Impact On Land Prices Of Export Demand For South African Deciduous Fruit: 1972-1992

This is the first local study of the linkage between export demand for deciduous fruit and South African deciduous fruit farm incomes and land prices. Export demand is expected to affect land prices through the derived demand relationship and capitalization formula. By analyzing the relative role of export demand, the study extends past research by van Wyk (1967), Behrmann and Collett (1970), Nieuwoudt (1980), Janse van Rensburg (1983) and Kassier (1985) which showed a close relationship between land prices and expected returns to farming. Ordinary Least Squares analysis of real annual farm income and land price data for the major apple producing area of Elgin in the Cape Province during 1972- 1992 supported a priori expectations of the linkage between export demand, farm income, and land prices. Lagged net revenue (total revenue less marketing costs) per hectare and lagged farmland prices per hectare had positive effects on land prices, while land prices were negatively related to lagged interest rates. When lagged net revenue per hectare was split into net export realisation revenue, net domestic realisation revenue and processing revenue, all three variables impacted positively on land prices, but only the export coefficient was statistically significant. These results imply that investor expectations about future net export revenue and interest rates, seem to drive farm land prices. Export enhancing policies to establish stable long-term export markets must account for the impact of macroeconomic linkages and global market forces on farm incomes and farm assets. Persistently high future local inflation rates could maintain downward pressure on the Rand exchange rate. Coupled with real income growth (increased demand) in developed countries, this will increase export revenues and land prices over time. New entrants will thus find it increasingly difficult to acquire farm land to produce for export markets.