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Empirical insights from literature

The empirical attempts to estimate the impact of agricultural support policies on land rents and land prices can be grouped into two broad categories: land value/price studies and land rent studies. Whereas the former study policy impacts on farmland prices, the latter investigate the policy impact on the farmland rental rates. The main reason why authors use one approach instead of the other is usually determined by the data: the availability of either land values (typically from regional datasets) or rental data (typically from farm-level surveys).

It is important to point out that virtually all of the existing studies relate to North America (the United States and Canada). To our knowledge, only a few papers cover the EU countries (Goodwin and Ortalo-Magne, 1992; Duvivier et al., 2005; Patton et al., 2008). Moreover, none of these measures the impact of the SPS.

In comparison with the hypotheses of theoretical models, several conclusions follow from the empirical studies (for more details, see Ciaian et al., 2010).

First, coupled agricultural support policies do increase land rents and land prices, albeit less than theory predicts. Land rents/prices do not appear to capture the full value of coupled subsidies, at least in the short to medium run, but they do capture a substantive share of subsidy payments (most studies report 20-80%). The reviewed literature on land value and land rental rate determination suggests that land prices and land rental rates are determined by a large number of factors, such as policy support, land use alternatives, competition on the land market, inflation etc., and this may explain these discrepancies between theory and empirical evidence.

Second, decoupled policy payments do affect land rents and land prices.3 One way to interpret these results is that in the real world there are no truly decoupled subsidies. All “decoupled” subsidies applied in the European Union or the United States impose certain restrictions on farms or are accompanied by other measures4. Therefore, it is rather difficult to compare the empirically estimated impact of decoupled and coupled policies. Perhaps, the subsidy that most closely resembles the decoupled subsidy definition is the Production Flexibility Contract (PFC) payments introduced in 1996 by the Federal Agricultural Improvement and Reform (FAIR) Act in the United States. The Act decoupled subsidies from contemporaneous production and removed all planting restrictions, including set-aside requirements. With the exception of certain fruits and vegetables, producers were given complete planting flexibility, while they still received subsidies based on their 1985 program yield and their 1995 acreage base.5

Third, landowners benefit from all support programs, both coupled and decoupled. All reviewed studies find that one additional unit of payment results in an increase of less than one land price unit. While these findings are not surprising in relation to decoupled subsidies, most of the empirical literature relates to coupled subsidies that would be expected to have most (if not all) of their final incidence on land. However, the reviewed studies have found a surprisingly small share of coupled subsidy benefits going to landowners.

Fourth, the difference between the estimated impact of coupled and decoupled subsidies is not statistically significant. Comparing the empirical results from different studies, we find evidence that coupled payments do not have a significantly different impact on land value from decoupled payments. For example, Duvivier et al. (2005) find that the elasticity of Belgian land values with respect to partially coupled support (compensatory payments) is between 0.12 and 0.47. Kirwan (2005) estimates that the marginal effect of all government subsidies in the United States on farmland rental rates is between 0.2 and 0.4. In contrast, Taylor and Brester (2005) find that the elasticity of land value with respect to market price support is between 0.16 and 0.32.

There are only a few studies which compare how the subsidy capitalisation differs between decoupled and coupled subsidies. Goodwin et al. (2003) find that, as predicted by theory, coupled subsidies (LDP)6 have a higher impact on land value than decoupled subsidies (PFC). The estimated marginal effect on land value is 6.6 for LDP and 4.9 for PFC. In contrast, the results of Lence and Mishra (2003) suggest that decoupled payments (PFC and MLA) have a stronger impact on rents than coupled subsidies (LDP). Moreover, the coupled subsidies are found to decrease rents. These estimates suggest that rents increase by around 85 cents for each dollar paid per hectare under the PFC and MLA. In the case of LDP, land rent is estimated to decrease by around 24 cents per each subsidy dollar.

 
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