Empirical and experimental analysis of land rental rates and farmland prices

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We will continue and extend on the previous work of SP1. The general objective of this subproject is to empirically and experimentally analyse rental rates and farmland prices. The subproject comprises of four work packages.In work package 1 we will expand the study on the rent-price ratio on the county level in Lower Saxony in the spatio-temporal dimension. We study the full distribution of the rent-price ratio of agricultural land. Therefore, farm level data from the agricultural census (including land rents) and land price data gathered by expert committees for land evaluation are merged on a spatial grid. A geo-additive generalised model for location, shape and scale is used to model the effects of the local farming structure on both the mean and the scale of the rent-price ratio distribution. Spatial dependencies are modelled by structured Gaussian-Markov-Random-Field-terms and unstructured spatial random effect terms. In a second work package, we will run a Discrete Choice Experiment to investigate farmers’ preferences for buying instead of renting farmland. Covariates that will be included in the model estimation encompass, for example, the farm-field-distance or the field size. From a policy perspective, we will investigate the impact of a more restrictive Land Regulation Act, as well as additional restrictions regarding the use of inputs on farmers’ willingness to pay for buying and renting farmland. Furthermore, we will develop a real options approach benchmark and test if the theory is able to explain experimentally observed renting and buying decisions better than the net present value model. The third work package, which will be jointly carried out with SP2, sets up a theoretical framework to investigate farmer’s (dis)investment behaviour on agricultural land markets. Specifically, our objective is to apply the real options theory to unravel supply dynamics on agricultural land markets by deriving triggers in prices that initiate a farm’s decision to sell farmland. Investigating the supply of agricultural land is particularly relevant as it can be regarded as an indicator describing the liquidity of agricultural land markets. In doing so, we scrutinise the role of liquidity for agricultural land markets to work efficiently.Finally, in collaboration with SP2, we aim to understand both tenants and landowners bargaining power over land rental prices. The objective here is to examine the bargaining process over a price margin, which results from a gap between tenant’s willingness to pay and landowner’s willingness to accept, which may arise in thin markets. For this purpose, game theory models will be adopted, which are able to capture the underlying logic of bargaining processes. The theoretical modelling and empirical analysis of bargaining processes will contribute to the understanding of market power on agricultural land markets.