Risk Premium Factors in Investment in Farming Land for Farming Purposes

Abstract

Following the Uruguay Round Agreements on Agriculture, the price stabilization policy for agricultural products has been reduced gradually in Japan and will be so in the future, which will have significant impact on the agricultural structure in Japan.This paper examines the relationship between the price fluctuation rate of agricultural products and the risk premium in investment in farming land, in order to clarify how the price stabilization policy affects future trend of agricultural production in Japan.Using the multiple regression analysis, this paper analyses the correlation of the risk premium in investment in farming land as a criterion variable with the price fluctuation rate, the ratio of business farm household, and an agricultural area-classified dummy as explanatory variables.Consequently, there is a tendency that the risk premium is higher if 1) the price fluctuation rate in a certain area is higher, 2) the ratio of business farm household is higher, and 3) when (or if) it is in the mountainous areas.The result indicates that farmers tend to choose the risk premium according to the price fluctuation rate of agricultural products in an attempt to avoid risk of price change. In addition, instability in farmer's income affected by the price fluctuation rate is likely to differ, depending on the population of part-time farmers or geographical conditions.The result is also consistent with the “relationship between the expected rate of return and the risk premium” in terms of the asset pricing theory. Theoretically, farmland price is determined as a result of division of net return of land by expected rate of return. In this regard, our finding of this paper indicates that the smaller the price fluctuation rate of products is, the smaller the expected rate of return, therefore, the higher the farmland price tends to be.This paper suggests, therefore, that the price stabilization policy of agricultural products tends to raise farmland price, hindering the distribution of farmland; thus, we can conclude that abolishing the price stabilization policy contributes into fall of farmland price.