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Agricultural Support, Farm Land Values and Sectoral Adjustment

The Implications for Policy Reform

image of Agricultural Support, Farm Land Values and Sectoral Adjustment

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.

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