Farmland Values, Government Payments, and the Overall Risk to U.S. Agriculture: A Structural Equation-Latent Variable Model

According to Ricardian rent theory, the value of farm assets is equal to the discounted present value of future expected net rents from farm returns, and the discounted expected value of the land if converted to nonfarm development. Some recent research has considered modifying this standard present value model by acknowledging that returns from the market may be discounted at a different interest rate than returns from government payments (Goodwin, Mishra, and Ortal-Magne) and also that the discount rate itself may be time-varying. However, very little research has considered how changes in the overall risk to agriculture may affect farmland values. An exception is Moss, Shonkwiler and Schmitz (2004). We use time series panel data from the USDA for United States, 1960-2004 and a structural equations model with latent variables for the rate of return on farm assets and for the real risk-adjusted interest rate. We find that a secondary effect of agricultural policies that reduces the overall risk to agriculture may increase farmland values (and thus farm sector wealth). Government payments are offsetting the negative impact of high volatility of returns to farming.

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 Record created 2017-04-01, last modified 2020-10-28

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