Capitalization of Government Support in Agricultural Land Prices: What Do We Know?

Abstract

The objective of this paper is to provide an overview of existing literature, both theoretically and empirically, on the extent to which agricultural subsidies do translate into higher land values and rents and finally benefit landowners instead of agricultural producers. Our review shows that agricultural support policy instruments contribute to increasing the rental price of farmland, and that the extent of this increase closely depends on the level of the supply price elasticity of farmland relative to those of other factors/inputs on the one hand, and on the range of the possibilities of factor/input substitution in agricultural production on the other hand. The empirical literature shows that land prices and rents have in general a significant positive and inelastic response to government support. Such inelastic response is thought to reflect the uncertain future of the farm programmes. And in general, studies have indicated that land prices are more responsive to government-based returns than to market-based returns.

Location determinants of agricultural land prices

“…After controlling for both accessibility conditions and rural amenities, the estimated elasticity of the single farm payment is 0.54, indicating that a doubling of this subsidy would increase land prices by about 54 per cent. The sign and the magnitude of the coefficient are in line with previous studies showing that decoupled payments translate into higher land values, generally with an elasticity less than 1 (Clark et al 1993;Weersink et al 1999;Latruffe and Mouël 2009). Agricultural environmental payments, by contrast, have a negative influence on land prices.…”

“…There is also a significant number of studies that analyse various aspects of decoupled payments with a focus on European land markets. These studies are primarily focused on the influence of the decoupling reform on agricultural production (Rude 2008), investment decisions of farmers (Sckokai and Moro 2009) and income distributional aspects (Latruffe and Mouël 2009). Furthermore, there is some empirical evidence suggesting that decoupled income support have a significant positive influence on the rental price of land (Brady et al 2009).…”

The common agricultural policy and the determinants of changes in EU farm size

“…The subject of the first branch of literature is the formulation of farmland prices or farmland rental prices with the emphasis on their evolution and on the determinants of such prices, including elasticity or capitalisation due to different types of government intervention (Ciaian and Swinnen, 2006;Latruffe and Le Mouël, 2009). The second branch of the literature analyses the preferences for different forms of land tenure or different production contracts, mainly from the point of view of neo-institutional economics.…”

Direct Payments and Land Rents: Evidence from New Member States

“…In addition to the magnitude and type of the agricultural subsidy measure, the capitalization of agricultural subsidies will also be affected by market imperfections in in-and output markets as well as by the land institutions and rental regulation in place (see for example, Chau and de Gorter, 2005;Hennessy, 1998;Latruffe and Mouël, 2009).…”