Farmland Investments Research Articles

Agricultural policy uncertainty and farm level adjustments—the case of direct payments and incentives for farmland investment

A dynamic stochastic business-level land valuation model is derived to analyse how agricultural policy uncertainty regarding reform of the CAP area payment system affects farmland investment incentives. Subjective probability beliefs of Swedish farmers were collected in a survey and used to illustrate the implications of the model. The results show the working of adjustments in current farmland investment incentives triggered by the announcement of agricultural policy programmes linked to farmland. Lack of complete information causes inefficiency by inducing farm operators to over-invest before the reform date if they expect a reform that is likely to reduce their area payment. Policy uncertainty has surprisingly volatile and ambiguous effects on farmland investment incentives. Copyright 2005, Oxford University Press.

Farmland in a Mixed-Asset Portfolio: A Mean-Semivariance Approach

Executive Summary. This study uses the downside risk or mean-semivariance (M-S) methodology to evaluate farmland as a component of a mixed-asset portfolio. Results confirm that while a minimal investment in farmland may be warranted, farmland investment does not need to be a substantial part of the core allocations of an optimized mixed-asset portfolio. Although investment in farmland cannot be shown to statistically improve mixed-asset portfolios, which already include allocations to real estate, investment in farmland can be part of the real estate allocation of an optimal mixed-asset portfolio when investors or their advisors have farmland investment expertise. More studies using additional farmland data are required to fully assess direct investment in agricultural land.

Farmland Investment Under Conditions of Certainty and Uncertainty

This study investigates the potential for farmland to improve mixed-asset portfolio efficiency. Three major conclusions are drawn from the research. First, in a world with certainty, farmland can be shown to statistically improve mixed-asset portfolio efficiency. Second, with the introduction of uncertainty into the portfolio allocation model, investors can justify small or no allocations of farmland in a mixed-asset portfolio, although it appears that even with uncertainty prudent investors should evaluate the asset class. Third, with respect to farmland investment and geographic diversification, the results question the ability of an optimized mean–variance portfolio to provide substantial improvement in comparison to a naive portfolio. The marginal improvement in portfolio efficiency of an optimized farmland portfolio versus a naive farmland portfolio is not statistically significant.

Farmland lease decisions in a life‐cycle model

Optimization procedures are used to investigate economic motivations of farmland lease arrangements in an intertemporal setting and to explore linkages among lease contracts, risk, and time attitudes, and their impact on farm performance. The model solutions suggest farm businesses can be effectively analyzed in a life‐cycle model in which farmland tenure, production, financing, and investment decisions are jointly optimized. The operator’s degree of risk aversion and time attitudes are shown to affect farm business decisions and performance.

Permissive growth policies may encourage speculative investment in farmland

Agricultural land is at risk in much of California, especially near the boundaries of rapidly growing communities. A study of five cities in Ventura County, which is roughly 60 miles east of Los Angeles, strongly suggests that traditional policies for protecting farmland may be ineffective. These policies exist in tension with tremendous growth pressure generated both by local economic development policies and by urban expansion from the Los Angeles region. Development interests tend to bid on farmland in areas anticipated to be most susceptible to changes in land-use regulations.

Household land tenure reform in China: Its impact on farming land use and agro-environment

Post-Mao rural reform has stimulated farmers' incentives for agricultural production. Yet, the short period of 15 years' land tenure, coupled with the ambiguous land property rights between collectives and individual households has also encouraged short-sighted decisions and the irresponsible use of land resources. Capital investment in farmland, and maintenance of irrigation facilities have been neglected. Farmers are “digging” soil and land resources for short and immediate benefit. In addition, low profit to grain production has the disadvantage of protecting arable land from being used for another purpose, also over-fragmented land with increased ridges and ditches has hampered—the function of irrigation and drainage and aggravated the impact of natural disaster. As a consequence, all this has led to the degradation of China's agro-ecological environment. The situation is deteriorating. This paper describes the links between reformed land tenure systems and irresponsible farming as well as degraded agro-environment, some policy remedies are suggested.

Stagnation Without Equity: Patterns of Growth and Inequality in China's Rural Economy

When China's leaders launched rural reforms in the late 1970s, they acknowledged the nation's need to modify its commitment to egalitarianism.1 Slogans such as Tt is glorious to be rich!' and 'Some areas will lead; others will follow!' signalled this fundamental shift in ideology. Leaders backed up these exhortations with a series of concrete policy actions ? establishing the Special Economic Zones and implementing the East Coast-first policy, introducing financial reforms, and initiating the rural industrialization movement. In China's version of the 'trickle down' theory, certain core areas were to take the lead in the modernization process and provide models for other areas to later emulate. Adopting strategies that had been employed

The Impacts of Business Cycles on Returns to Farmland Investments

AbstractExpected performance and valuation of investments in farmland are examined in relation to prevailing business cycle conditions over a period that includes both the 1970s farm boom and 1980s farm recession. Information on risk premia in debt, equity, and land markets are shown to significantly affect conditional expected returns to farmland and, consequently, farmland values. Further, conditional expected land returns diverge significantly in some years from returns conditionally required on the basis of systematic risk. Overall implications are that expected land returns are dependent not only on local sector conditions but also on time‐varying macroeconomic conditions related to business cycles.

Institutional Portfolios: Diversification through Farmland Investment

This article demonstrates that farmland can enhance the overall performance of institutional portfolios which are currently dominated by stocks, bonds, and business real estate. Unlike previous articles on farmland returns, this article addresses the issue of “smoothing bias” associated with appraisal‐based farmland returns. Improved measures of income returns to farmland are also used in developing the estimates of optimal portfolios. Parametric testing revealed that farmland continues to enter the optimal portfolios even for large increases in the variance or for large reductions in the annual returns to farmland.

Leveling peasants? the maintenance of equality in a Swiss Alpine community

This quantitative examination of economic stratification in a Swiss Alpine village is based on data of individually owned farm land and building valuations for the period 1851–1915. Comparisons with other societies and with European peasant communities indicate a relatively low degree of inequality and the possibility of considerable intergenerational mobility in wealth. Demographic factors appear to have little influence on wealth. The egalitarian nature of the community results less from systematic wealth leveling mechanisms than from a limited production base, partible inheritance, the low returns on investment in farmland, communal credit facilities, and a democratic local political structure. [peasants, Switzerland, stratification, inequality, leveling, mobility]

Inflation and Crop Profitability: How Much Can Farmers Pay for Land?

The purchase of a parcel of farm land can be one of the most difficult investment decisions confronting farm operators. Compared with other production inputs, land is purchased infrequently and usually involves a large, longterm financial obligation. The land investment decision is especially critical today, when many are questioning the ability of farm income to support current land values at normal commodity prices. Fairly stable relationships existed during the 1960s between land values, net returns to farming, and the general rate of inflation (see table 1). However, during the 1970s and especially since 1972, land prices have escalated sharply, net farm income has been very volatile at high levels, and nonland production costs have increased faster than the general price level (consumer price index). These recent trends raise serious questions not only of magnitude but also direction of movement for these important determinants of how much farmers can pay for land. We accept the proposition that prospective buyers must evaluate investments and make decisions based on present conditions with appropriate allowances for future anticipated trends. In this paper, we have not attempted to guess the future direction nor magnitude of these important variables but have developed a framework for analyzing farmland investments. A capital budgeting decision model developed by Lee for evaluating farm real estate purchases is used to test the land price sensitivity of a set of decision variables. Specific case situations are analyzed by comparing buyers with different characteristics, each facing favorable and unfavorable economic trends. These specific situations are then compared to illustrate how much farmers can fford to pay for land under specified conditions and expectations. For purposes of analysis, a Corn Belt farm situation is assumed, although the general results and conclusions would apply to most parts of the country.