Applying Appraisal Principles in Practice

Applying Appraisal Principles in Practice Felicia Nelson, AIC USDA:APHIS:VS APHIS Appraisal Process Subject to Federal Regulations and VS Memorandums CFRs on the web (Title 9, Parts 50-56) http://www.access.gpo.gov/nara/cfr/cfr-table-searc h.html#page1 VS Memos on the Web (No. 534.1) http://inside.aphis.usda.gov/vs/downloads/memos/ 534_1.pdf Includes guidelines for private appraisers Updated guidelines for private appraisers as well as poultry values http://inside.aphis.usda.gov/cei

APHIS Appraisal Process According to USDA-OGC the appraisal process is NOT a series of negotiations between USDA and the owner, nor is any contract implied during discussion with owner However, best not to use the word offer which can imply a contract Better to use the word proposed or proposal and any values discussed must be approved by higher level officials Make clear up front to the owner no contract is implied Have contract when VS Form 1-23 is signed by all parties A fair offer based upon relevant information is what is desired APHIS Appraisal Process The owner will claim above average quality animals, thus deserve above average compensation Owners need to document above average

quality Let the owner tell his story, especially in whole herd/flock depopulations Identify top quality within the herd & owners valuation Identify average quality within the herd & owners valuation Identify bottom quality within the herd & owners valuation APHIS Appraisal Process Work with the owner to document quality / value Good cop / bad cop routine Youre the good guy gathering information to convince the evil bean counter in Fort Collins that the owner has high valued animals Includes both production and financial

records Receipts of sales and purchases It is a red flag when owners either claim they dont have or are unwilling to share their records and yet claim high value animals APHIS Appraisal Process Locate relevant markets for quality/type of animals, may not be the local auction Owner can help with this Analyze market prices of comparable (similar quality) animals to determine appraisal value It is very important to document how you arrived at

your values in order to pass any OIG audits APHIS Indemnity Process Once value has been determined, calculate indemnity Indemnity = appraisal value x indemnity rate (%) Sometimes there is a maximum payment limit Example of Appraisal SELF-CONTAINED APPRAISAL OF Description of Animal IN POSSESSION OF Any Producer ADDRESS Any Address

Any City, AS 12345-6789 PREPARED FOR Any AVIC USDA, APHIS, VS EFFECTIVE DATE DD.MM.YYYY PREPARED BY Your Name, Your Title USDA, APHIS, VS WHAT? WHO? WHERE? WHO? WHEN?

WH0? Example of Appraisal PURPOSE OF APPRAISAL The purpose of this appraisal is to establish the fair market value WHEN? (FMV) of the subject livestock as of Month Day, Year. DEFINITION OF FAIR MARKET VALUE Fair market value is defined as the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of relevant facts. Ref: Internal Revenue Section 1.170A -1(c) (2) HOW? APPRAISAL METHOD A variation of the sales comparison approach was used to establish the value of the subject livestock. Whereas the sales comparison approach has as its premise the comparison of the subject livestock with similar individual livestock that sold in the recent past in a relevant market, the approach used compared the subject property

to an aggregate of similar livestock as represented by average selling prices that sold in the recent past at two relevant markets. ASSUMPTIONS AND LIMITING CONDITIONS The livestock being appraised herein are assumed to be the property of Any Producer. However, this appraisal makes no WHO? guarantee of actual ownership of said livestock. The subject livestock is assumed to be of relatively sound body condition as the owner s attestation of soundness has not indicated otherwise. Example of Appraisal DESCRIPTION OF SUBJECT LIVESTOCK During tuberculosis testing, one Holstein female located on the premises of Any Producer was positive to the caudal fold and gamma interferon tests. The subject animal is characterized as summarized below: Why?

Id #840012345678910 Age: 4 years 5 months Breed: Holstein Sex: Female Lactation (#): 3 Days in Milk (DIM): 265 Pregnancy Status (Days Carried Calf): 190 (due 03/12/2009) Average daily milk production (lbs): 51.6 During a December 22, 2008 telephone interview with the owner, Any Producer stated that the subject livestock is in good body condition with a good udder (all teats attached and functional) and good feet. He also provided production and pregnancy information about the subject animal as denoted above. Any Producer considers this natural addition to be average in comparison to herd mates. VALUE ESTIMATE OF SUBJECT LIVESTOCK In placing a value on the subject cow, the determining factors were age, breed, lactation, days in milk , pregnancy status, and milk production .

How? Based on the age (e.g., 4 years 5 months) of the subject animal, her lactation (e.g., 3), days in milk (e.g., 265), and pregnancy status (e.g., 190 days in calf), her value would fall in the middle of the relevant range. Her extrapolated annual milk production (e.g., 17,854) is approximately 19-20% below average when compared to the 2007 Michigan state average of 22,234 pounds for Holstein cows (Source: USDA, NASS-Quick Stats-Michigan Data-Dairy). The subject animals below average milk production warrants a downward adjustment in value from the middle to the lower half of the relevant range. Impact of Animals Qualities on its FMV Published market reports from Lake Odessa Livestock Auction (Appendix 1) and Ravenna Auction (Appendix 2 ) were used to obtain comparables to the subject animal. Since bred cow selling prices were not available from either market, their fresh cow pricing categories, with an upward adjustment for the unborn calf, were used as comparables. Selling prices for dairy cows sold at Lake Odessa Livestock Auction have been steady over the last 3 weeks. Consequently, its most recent market report (e.g., 12/16/2008) was used to value the subject animal. Ravenna Auctions latest, available market report (e.g., 11/2008) was used to value the subject animal in the absence of Decembers data. Comparables Example of Appraisal In order to determine the value of the unborn calf, several assumptions were

made. First, the calf was assumed to be born alive, at least one day old, and to weigh within the range of a healthy Holstein calf at birth. Second, the buyer would incur addition al feed cost for the unweaned calf because of the higher cost of milk replacer in contrast to purchasing a weaned calf. As day-old calves are not sold at market, the current selling prices of weaned calves (e.g., starter calves and dairy calves) sold at Lake Odessa Livestock Auction and Ravenna Auction were used to estimate its value (Appendix 3). The value of the day-old calf would fall in the lower end of the relevant range due to the additional feed cost incurred as discussed herein. Adjustments to Comparables With no additional evidence to support that the subject livestock is of greater or lesser quality than discussed herein, I assess the fair market value of the subject livestock to be $2,165.00 as calculated in Appendix 3. Statement of FMV Example of Appraisal Example of Appraisal Example of Appraisal

APPENDIX 3 Low Comparables to Subject Animal (per head) High (per head) Average (per head) Lake Odessa Livestock Auction 1 $1,500.00 $1,800.00 $1,650.00 Ravenna Auction 1

$2,200.00 $3,000.00 $2,600.00 Average of Comparables (per head) $2,125.00 Lower 3rd of Relevant Range (Average Low + Average)/2 $1,987.50 Adjustment for Unborn Calf 177.50 Assessed Fair Market Value

$2,165.00 Lake Odessa3 (per head) Ravenna Auction (per head) Starter/Back to Farm Calves (Low) $ 10.00 $ 50.003 Dairy Calves (Low) $ 150.00

$ 500.001 $ 80.00 $ 275.00 Unborn Calf Computation Average 2 Adjustment for Unborn Calf (per head) 1 2 3 Values are based on November 2008 market conditions Assuming 100-lb calf Values are based on December 2008 market conditions.

Average (per head) $ 177.50 $ 177.50 APHIS Indemnity Process Present appraisal value & indemnity amount to owner on VS Form 1-23 http://inside.aphis.usda.gov/vs/downloads/vsform1-23.pdf Use correct version: Apr 2002 If indemnity rate is less than 100%, show the full appraisal value, not the indemnity value in the appraisal columns. Otherwise owner may feel his animals were not properly appraised. Once signed, send to Regional Office Regional Epidemiologist can help with this (more later)

If the Owner Refuses to Sign Remind the owner that USDA assumes healthy animals and thus there is a high probability he will receive more than what he could earn in trying to sell diseased or exposed animals at a market Can the owner document and justify additional value? If there appears to be a reasonable justification / additional documentation, then USDA can reappraise the animals Otherwise formal appeal to VS Deputy Administrator, which is final Remind the owner that current federal law prohibits APHIS being sued on its valuation Appraiser-to-Owner Experience Owner's Records

Owner's Memory Owner's Acceptance Your experience determining dairy values with limited cow data Available data Lactation Date bred or due Average daily milk produced Normal days dried off Extrapolated data Days carried calf Days in milk Annual milk production

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