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What is happening to EU land prices?

The evolution of agricultural land prices and rents can be a good indicator of the effect of agricultural policy, because of the assumption that a significant proportion of the transfers to farmers as a result of such policy are capitalised into land values. Thus, changes in agricultural policy may have implications for land values, and the prospect of capital losses due to a fall in land values can be one source of opposition to such changes.

The issue is relevant in the context of the Commission’s proposals to introduce a ‘regret clause’ with respect to the implementation of the Single Payment Scheme as part of the Health Check. This would allow countries which have implemented the historic model of Single Farm Payments (SFP) to convert to a regional or flat-rate model if they desired.

The impact of such a proposal on land values is clearly one consideration which member state governments would need to consider in contemplating such a move. But the relationship between the SFP and land values is controversial, as I discussed in an earlier post.

A new report from the OECD looks at the theory behind the capitalisation of policy support measures into land values and rents, and also at the empirical evidence. The report’s conclusions are based on model simulations rather than direct observations, and all the empirical literature reviewed predates the introduction of the EU’s SFP scheme. Thus the report does not throw any light directly on the SFP land price paradox.

The paradox arises because the way the EU has implemented decoupled payments has been to create entitlements to the SFP.

These entitlements must be activated by farming eligible land, but the entitlements themselves can be traded or leased. In addition, the entitlements carry with them certain obligations which impose a cost on farmers, such as the need to observe cross-compliance requirements as well as to maintain the land in good agricultural and environmental condition.

The OECD has the following to say about the consequences of a move to decoupling for land values:

Depending on implementation criteria, decoupled payments can result in a higher rate of asset capitalization compared to other forms of support. If the right to receive payments can be transferred with assets such as land, then most of the benefits will end up in higher asset prices. [italics added]

It reaches this conclusion because, although market price support or coupled payments also raise the price of land, they do so indirectly. Other things being equal, if the support is linked directly to the price of land, then the capitalisation effect will be greater.

However, Kilian and Salhofer have shown that, where there is a market for entitlements separate from the market for land, whether the value of the Single Payment is capitalised into the value of land depends crucially on the ratio of the number of entitlements to the number of hectares of agricultural land, as well as on the payment model (historic, regional or hybrid) in place.

They argued that the number of entitlements was greater than the number of eligible hectares, and thus that the SFP is capitalised into the value of land. In discussing that paper, I argued that it was more likely that the number of entitlements would be less than the number of eligible hectares in most member states, and thus that the value of the SFP should not be reflected in the price of land. Given that the direct payments which the SFP replaced were coupled payments, then decoupling the SFP in the way it was done should lead to a fall in the price of land. This is an argument which in principle should be settled by a look at the data.

Land price and rental statistics across Europe are collected by Eurostat, but data are scarce and come with the caveat that methodologies of collecting these prices differ across countries. The table shows both land prices and rents over the three years 2004-2006 (click on the tab buttons at the bottom to open the second sheet). Looking at the evolution of land prices over the years 2005-2006 for countries where data are available, land prices fell in six countries in 2005, namely, Belgium, Germany, Luxembourg, Netherlands, Ireland and Wales. Land prices continued to rise in 2005 in Denmark, Spain, Finland, Sweden, England and Wales, and Northern Ireland among the old member states. However, in all cases prices resumed their upward trend in 2006.

Source: Eurostat

The new member states are in a different position because they are experiencing a steady rise in direct payments over the early years of their membership. In countries like Romania and Latvia, this has led to some pretty spectacular increases in the price of land.

As well as policy support, land prices are affected by a range of other factors, including planning regulations and expectations of capital gains, which are well reviewed in the OECD report. So it may be more informative to look at rental values as a ‘purer’ indication of agricultural policy effects. Here again a mixed picture emerges, although in those countries where rents fell in 2005, the decreases were pretty small and could well be explained by factors other than the introduction of SFP.

Thus we are still left with the paradox that what theory predicts is not what we observe in practice if I am correct in arguing that there are more eligible hectares than entitlements in most EU member states. In arguing that the number of entitlements exceeds the number of eligible hectares, Kilian and Salhofer make their model consistent with the evidence we have on prices. But I have yet to see firm evidence to back up this assertion for most member states. Without clarity on this issue, it is hard to predict what might happen to land values if countries opt to move from a historic to flat-rate SFP system.

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