Fads Versus Fundamentals in Farmland Prices

A consensus appears to be forming that farmland price movements are not well-explained by the present value model with rational expectations. See, for example, Burt (1986), Featherstone and Baker (1987), Falk (1991,1992), and Hanson and Meyers (1995). Although the specific methods and data sets differ across these papers, each one formally or informally rejects the present value model as an explanation of farmland prices. The reasons for the empirical failure of the present value model are not clear. Burt (1986) concludes that deviations of farmland price from its fundamental path can be explained in terms of overreaction to rent movements. Featherstone and Baker (1987), on the other hand, conclude that these deviations are largely determined by purely speculative forces, i.e., by fads. No one, however, has attempted to quantify the fad component to help resolve this basic issue.