Drivers for farmland value revisited: adapting the returns discount model (RDM) to the sustainable paradigm

Bazyli Czyżewski,Piotr Kułyk,Łukasz Kryszak

doi:10.1080/1331677x.2019.1642778

Abstract

In recent studies many researchers have identified non-agricultural attributes of land that significantly contribute to its value. They claim that the increasing proportion of the value of land may now be explained by environmental amenities in rural areas. On the other hand, mainstream economics says that farmland values are determined by the discounted stream of returns (present value model). The main aim of this work was to adapt neoclassical concept of the Returns Discount Model (RDM) of Saphiro–Gordon type to the case of a land market in Poland. We introduced a modified RDM (i.e. the multilevel variance component model) to answer whether it remains applicable to the valuation of farmland in the context of sustainable agriculture. It was found that in spite of the growing role of non-productive functions of agriculture the improved RDM continues to perform well as a tool to assess changes in land prices.

Highlights

Mainstream economic theory says that farmland values are determined by the discounted stream of expected returns (Burt, 1986; Capozza & Helsley, 1989; Featherstone & Baker, 1987)
A consensus has been achieved that farmland prices are not well explained by the present value model which is a different name for Returns Discount Model (RDM) (Return Discount Model)
We introduce an additional multiplier representing the expected rent related to the increased scarcity of agricultural land in the economic system (1 þ k)

Summary

Introduction

Mainstream economic theory says that farmland values are determined by the discounted stream of expected returns (Burt, 1986; Capozza & Helsley, 1989; Featherstone & Baker, 1987). A consensus has been achieved that farmland prices are not well explained by the present value model which is a different name for RDM (Return Discount Model) (see for example Burt 1986; Falk 1991, 1992; Falk & Lee, 1998; Featherstone & Baker 1987).

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Conclusion