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An Agent Based Simulation of Farm Succession and Farmland Valuation

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  • Su, Chi
  • Schoney, Richard
  • Nolan, James

Abstract

The impact of widespread farm ownership by large investors is influential and uncertain. There are various reasons for buying farmland as an investment, and one of them diversification benefits for financial portfolios because many studies have found that the correlation between farmland price yield and the yields of major financial assets, such as stocks, bonds and real estates are negative. On the other hand, the prime objectives of many farm family businesses are “to maintain control and pass on a secure and sound business to the next generation” (Hay and Morris 1984, Errington 2002). Farmland is generally retained within the family by succession due to the strong emotional and economic linkage. However, very little literature has studied the interaction between these two types of farmland transitions. Given limited data on this research topic, an agent based simulation model (ABSM) is one of the few practical solutions for the study of this area. The model in this study is built upon Anderson’s (2012) model that simulates farming activities in Canadian Agricultural Region 1A in Saskatchewan in Repast©. Two modules, farm succession and institutional investors who purchase farmland as a financial asset to diversify the aggregate risk of the portfolio, are added. Further, 30-year farming and investing performances are simulated in four different scenarios to test the impacts on different activeness of institutional investments. They are assumed to lease the farmland they own back to the local farmers for the rent as their dividends. Conclusively, it is found the participation of institutional investors in farmland purchase market can push up the farmland price for 15% to 40% in different scenarios, and the farmers tend to lease slightly more. Meanwhile, the number of farms constantly decrease and more and more large farms emerge in the simulation period with or without investors. Finally, the results show that the existence of institutional investors would not negatively impact the industry health. Les impacts de l'achat en masse de terres agricoles par de grands investisseurs sont à la fois influents et incertains. L'achat de terres agricoles comme investissement se fait pour diverses raisons. L'une d'entre elles est l'avantage que représente la diversification des portefeuilles financiers parce que de nombreuses études démontrent le lien négatif entre la valeur du rendement agricole et les rendements d'avoirs financiers d'importance comme les actions, obligations et investissements immobiliers. D'autre part, les objectifs principaux de nombreuses entreprises agricoles sont de « maintenir le contrôle et de transmettre à la prochaine génération une entreprise solide et saine » [traduction libre] (Hay and Morris 1984, Errington 2002). Les terres agricoles sont ainsi conservées au sein d'une même famille par succession grâce aux liens émotifs et économiques forts. Par contre, peu d'études portent sur cette interaction entre ces deux types de transitions agricoles. Étant donné le peu de données à ce sujet, le modèle de simulation à base d'agents représente l'une des solutions les plus pratiques pour étudier ce sujet. Le modèle utilisé pour cette étude se base sur le modèle d'Anderson (2012) qui simule les activités agricoles de la région agricole canadienne 1A en Saskatchewan dans Repast©. Deux modules sont ajoutés : succession agricole et investisseurs institutionnels qui font l'acquisition de terres agricoles comme avoir financier pour diversifier le risque global au portefeuille. De plus, les performances agricoles et d'investissement sur une période de 30 ans sont simulées dans quatre scénarios distincts afin d'évaluer les impacts sur différents niveaux d'activités des investissements institutionnels. L'on suppose que ces derniers louent les terres agricoles aux fermiers locaux pour le loyer comme dividendes. Il est donc trouvé définitivement que la participation des investisseurs institutionnels dans l'achat de terres agricoles peut faire augmenter le prix de ces terres de 15 % à 40 $ selon le scénario, et les fermiers ont légèrement plus tendance à louer. Parallèlement, le nombre de fermes diminue constamment et de plus en plus de grandes fermes apparaissent dans la période de simulation avec ou sans investisseurs. Finalement, les résultats démontrent que l'existence d'investisseurs institutionnels n'aurait pas d'impact sur la santé de l'industrie.

Suggested Citation

  • Su, Chi & Schoney, Richard & Nolan, James, 2017. "An Agent Based Simulation of Farm Succession and Farmland Valuation," 7th Annual Canadian Agri-Food Policy Conference, January 11-13, 2017, Ottawa, ON 253250, Canadian Agricultural Economics Society.
  • Handle: RePEc:ags:cafp17:253250
    DOI: 10.22004/ag.econ.253250
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    Keywords

    Farm Management;

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