markets and communications and the d e s i r a b i l i t y of the property as a homesite.  Another  factor that would tend to lower the rate i s the moderate size of the farms which makes them accessible to a f a i r l y large number of purchasers x*ho are interested i n places to l i v e . There seems to be as much, i f not more, i n favour of using a c a p i t a l i z a t i o n rate which i s lower than the e x i s t i n g mortgage rate as there i s In favour of using one which i s higher. M u r r a y 3 states that there i s a tendency toward equilibrium between the mortgage i n t e r e s t rate and the return from land i n vestment.  I f the i n t e r e s t rate goes up i n any area, investors  and potential land owners prefer to invest i n mortgages rather than i n farms.  This causes a decline i n the demand for land  which i n turn causes the price to f a l l and the rate of return to rise.  I f the i n t e r e s t rate goes down i n any area, c e r t a i n inves-  tors take t h e i r money out of mortgages and buy land.  This tends  to raise the price of land and lower the rate of return. Calculation of Present Values In order to obtain the present value of an asset i t i s necessary to discount the anticipated net income back to date. . . _____ William G. Murray, Farm Appraisal, Ames, Iowa State College Press, 3 r d ed., 19514-, p. J  55 The p r i n c i p l e value  o f an asset  which, it  because  behind this procedure i s dependent  i t extends  w o u l d be i f i t were  necessary trees  to discount  to arrive  into  upon the f u t u r e the future,  presently the future  at the value  i s that  available.  the  earning  where  fers  "R" r e f e r s  Therefore,  annual earnings  of the orchard at  rate  o f income over  be m o d i f i e d t o t a k e ing be  levels  expanded to give  vides  rate.  This  i n t o account  shorter  Por example  time p e r i o d s  the basic  (2)v=-^- |l — ^^ ^n )  for  variations i n costs  the  t e r m i n a t i o n o f these  a  and  "C" refers  is  and revenues factors  a  con-  and must or  chang-  e q u a t i o n may  that  I n order  for each year  I t i s necessary  the annto provide  as w e l l  as  to expand the  into  (3) V = l-K * (l+r) MT+rp^ "R^" r e f e r s  time.  equation pro-  :  r  n e t i n c o m e s a r e t h e same f o r e a c h y e a r .  where  value  e q u a t i o n assumes  ual  further  is  the present  f o r the t e r m i n a t i o n o f incomes b u t assumes  equation  i t  o f a l l the  an i n d e f i n i t e p e r i o d o f time  o f net income.  than  to t h e a n n u a l n e t income a n d " r " r e -  to the market i n t e r e s t  stant  power  i s worth less  The b a s i c e q u a t i o n u s e d i n c a l c u l a t i n g p r e s e n t (1) V=-^-  present  0-rr)"  to the gross  to the cost  revenues  a t t h e end o f each  of production at  year  the b e g i n n i n g o f the  year.; The p r e s e n t application These years.  values  values  of this  which were  o b t a i n e d as a r e s u l t  e q u a t i o n a r e shown i n T a b l e  are based on the average  The p r e s e n t  values  reach  life  of the  5 and Figure $.  of a tree  being  a m a x i m u m d u r i n g t h e 16-20  forty years  56 age group.  This i s e a r l i e r than the age at which the maximum net  income i s r e a l i z e d ; this i l l u s t r a t e s the fact that a tree i s most valuable not at the age when i t s net income i s the highest but rather at the age when i t s most productive years are just ahead of i t .  The present values assume the continuation of t y p i c a l  management practices throughout the productive l i f e of the tree and, as a r e s u l t , these values w i l l not equal market value  if  general economic conditions cause buyers and s e l l e r s to foresee i n f l a t i o n a r y or deflationary tendencies i n the years ahead. The present value per tree at one year of age i s shown on Table 5 to be a negative figure.  This has r e s u l t e d from  high l e v e l of costs incurred during the non-bearing period the tree's l i f e .  the of  This i s not to say, however, that the orchard  i s of no value when the trees are at this age.  The value of a  tree at this age i s more dependent upon the cost of producing i t than i t i s at an age when i t becomes productive because then its  income producing a b i l i t y i s the main determinant of value.  The value of a young tree should be at least equal to, i f  not  greater than, the cost of producing i t because the orchardist expects to recover the production costs during some future perworth  lod.  The trees which are already growing may  be something more  than their cost of replacement. The value of orchard land before the trees are planted when the trees are ready to be replaced must be based upon  or the  anticipated income from the land when i t i s used for orchard or some other competing use.  This would involve calculating  the  57 TABLE 5 CALCULATION OP PRESENT VALUES POR RED DELICIOUS APPLE TREES BY AGES Age of  Net Income  Trees  Per Tree  Per Tree  $  $  Years  Present Value  Present Value Per Acre^ $  1  -3.50  -2.10  2 •  -3.20  1.50  70  3  -3.50  I1..90  21^0  k  -3.90  9.00  _£0  5  -k'k-0  13.70  6-10  -3.50  31+.50  1660  11-15  -O.ij.0  55.8o  2680  16-20  J4.I4.O  68.80  3300  21-25  6.70  65.50  31^0  26-30  7.00  55.30  2650  31-35  6.60  lj.0.10  1920  36-Ij.O  6.20  111.. 30  690  I4.8 trees per acre.  660  59 average annual net income that would be expected from alternative uses and assuming that this average income approximates the expected future income, the value of the site can be  ob-  tained by the use of Equation ( 2 ) . This would perhaps represent a c e i l i n g of value i f the future trends of incomes and costs appear to be uncertain.  v  In the case of Mcintosh trees which received a negative net income throughout  their l i f e  span i n the above analysis, i t i s  not possible to calculate their present values. at  This means that  the existing price for Mcintosh apples the trees themselves  have no value and that the only value of such an orchard l i e s i n the basic s i t e value of the land as determined by the average annual net income from alternative uses discounted to date. The orchard conditions under which the basic data were established apply part of the Summerland d i s t r i c t of the Okanagan Valley.  The predominant s o i l type was  Penticton s i l t loam with  s l i g h t l y undulating topography (less than 10 per ce.nt slope) and there was no s i g n i f i c a n t erosion.  This area was not considered  to be subject to blossom f r o s t with any r e g u l a r i t y .  These condi-  tions are perhaps the best for orchard production and the values obtained from the analysis would represent the maximum for area.  the  This area was selected only because i t provided the nec-  essary basic data for the analysis.  The application of these  values to other areas i n the d i s t r i c t would lead to lower values as a r e s u l t of the existence of less favourable production conditions.  The conditions under which the basic data are ob-  tained need not be i d e a l however; as long as they are uniform  60 the n e c e s s a r y In order  c a n be  to o b t a i n the  actual values  will  in  each o r c h a r d w i t h r e s p e c t to The  necessary  obtained.  it  age.  be  control  present  of individual  to o b t a i n a complete  values  as  i n v e n t o r y o f the  the k i n d o f f r u i t ,  c a l c u l a t e d by  sum  o f the v a l u e s  inventory value be  o f the  o b t a i n e d would g i v e  orchard.  larger  blossom f r o s t . orchards,  degrees o f  pockets.  s l o p e and  would  of s o i l ,  e r o s i o n and  ge  over and  be  orchard.  This inventory value  inventory value  then  slope,  especially  would have t o soil  the presence  type, of  in be  diff-  frost  Another f a c t o r which might r e q u i r e c o n s i d e r a t i o n i n  the p h y s i c a l adjustments to v a l u e age  would  total  d i v i d e d i n t o p a r t s t o accommodate more t h a n one erent  and  the  I t i s quite probable,  that the  (3)  group i n the  adjusted f o r the p h y s i c a l c h a r a c t e r i s t i c s  e r o s i o n and the  thereby  trees  variety  Equation  a p p l i e d t o t h e number o f t r e e s i n e a c h age The  orchards  an o r c h a r d .  i s the problem o f a i r d r a i n -  This i s c l o s e l y  a f u r t h e r allowance  associated with f r o s t  f o r i t c o u l d be  g i v e n i n the  dama-  frost  adjustment. The  I n f l u e n c e o f non-income f a c t o r s  the o r c h a r d the  i s not  convenience  other  easily  determined.  o f markets,  schools  s e r v i c e s are g e n e r a l l y not  on  Certain factors  and  the  important  V a l l e y because  they are u s u a l l y adequately  areas.  case  end  I n the  when h i s f r u i t  o f markets, the  type i n the  orchard values  of his  c a l c u l a t e d by  as and  Okanagan  available  farmer's  of  such  of roads  in a l l  responsibilities  I s d e l i v e r e d to the n e a r e s t p a c k i n g  w h i c h i s u s u a l l y w i t h i n a few m i l e s The  the b a s i c v a l u e  house  farm.  t h i s method s h o u l d  not  61 r e q u i r e r e v i s i o n more o f t e n t h a n  once e v e r y  five years.  movement o f p r i c e s a n d c o s t s s h o u l d be r e l a t i v e l y ing  significant  in values. will  w h i c h accompany  at f i v e year  once i n f i v e The the  factor requiring  years  fact  this  however, a r e v i s i o n o f t h e i n v e n t o r y  w o u l d be a d e q u a t e  purposes,  five  a complete years.  t r e e census i n a l l d i s t r i c t s  Instead o f duplicating  that this  the p u r p o s e s o f i n v e n t o r y r e v i s i o n .  c o u l d be  and the a s s e s s o r s for  I n t h e case  of individual or-  m a r k e d c h a n g e s i n i n v e n t o r y due t o severe  damage o r c o m p l e t e r e - p l a n t i n g , a s e c o n d i n s p e c t i o n c o u l d  be made by t h e a s s e s s o r .  I n most c a s e s ,  changes w o u l d m e r e l y i n v o l v e t h o s e  however, t h e o v e r a l l  a s s o c i a t e d w i t h an i n c r e a s e i n  ages o f t h e t r e e s a s w e l l a s a few a d d i t i o n s a n d d e d u c t i o n s replacements. The  physical factor  adjustments  n o t have t o be r e a s s e s s e d because  they  types,  t o the o r c h a r d v a l u e s  f o r each subsequent i n v e n t o r y  a r e f a i r l y premanent i n n a t u r e .  might need r e v i s i o n soil  the e f f o r t s o f  Information  t o the Department o f Finance  which experienced  i n the  i t s own t r e e c e n s u s f o r a s s e s s m e n t  i t w o u l d seem f e a s i b l e  made a v a i l a b l e  frost  t o keep t h e values up to date.  t h a t the H o r t i c u l t u r e B r a n c h o f the Department o f A g r i -  Department by u n d e r t a k i n g  chards  t h e age g r o u p s  t a s k o f i n v e n t o r y r e v i s i o n w o u l d be g r e a t l y a s s i s t e d b y  Okanagan e v e r y  for  re-adjustment  changes i n t r e e a g e s . S i n c e  intervals,  c u l t u r e undertakes  the  of disparity  be t h e i n v e n t o r y o f t h e t r e e s b e c a u s e o f t h e changes i n  value are  s l o w i n mak-  changes a n d s h o u l d n o t be a s o u r c e  The most i m p o r t a n t  The  i s the allowance  topography, and f r o s t  would  revision  The o n l y one t h a t  f o r e r o s i o n , otherwise, the  zones would r e m a i n  once t h e y h a d b e e n e s t a b l i s h e d f o r e a c h  orchard.  constant  62  A P P E N D I X  TABLE 6 SUMMARY OF WEIGHTED AVERAGE PRICES PAID TO GROWERS BY YEARS FOR APPLES PER PACKED BOX, OKANAGAN VALLEY, B.C. Variety  1 9 4 2  1 9 4 3  1 9 4 4  1 9 4 5  1 9 4 6  1 9 4 7  1 9 4 8  1 9 4 9  1 9 5 0  1 9 5 1  1 9 5 2  1953  Golden Delicious  Included  i n "Common D e l i c i o u s "  0.700  Sparton  Included  i n " A l l Others"  0 . 6 7 1  1 . 2 3 4  1 . 3 6 2  1 . 1 2 4  Red Delicious  Included  i n "Common  1.301  1 . 6 5 4  1 . 9 1 1  . 0 2 6  1 . 5 4 9 1 . 4 1 1  Delicious"  1.668 1.664 1.606  1955  1956  1957  1957  1 . 4 0 4 5  I . 3 6 9  2 . 1 2 4  1.762  1.065  1.431  1.958  1.473 1.2898  2 . 0 2 4  1.936  1.603  2.704  1.415 1.7848  I . 8 6 5  1 . 6 9 7  1.498  1.054  2.012  1 . 2 2 5 1.4696  1 . 4 7 9  1 . 2 6 1  1.192  1.094  1.640  0.878 1.2526  1.309  1.108  1 . 9 5 6 0.811 1.2760  Winesap  1 . 0 2 6 1 . 7 4 6 1 . 4 4 2 1 . 7 3 7 1 . 7 1 0 1 . 6 8 6 1 . 5 8 3  Newtown  1.088 1 . 7 0 8 1 . 3 8 1 1 . 7 7 4 1 . 6 9 7 1 . 6 3 9 1 . 5 3 7 1 . 1 1 3  0 . 9 2 1  Common  0 . 9 1 6  0.833  1.281  1 . 4 5 2 1.458  0 . 5 3 2  0.987  1.245  1.208  1.241  0.881  1.557  0.802 1.0566  0.497  1.058  1.233  1 . 0 3 1  0.906  0.578  1.270  0.674 0.9175  0.716  1.143  1.320  1.187  1.057  0.581  1 . 4 4 2  0 . 5 1 0  0.544  0.859  0.801  0.718  0 . 5 5 6  0.350  0.954  0.379 0.6875  0 . 4 4 6  1.145  0.838  0 . 8 4 1  1.200  1.132  0.928  1.166 0.8816  0.284  0.682  0.748  0 . 5 2 5  0.479  0.198  0.767  0.271 0.4940  0.825  1.236  1.363  1 . 2 9 4  1.144  0.874  1 . 6 2 6 0.885 1.1602  1 . 5 3 3  1 . 2 7 2  I . 6 1 6  1 . 5 1 8  1 . 5 1 1  1 . 1 8 71  1 . 3 4 3  1954  I . 6 5 2  0 . 9 8 8  Delicious Red  Rom.es  Included  i n " A l l Others"  Mcintosh  0 . 7 3 5  1 . 2 9 6  0 . 9 7 3  1 . 3 1 4  1.160  1 . 2 2 2  1 . 2 6 0  Stayman  0 . 8 3 0  1 . 4 7 0  1 . 1 3 0  1 . 4 1 4  1 . 3 6 0  1.282  1 . 4 1 9  Jonathan  0 . 7 3 5  1 . 4 3 4  1 . 1 1 0  1.441  1 . 2 9 5  1 , 2 6 9  I . I 6 5  0.549  Cookers  0 . 5 1 3  1 . 0 0 1  0 . 8 3 3  1 . 1 3 5  0 . 8 7 5  0 . 8 1 3  O.858  0 . 2 6 2  3  O.667  0.831  All  OthersO.564  1.158  0 . 8 6 4  1 . 1 6 5  0 . 9 8 4  0 . 9 2 8  0 . 9 7 2  0 . 3 8 0  All  ApplesO.846  1 . 5 0 2  1 . 1 8 7  1 . 5 4 6  1 . 7 9 2  1 . 4 2 7  1 . 4 3 3  0 . 9 2 2  SOURCE: B r i t i s h  Columbia  Tree  Fruits Limited,  I W e i g h t e d by volume o f s a l e s ,Ten y e a r m o v i n g a v e r a g e •'Includes W e a l t h y , D u c h e s s , Y e l l o w  1 . 0 2 0 6  Kelowna.  Transparent,  and Rob Roy  varieties ON  2  TABLE 7 EXPECTED NORMAL REVENUE PER TREE FOR APPLES BY AGE GROUPS AND VARIETY Mcintosh Y i e l d i n Yield i n Revenue P e r Age o f T r e e L o o s e Boxes P a c k e d Boxes Tree i n i n Years P e r Tree Per Tree Dollars at $0.9175 P e r Box  Yield i n L o o s e Boxes Per Tree  Red Delicious Yield i n Revenue P e r P a c k e d Boxes Tree i n D o l l a r s Per Tree a t #1.7848 P e r Box  1 2  3 4  1 . 7  1.2  1 . 1 0  5  2 . 2  1.5  1.40  6 - 1 0  4 . 0  2.8  2 . 6 0  1 . 9  1 . 3  2.30  1 1 - 1 $  8 . 0  5.6  5 . 1 0  6 . 0  4 . 2  7.50  1 6 - 2 0  1 3 . 0  9.1  8 . 3 0  1 1 . 0  7 . 7  13.70  2 1 - 2 5  1 5 . 6  10.9  1 0 . 0 0  1 3 . 6  9 . 5  17.00  2 6 - 3 0  1 6 . 0  11.2  1 0 . 3 0  1 3 . 9  9 . 7  17.30  3 1 - 3 5  1 5 . 6  10.9  1 0 . 0 0  1 3 . 5  9 . 4  16.80  3 6 - 4 0  1 4 . 9  10.4  9 . 5 0  1 3 . 0  9 . 1  16.20  TABLE 8 COST OF APPLE PRODUCTION PER ACRE IN DOLLARS BY AGE OF TREES FOR THE SUMMERLAND TREE FRUIT AREA OF THE OKANAGAN VALLEY TRee'Age i n Years  Pruning  Spraying  Thinning M. R.D.  Picking M. R.D.  -  -  -  -  Cultivating and Mowing  Irrigating  Fertilizing  Propping M. R.D.  Hauling M . R.D.  15  30  4  -  15  3o  4  -  15  35  4  15  35  4  -  3  15  40  6  -  4  -  Repairs to Machinery and Equipment  -  -  -  15  -  -  15  -  15  1  -  10  2  2  15  3  4  20  4  6  30  5  8  40  -  14  -  12  50  25  25  12  15  40  8  4  7  3  20  11-15  20  78  50  50  37  15  40  10  6  13  10  25  16-20  25  78  70  81  69  15  40  10  8  21  18  25  21-25  30  78  90  96  85  15  40  12  8  26  23  25  26-30  30  78  90  100  87  15  40  12  8  27  23  25  31-35  30  78  90  95  84  15  40  12  8  26  23  35  36-40  25  78  90  93  81  15  40  12  8  25  22  25  set at  11 . 0 0 p e r h o u r .  6-10  ^•All  operations include  11  l a b o u r , m a t e r i a l s , and machine  operating  costsj labour  -  cost i s  15 15  TABLE 8 (CONTINUED) T r e e Age i n Years  L a n d Taxes  D e p r e c i a t i o n on Interest^on Machinery and M a c h i n e r y and E q u i p m e n t @ 1 0 $ Equipment @6%  Miscellaneous  T o t a l E x p e n s e s Per. A c r e M c i n t o s h Red D e l i c i o u s  28  T o t a l Expenses Per Tree M c i n t o s h Red D e l i c i o u s  169  1 6 9  3 . 5 0  3 . 5 0  4  1 5 2  1 5 2  3 . 2 0  3 . 2 0  27  4  169  169  3 . 5 0  3 . 5 0  40  27  4  200  4 . 2 0  3 . 9 0  10  45  27  5  229  2 1 1  4.80  4.40  6 - 1 0  1 0  45  27  5  283  2 7 6  5 . 9 0  5.80  1 1 - 1 5  10  45  27  5  3 9 4  3 7 8  8 . 2 0  7 . 9 0  1 6 - 2 0  1 0  4 5  27  5  4 6 0  4 4 5  9 . 6 0  9.30  2 1 - 2 5  10  45  27  5  507  4 9 3  1 0 . 6 0  10.30  2 6 - 3 0  10  45  27  5  512  4 9 5  10.70  1 0 . 3 0  3 1 - 3 5  10  45  27  5  5 0 6  4 9 2  1 0 . 5 0  1 0 . 2 0  36-40  10  45  27  5  4 9 8  4 8 2  10.40  1 0 . 0 0  1  10  30  27  2  10  30  27  3  10  35  4  10  5  Investment Includes  i n m a c h i n e r y and equipment  the c o s t  of p l a n t i n g  orchard) f o r planting  f o r a twenty acre  and e x t r a  at $ 1 4 per acre  c a r e f o r young  orchard treesj  spread over the l i f e  . 186  i s set at  the cost  # 9 , 0 0 0 .  of c l e a r i n g  of the t r e e s j  the l a n d  ( o r the removal of o l d  and s m a l l p u r c h a s e s .  67:  In reference to Table 8, the following spraying program was set up. 1.  DDT.  Pour sprays @ 12 lbs per spray @$0.33per  2. Mites. One 3.  Aphis. Two  ^ $16  k  spray  16  sprays of malathion  12  k- Kelthane. One spray  8  5-  Dormant. One spray lime-sulfur  6.  Fungicides for scab and mildew, one spray  Labour. Ten sprays at \\$ minutes per spray @ $1.2^ an hour 8. Machinery operating costs  7.  10 9 3 78  Total Cost per Acre  The rate of application of a high-nitrogen f e r t i l i z e r i s as follows: Age of Tree  Founds Per Acre  1-5  100  6-10  200  11-15  250  16-20  250  21-LtO  300  The cost of apple picking used was The cost of hauling used was  $0.13 per box.  $0,035 per box. These rates were  obtained from growers i n the Okanagan.  68  0)  G 0  <D 0  Uo > 0) E H « •  o •rH O  •H  H  ©  O  s  CM  •  Cn  cn I  0) SH EH  o  O  SH  cn  ON,  SH 0 PH  1  O  • 1  O 0  •  on I  o • -4"  O  UN  •  1  cn 1  o -4-  to  o  -*• o 1  o • -4  o •  O O  •  O  O  sO  vO  O  o  NO 0  CM  •  -p  CO ©  o  o H  Tot Pe  CO  O  CM  O  o  cn  cn  ir\  ON  O  o o  o  o  O  cn  cn  cn  o  o  o  rH  rH  o  o  CM  o  H  o  o  a> © Pi  G  0  > ©  ca U CO CD  w  O  u  I=> CO S  PH  >  S3 O  H  ON W  -=* EH  « o  m«  CD  EH  fx)  3  CJ3 <<  G  W  a> P-5 P  o  M  EH  P3 EH  l-l  <  PH  i  i  i  1  cn  •  CM  o  UN  •  IN-  O  •  o  cn H  H  •  cn  •  o  CO  •  o  CM  •  NO  NO  H  rH  H  CO CO  O  O  UN  ON  u  O  UN  CM  o  o  o  O  <r  O cn  o  o  O  SH CD  cn 1  cn  cn 1  cn i  cn i  cn i  cn i  rH i  o i  O 1  o 1  o i  o  O  O  UN  o -4  o  o H  O H  o  O  O  O  O  UN  o  P-i  i  UN  H  H  cn  -4  O  S  Cxq  . - l a? O  d>  W  o 1  PH  > EH  &H 1>H O PQ S3  CD 0 SH EH  xi [0 O  p  -P  cn CD O  G rH frl cj O  ©  o Si o  EH U N  CM  o  o  o  CM  o to  o  o  CM  NO  cn  cn  cn  -4"  ~t  UN.  CO  ON  O  o -4-  NO  SH CO P O PH EH  UN  ON  o  NO  H  rH  CD  G  CD 0 0 SH EH  >  H  to SH CO 0  o  o  o  CM  UN  to  H  cn  o  cn  o  u-\  O H  O PH SH  O 0  bO  0 0 SH EH  o rH  CM  cn  H 1 NO  UN H 1 rH rH  O  CM 1  NO H  UN CM 1 H  CM  O  cn i  NO  CM  cn i rH cn  -4 i  vO cn  169  BIBLIOGRAPHY Babcock, P.M. The Valuation of Real Estate. New York, McGrawHill, 1932. Bonbright, J.C. The Valuation of Property. New York, McGrawH i l l , 1937, v o l . 1 . B r i t i s h Columbia, Department of Agriculture. Proceedings of the Reclamation Committee. Kelowna, 1952, B r i e f Nos. 15 - 18. B r i t i s h Columbia, Revised Statutes. V i c t o r i a , Queen's Printer,  1950.  Curry, C P . "Capitalization Rates". 7 (July -1939).  The Appraisal Journal, v o l .  E l l i o t , G.C. "Theoretical Considerations on Rural Appraisal". Journal of the Appraisal Institute of Canada, v o l . 8 (December 19*1-8). Pisher, D.V. Interview with the writer. December,  1958.  Fisher, I. The Nature of Capital and Income. New York, MacMillan,  1912.  Heady, E.O. Economics of A g r i c u l t u r a l Production and Resource Use. New York, Prentice - H a l l , 1952. Kurd, R.M. Principles of City Land Values. New York, The Record and Guide, 1911. Jevons, W.S. The Theory of P o l i t i c a l Economy. London, MacMillan, 1879.  Second ed.,  Knight, F.H. "Value Theory for Economists". American Economic Review, v o l . ij.6 no. 1 (March 1956).. Kuo-chiin, Chao. "Current Agrarian Reform P o l i c i e s i n Communist China". The Annals of the American Academy of P o l i t i c a l and Social Science, Philadelphia, 1951» Marenghi, E. Lezioni d i Estimo. Milano, L i b r e r i a E d i t r i c e Politecnia, 1925. Marshall, A. Principles of Economics. Eigth ed., London, MacMillan, 1925". Medici, G. Principles of Appraisal. Ames, Iowa State College Press, 1953.  70  Mertzke, A.J. Real Estate Appraising. Chicago, National Associ a t i o n of Real Estate Boards, 1 9 2 7 . M i l l , J.S. P r i n c i p l e s of P o l i t i c a l Economy, ed. Asley, New York, Longmans^ Greene and Co., 1926. Morehouse, E.W. "Land Valuation". Encyclopaedia Sciences, v o l . 9 ( 1 9 5 * 0 ) pp. - 1 3 7 - 1 3 8 .  of the Social  Murray, W. G. Farm Appraisal. Ames, Iowa State College Press, t h i r d ed., 1 9 5 * 4 Ricardo, D. P r i n c i p l e s of P o l i t i c a l Economy and Taxation. London, MacMillan, 1 9 0 8 . Smith, A.  The Wealth of Nations  (1776).  Taussig, F.W. Principles of Economics. Harper, v o l . 1 9 2 2 .  London, Methuen, 1 9 0 J + . 3 r d ed. New York,  Wald, H.P., ed. Papers and Proceedings of the Conference on A g r i c u l t u r a l Taxation and Economic Development. Cambridge, Mass. 1 9 5 * 4 - . Walker, F.A.  P o l i t i c a l Economy. New York, Crofts, 1 8 8 6 .  Wendt, P.E. Real Estate Appraisal. New York, Henry Holt and Co. 1 9 5 6 . Wilcox, J.C.  Interview with the writer.  August  1958.  Woodworth, H.C. and Potter, G.F. "Studies i n the Economics of Apple Orcharding". New Hampshire A g r i c u l t u r a l Experimental Station B u l l e t i n .No. 3 2 3 , 19*4-0.  

Cite

Citation Scheme:

    

Usage Statistics

Country Views Downloads
China 22 14
Canada 12 0
United States 5 0
Japan 4 0
Poland 3 0
France 2 0
Russia 1 0
New Zealand 1 0
City Views Downloads
Beijing 19 0
Unknown 8 6
Kelowna 7 0
Ashburn 5 0
Tokyo 4 0
Shenzhen 3 14
Edmonton 2 0
Montreal 1 0
Saint Petersburg 1 0

{[{ mDataHeader[type] }]} {[{ month[type] }]} {[{ tData[type] }]}
Download Stats

Share

Embed

Customize your widget with the following options, then copy and paste the code below into the HTML of your page to embed this item in your website.
                        
                            <div id="ubcOpenCollectionsWidgetDisplay">
                            <script id="ubcOpenCollectionsWidget"
                            src="{[{embed.src}]}"
                            data-item="{[{embed.item}]}"
                            data-collection="{[{embed.collection}]}"
                            data-metadata="{[{embed.showMetadata}]}"
                            data-width="{[{embed.width}]}"
                            async >
                            </script>
                            </div>
                        
                    
IIIF logo Our image viewer uses the IIIF 2.0 standard. To load this item in other compatible viewers, use this url:
http://iiif.library.ubc.ca/presentation/dsp.831.1-0106126/manifest

Comment

Related Items