We find that DPs have a positive and significant impact on land rents, indicating that there is rent extraction of government payments by landowners. This impact is not only statistically significant, but is also economically significant. An increase of one additional euro per hectare in DPs increases land rents by 13 to 25 euro cents, corresponding to a capitalisation rate of 13% to 25%. Since renting is widespread in several EU-NMS and most landowners are absentee landowners who live in urban areas or who are no longer active in agriculture, the payments will flow out of the agricultural sector and are, to a large extent, missing their goal of improving the livelihoods of rural inhabitants.
In addition, we find that the level of capitalisation depends on market imperfections. In particular, credit market imperfections are important as well as the country’s farm structure, which affects transaction costs and imperfect competition (bargaining position) in the land rental market.
Capitalisation of DPs is higher in more credit-constrained markets, with the level of capitalisation ranging from 40 euro cents (in the case of poorly functioning credit markets) to 16 euro cents per additional euro of DPs (in the case of well-functioning credit markets). DPs may reduce farmers’ credit constraints, for example because farmers may use them as collateral for bank loans (Latruffe et al., 2010). As a consequence, the marginal productivity of agricultural land increases which will in turn
56|VAN HERCK,SWINNEN &VRANKEN
boost the demand for agricultural land, as theoretically shown by Ciaian &
Swinnen (2009).
With respect to farm structure, we find that capitalisation of DPs is lower in countries characterised by a significant share of agricultural land used by corporate farms, reflecting a stronger bargaining position of the farmers. Per additional euro of DPs, the level of capitalisation in the land rental price ranges from 21 euro cents, if all land is used by individual farmers, to 4 euro cents if all land is used by corporate farms. Hence, in the countries where the farm structure is dominated by corporate farms, the level of capitalisation of DPs is found to be lower, suggesting that transaction and stronger bargaining positions of the tenants temper capitalisation.
4. Conclusion
In this chapter, we analyse the impact of increasing DPs on land rents in six new EU member states. In these countries, agricultural subsidies largely increased as a result of their EU accession. We find that up to 25% of DPs is capitalised in land rents. In addition, the results show that capitalisation of DPs is higher in more credit-constrained markets, while capitalisation of DPs is lower in countries where more land is used by corporate farms, reflecting a stronger bargaining position of corporate farms in these countries.
All this clearly illustrates the importance of reforms focused on improving the bargaining position of farms and on improving access to input and output markets, and particularly credit markets, as well as of reforms of sectors ‘surrounding agriculture’. Such reforms are not only crucial to improve access to land by farmers and to induce structural change in the sector, but also to ensure that agricultural subsidies are not missing their goal of improving the livelihoods of rural inhabitants in the EU-NMS.
References
Barnard, C.H., G. Whittaker, D. Westenbarger, M. Ahearn (1997), “Evidence of Capitalization of Direct Government Payments into U.S. Cropland Values”, American Journal of Agricultural Economics, 79(5):1642–1650.
Breustedt, G. and H. Habermann (2011), “The Incidence of EU Per-Hectare Payments on Farmland Rental Rates: A Spatial Econometric Analysis of German Farm-Level Data”, Journal of Agricultural Economics, 62(1):225–243.
DIRECT PAYMENTS AND LAND RENTS:EVIDENCE FROM NEW MEMBER STATES |57 Ciaian, P. and D. Kancs (2012), “The Capitalisation of Area Payments into
Farmland Rents”, Canadian Journal of Agricultural Economics, 60(4):517–540.
Ciaian, P. and J.F.M. Swinnen (2006), “Land Market Imperfections and Agricultural Policy Impacts in the New EU Member States: A Partial Equilibrium Analysis”, American Journal of Agricultural Economics, 88(4):799–815.
Ciaian, P. and J.F.M. Swinnen (2009), “Credit Market Imperfections and the Distribution of Policy Rents”, American Journal of Agricultural Economics, 91(4):1124–1139.
Ciaian, P., D. Kancs and S.G. Paloma (2010), “Distributional Effects of CAP Subsidies: Micro Evidence from the EU”, EERI Research Paper Series 05/2010, Economics and Econometrics Research Institute, Brussels.
Chau, N.H. and H. de Gorter (2005), “Disentangling the Consequences of Direct Payment Schemes in Agriculture on Fixed Costs, Exit Decisions, and Output”, American Journal of Agricultural Economics, 87(5):1174–1181.
Floyd, J.E. (1965), “The Effects of Farm Price Supports on Returns to Land and Labour in Agriculture”, Journal of Political Economy, 73:148–158.
Goodwin, B.K. and F.N. Ortalo-Magné (1992), “The Capitalisation of Wheat Subsidies into Agricultural Land Value”, Canadian Journal of Agricultural Economics, 40(1):37–54.
Goodwin, B.K., A.K. Mishra and F.N. Ortalo-Magné (2003), “What’s Wrong with Our Models of Agricultural Land value?”, American Journal of Agricultural Economics, 85(3):744–752.
_____ (2005), “Land owners’ Riches: The Distribution of Agricultural Subsidies”, University of Wisconsin-Madison School of Business, Department of Real Estate and Urban Land Economics.
_____ (2011), “The Buck Stops Where? The Distribution of Agricultural Subsidies”, in J. Graff Zivin and J. Perloff (eds.), The Intended and Unintended Effects of U.S. Agricultural and Biotechnology Policies, Cambridge, MA: National Bureau of Economic Research, pp. 15–50.
Guyomard, H., C. Le Mouël and A. Gohin (2004), “Impacts of alternative agricultural income support schemes on multiple policy goals”, European Review of Agricultural Economics, 31(2):125-148.
Hendricks, N.P., J.P. Janzen and K.C. Dhuyvetter (2012), “Subsidy Incidence and Inertia in Farmland Rental Markets: Estimates from a Dynamic Panel”, Journal of Agricultural and Resource Economics, 37(3):361–378.
Hennessy, D.A. (1998), “The Production Effects of Agricultural Income Support Policies under Uncertainty”, American Journal of Agricultural Economics, 80(1):46–57.
Kilian, S., J. Anton, K. Salhofer and N. Röder (2012), “Impact of 2003 CAP Reform on Land Rental Prices and Capitalization”, Land Use Policy, 29:789–797.
58|VAN HERCK,SWINNEN &VRANKEN
Kirwan, B.E. (2009), “The Incidence of US Agricultural Subsidies on Farmland Rental Rates”, Journal of Political Economy, 177(1):138–164.
Kirwan, B.E. and M.J. Roberts (2010), “Who Really Benefits from Agricultural Subsidies? Evidence from Field-Level Data”, paper presented at the 2010 Agricultural and Applied Economics Association Annual Meeting, 25–27 July, Denver, CO.
Kropp, J.D. and J.G. Peckham (2012), “Impacts of U.S. Agricultural and Ethanol Policies on Farmland Values and Rental Rates”, paper presented at the 2012 Agricultural and Applied Economics Association Annual Meeting, 12–14 August, Seattle, WA.
Latruffe, L. and C. Le Mouël (2009), “Capitalization of Government Support in Agricultural Land Prices: What do we Know?”, Journal of Economic Surveys, 23(4):659–691.
Latruffe L., S. Davidova, E. Douarin and M. Gorton (2010), “Farm Expansion in Lithuania after Accession to the EU: The Role of CAP Payments in Alleviating Potential Credit Constraints”, Europe-Asia Studies, 62(2):351–365.
Lence, S.H. and A.K. Mishra (2003), “The Impacts of Different Farm Programmes on Cash Rents”, American Journal of Agricultural Economics, 85:753–761.
Patton, M., P. Kostov, S. McErlean and J. Moss (2008), “Assessing the Influence of DPs on the Rental Value of Agricultural Land”, Food Policy, 33:397–405.
Vyn, R.J., Z.U. Haq, J. Weerahewa and K.D. Meilke (2012), “The Influence of Market Returns and Government Payments on Canadian Farmland Values”, Journal of Agricultural and Resource Economics, 37(2):199–212.
| 59