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Farmland Values, Government Payments, and the Overall Risk to U.S. Agriculture: A Structural Equation-Latent Variable Model

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  • Mishra, Ashok K.
  • Dedah, Cheikhna O.

Abstract

According to Ricardian rent theory, the value of farm assets is equal to the discounted present value of future expected net rents from farm returns, and the discounted expected value of the land if converted to nonfarm development. Some recent research has considered modifying this standard present value model by acknowledging that returns from the market may be discounted at a different interest rate than returns from government payments (Goodwin, Mishra, and Ortal-Magne) and also that the discount rate itself may be time-varying. However, very little research has considered how changes in the overall risk to agriculture may affect farmland values. An exception is Moss, Shonkwiler and Schmitz (2004). We use time series panel data from the USDA for United States, 1960-2004 and a structural equations model with latent variables for the rate of return on farm assets and for the real risk-adjusted interest rate. We find that a secondary effect of agricultural policies that reduces the overall risk to agriculture may increase farmland values (and thus farm sector wealth). Government payments are offsetting the negative impact of high volatility of returns to farming.

Suggested Citation

  • Mishra, Ashok K. & Dedah, Cheikhna O., 2008. "Farmland Values, Government Payments, and the Overall Risk to U.S. Agriculture: A Structural Equation-Latent Variable Model," 2008 Annual Meeting, July 27-29, 2008, Orlando, Florida 6569, American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association).
    • Handle: RePEc:ags:aaea08:6569
    DOI: 10.22004/ag.econ.6569
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    References listed on IDEAS

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    1. Avinash K. Dixit & Robert S. Pindyck, 1994. "Investment under Uncertainty," Economics Books, Princeton University Press, edition 1, number 5474, December.
    2. Barry K. Goodwin & Ashok K. Mishra & François N. Ortalo-Magné, 2003. "What's Wrong with Our Models of Agricultural Land Values?," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 744-752.
    3. Bjornson, Bruce & Innes, Robert, 1992. "Risk And Return In Agriculture: Evidence From An Explicit-Factor Arbitrage Pricing Model," Journal of Agricultural and Resource Economics, Western Agricultural Economics Association, vol. 17(2), pages 1-21, December.
    4. Avinash Dixit, 1992. "Investment and Hysteresis," Journal of Economic Perspectives, American Economic Association, vol. 6(1), pages 107-132, Winter.
    5. Peter J. Barry, 1980. "Capital Asset Pricing and Farm Real Estate," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 62(3), pages 549-553.
    6. Sergio H. Lence & Ashok K. Mishra, 2003. "The Impacts of Different Farm Programs on Cash Rents," American Journal of Agricultural Economics, Agricultural and Applied Economics Association, vol. 85(3), pages 753-761.
    7. Ashok K. Mishra & Carmen L. Sandretto, 2002. "Stability of Farm Income and the Role of Nonfarm Income in U.S. Agriculture," Review of Agricultural Economics, Agricultural and Applied Economics Association, vol. 24(1), pages 208-221.
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