Agricultural Support, Farm Land Values and Sectoral Adjustment

Agricultural Support, Farm Land Values and Sectoral Adjustment

The Implications for Policy Reform You do not have access to this content

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05 May 2008
9789264031739 (PDF) ;9789264031722(print)

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Governments intervene in the agricultural sector through policies that both support and shape agricultural production. This leads to two important outcomes. First, agriculture specific programmes intended to increase the welfare of farmers can become capitalised into asset values. Second, many policies, in particular regulatory ones, reduce asset mobility, resulting in reduced economic efficiency due a sub-optimal allocation of resources. This study focuses on the capitalisation of government support into land rents and prices. It assesses the consequences of inflated asset values, and suggests lessons for future policy making.
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  • Introduction
    In most OECD countries, governments intervene in the agricultural sector through policies that both support and shape agricultural production. In addition to providing payments on several different bases (such as production, land area or farm income), governments regulate land use and changes in land use, specify restrictions based on environmental policy goals, and target support to such areas as rural development and rural landscapes. While these programs have many effects, intended or otherwise, two are important here. First, agriculture specific programs intended to positively affect the welfare of farmers through commodity prices, input costs, or direct cash transfers can become capitalized in asset values. These higher asset values translate to higher wealth for current sector participants, but the resulting higher cost structure for the sector can have deleterious effects. Second, many policies, in particular regulatory ones, have implications for asset mobility –the ease with which capital, land, labour and other inputs are transferred between different economic activities. In addition to influencing how land is used, these can also act to enhance or suppress the value of land, with a corresponding wealth effect.
  • Theoretical Foundations for Asset Capitalisation
    It is recognised that agricultural support can affect farmland markets. Understanding the mechanism through which these affects are felt is the first step in explaining and predicting the impacts of agricultural policies on land use and prices, determining who benefits and who loses from support policies and all the other information that good policy making requires. This section identifies the main assumptions and economic variables behind that mechanism according to economic theory.
  • Land prices, Empirical Evidence and Literature Review
    The general theoretical framework for the capitalisation of agricultural support into the production factor land has been developed in Chapter 2. This chapter reviews the extensive empirical literature on this topic; it summarizes what we know about the size of the impact of agricultural policies on land rentals and land prices. The empirical literature confirms that we know relatively well the impact of polices on land rentals, but we know less about the working of land markets and the formation of land transaction prices. The consensus emerging from the empirical literature is that government policies can indeed affect rentals through the capitalisation phenomenon. In addition, the land rent has a positive relation with the transaction price of land, but it is only one of its many possible explanatory factors.
  • A Framework to Analyse Policies that Affect Asset Capitalisation and Mobility
    Asset capitalisation and asset mobility are two dimensions that are important for policy reform. The discussion thus far has concentrated on government policies directly provided as price support or subsidies to agriculture. This chapter broadens the discussion to include other policies and puts them in a general guiding framework. The framework encompasses agricultural policies as well as other policies such as taxation, rules and regulations. This is followed by a qualitative assessment of how other policies might impact asset mobility in agriculture, using information gleaned from various government information sources and five commissioned country case studies for France, Japan, Korea, Mexico and Norway. 
  • Policy Implications and Conclusions
    The discussion in the previous chapter highlighted the potential influence of government policy on asset values and asset mobility. The capitalization of government support into asset values reduces asset mobility, mainly because new entrants into the sector and existing farmers wishing to expand are faced with higher asset prices, the cost of which may not be recuperated in the future if farm returns (including support) are lower. In addition a number of other policies, mainly in the form of tax rules and other regulations, can also reduce asset mobility. This further enhances the capitalization phenomenon because, as seen in the theoretical discussion (Chapter 2), the least mobile assets are the ones most likely to be associated with the benefits of government support.
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