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Determinants of Iowa Cropland Cash Rental Rates: Testing Ricardian Rent Theory

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Based on the Ricardian rent theory, this study employs the variable profit function to analyze the determinants of Iowa cropland cash rental rates using county-level panel data from 1987 to 2005. Accounting for spatial and temporal autocorrelations, responses of local cash rental rates to changes in output prices and other exogenous variables are estimated. We find that Iowa cash rental rates are largely determined by output/input prices, soil quality, relative location, and other county-specific factors. Cash rents go up by $79 for a $1 increase in corn price in the short run. The marginal value of cropland quality, as represented by row-crop corn suitability rating index, is about $1.05. Ethanol plants are not found to have a significant local effect on cash rental rates, impacting local rental markets mainly through the national futures price. Scale of the local livestock industry and adoption of genetically engineered crops have significant impacts on local cash rental rates. In addition, changes in crop output prices are found to have long-run effects on cash rental rates. The long-run change in cash rents is approximately $109-$114 for a $1 change in corn price and is reached in about four years. Our research may be viewed as a test of the Ricardian rent theory. We find limited support for the theory.

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Paper provided by Center for Agricultural and Rural Development (CARD) at Iowa State University in its series Center for Agricultural and Rural Development (CARD) Publications with number 07-wp454.

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Date of creation: Oct 2007
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Handle: RePEc:ias:cpaper:07-wp454

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Keywords: bargaining; basis; ethanol; land quality shadow price; rate of adjustment; spatial autocorrelation.;

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Cited by:
  1. Ibendahl, Gregory & Griffin, Terry, 2013. "The Connection Between Cash Rents and Land Values," Journal of the ASFMRA, American Society of Farm Managers and Rural Appraisers.
  2. Ibendahl, Gregory A., 2012. "The Connection Between Cash Rents and Land Values," 2012 Annual Meeting, February 4-7, 2012, Birmingham, Alabama 120055, Southern Agricultural Economics Association.
  3. Baylis, Katherine R. & Paulson, Nicholas D. & Piras, Gianfranco, 2011. "Spatial Approaches to Panel Data in Agricultural Economics: A Climate Change Application," Journal of Agricultural and Applied Economics, Southern Agricultural Economics Association, vol. 43(03), August.
  4. Miao, Ruiqing, 2013. "Impact of Ethanol Plants on Local Land Use Change," Agricultural and Resource Economics Review, Northeastern Agricultural and Resource Economics Association, vol. 42(2), August.

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