Capital Gains versus Current Income in the Farming Sector

Abstract

years since the Great Depression, mainly because of rising farm real estate prices. After 1970, annual increases in asset values have each year exceeded annual net farm income (including landlords' net rent), often by wide margins. This paper examines the magnitude and causes of asset appreciation. It first notes that asset appreciation should be adjusted for general price inflation before it is compared with income. The comparable series, known as real capital gains, has been roughly equal to net farm income during this decade. Next, the primary origin of these significant real capital gains is traced to the fact that, contrary to the popular impression, the current return to farm assets has grown rapidly over the past twenty-five years, even when measured in constant dollars. It is then shown that, according to asset-pricing theory, a farm economy characterized by rapid growth in the real current return to assets will tend to experience large annual real capital gains and a low rate of current return to assets-which corresponds to actual experience in most years since the mid-1950s. This inescapable tendency has serious and paradoxical implications for the structure of agriculture and for farm policy, which are briefly sketched in the concluding remarks.