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Humboldt-Universität zu Berlin - Faculty of Life Sciences - Department of Agricultural Economics

Projects

of the FORLAND research unit:
Agricultural Land Markets - Efficiency and Regulation

 

SP 1: Empirical and experimental analysis of land rental rates and farmland prices
Oliver Mußhoff

SP 2: Efficiency of agricultural land markets – The role of liquidity and competition
Martin Odening / Matthias Ritter

SP 3: Investigating Market Scepticism Regarding Agricultural Land Markets
Johanna Jauernig

SP 4: Is regulation of agricultural land markets warranted? - A microstructural investigation
Silke Hüttel / Axel Werwatz / Stefan Seifert

SP 5: Understanding farmers’ land use behaviour under different institutional settings
Klaus Salhofer

SP 6: Impacts of strategic behavior on land market dynamics and regulation effects
Alfons Balmann / Franziska Appel / Marten Graubner

SP 7: Quantifying the concentration of land ownership and trade-offs in agriculture
Tobia Lakes / Daniel Müller

 

Subproject 1:

Empirical and experimental analysis of land rental rates and farmland prices

Prof. Dr. Oliver Mußhoff, Farm Management Group, Georg-August-Universität Göttingen

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.

Keywords: Agricultural Economics, Land Markets, Real Options Models, Relationship between Rental Rates and Farmland Prices, Experimental Economics

 

Subproject 2:

Efficiency of agricultural land markets – The role of liquidity and competition

Prof. Dr. Martin Odening, Farm Management, Humboldt-Universität zu Berlin
JProf. Dr. Matthias Ritter, Quantitative Agricultural Economics, Humboldt Universität zu Berlin

Subproject 2 investigates price formation on agricultural land markets considering the interplay of (incomplete) competition, structural change, and market liquidity. The core question is: Are observed land transactions and prices the outcome of an efficient reallocation of a scarce resource or are they plagued by the exercise of market power resulting from the immobility of land?

Furthermore, is the low observed liquidity in land markets the result of dynamically optimal decisions of market participants or is it an indicator of market inefficiency in the sense that observed prices do not reflect available information on farmland values?

Finding answers to these questions is of utmost importance for this research unit because they may or may not provide the rationale for land market regulation. In general, market liquidity in the sense of market depth and immediacy is closely related to market efficiency: It describes the ability of market participants to realize desired buy or sell transactions without a time delay. The determinants and impact of liquidity are well-explored in financial markets. However, there is little knowledge about the relationship between market liquidity and prices on land markets. Our objective here is twofold: First, we intend to measure market liquidity on land markets with different indicators and methods.

Second, using a real options approach, we strive for a microeconomic explanation of market liquidity, focusing on the supply side of the market. A major concern about unregulated land markets is that the resulting allocation of land fosters an undesired agricultural structure in a sense that large industrialized farms gain a competitive advantage over smaller family farms and that young farmers with financial constraints cannot compete with financial investors. We will empirically explore farms’ growth decisions, accounting for their relative market position.

We include indicators of competitiveness, particularly concentration measures, and farm characteristics into our analysis. Computing concentration measures that serve as a proxy to power on the land market requires defining the relevant market, which is a specific subgoal of our analysis. On thin farmland markets with heterogeneous land, a gap between the willingness to pay of buyers/tenants and the willingness to accept of land owners results in a bargaining process over the price of land. Until now, bargaining power has been examined in the literature to the extent that hedonic pricing models under perfect competition have been adapted to thin markets with heterogeneous goods. We complement these econometric approaches with the development and estimation of a structural model. To this end, we derive a bargaining model from game theory literature, such as the ultimatum game and sequential bargaining models.

Key words: Agricultural Economics, Land Markets, Competition, Liquidity

 

Subproject 3:

Investigating Market Scepticism Regarding Agricultural Land Markets

Dr. Johanna Jauernig, Leibniz Institute of Agricultural Development in Transition Economies (IAMO), Halle/Saale

So far, our subproject has analyzed agriculture-society-tensions evolving around land market regulations and has shown that invoking agrarian ideals exacerbates these conflicts even further. Accompanying survey data showed that farmers are in favor of governmental regulations of land markets, which protect them e.g. against non-agricultural investors. Generally, there seems to be significant skepticism toward market solutions. In the 2nd phase of this project, this market skepticism of stakeholders in land markets shall be further explored as it may prevent exploring the potential of market solutions for societal improvement.

  1. Eliciting and understanding skepticism regarding land markets

Since the emergence of the Industrial Revolution in the 18th century, market-based societies have cultivated intense debates about the systemic quality of capitalism. Research so far has shown that there is a deep skepticism against the market mechanism resulting from unintended consequences such as negative environmental or social effects. However, current research argues that these problems can be overcome with changing and adjusting the rules of a market economy. This research demonstrates that the market economy holds the potential to create and improve value for society if the institutional framework of competition activates the self-interest of actors to operate in favor of the public interest. Thus, an escalating skepticism against the market economy may prevent exploring this potential for societal improvement.

There is evidence that market skepticism is especially prevalent when the resource land is concerned. There are several reasons put forward to justify market interventions including economic reasons (e.g. non-producible resource) or ideological reasons (e.g., only farmers can be proper land stewards). Furthermore, a rich history of market interventions such as price policies and privileges for farmers has created endowment effects. Our first research aim is to better understand the skepticism towards land markets of different stakeholders such as farmers, but also public stakeholder groups. With the help of a survey, we want to find out whether these stakeholders are generally skeptical towards market solutions or whether land markets constitute a special case. In a second step, we want to better understand what drives this skepticism. Thus, the following drivers shall be tested: Which role do ideological concepts such as land stewardship play (1), seeking one’s advantage as a landowner might also be a reason to oppose market solutions, if market restrictions promote one’s interests (2) and stakeholders also might be rationally bounded such that they are unable to see through the modes of action and consequences of market solutions and therefore resent it. All these proposed drivers hint at different mental models of stakeholders. Understanding these mental models is not just a step forward for agricultural ethics, but also for business ethics in general.

  1. In-depth understanding of the drivers of market skepticism and tests to mitigate them

In a second step, we want to further explore the drivers for market skepticism elicited in the survey with the help of economic experiments. Controlled treatments allow us not only to observe actual and incentivized behavior, but also bring to light inconsistencies in attitude and behavior. Experiments also enable us to test mechanisms to alter attitudes. This can be helpful to ultimately determine the driver of a skeptical attitude, as an ideology based view shall be unalterable. Furthermore, economic analyses of other SPs have already shown that market solutions could be desirable from an efficiency point of view. In this case, testing institutions to mitigate market skepticism in land markets can itself become an ethical endeavor.

Keywords: Land Markets, Market Skepticism, Rent-Seeking, Ideology, Economic Experiments

 

Subproject 4:

Is regulation of agricultural land markets warranted? - A microstructural investigation

Prof. Dr. Silke Hüttel, Dr. Stefan Seifert, University Bonn
Prof. Axel Werwatz, Ph.D, Technical University Berlin

A primary concern of existing and proposed regulation of the farmland market has been the perceived risk of farmers being “priced out of the market” and a resulting loss of a “sustainable farming structure”. This risk is suspected to have increased because of new demands for land from, among other things, (i) investors, argued to benefit from lower financial constraints and strong bargaining positions, and (ii) urbanization, infrastructural and industry sprawl, potentially reinforcing (i). In the initial funding period, we have focussed on land prices as the outcome variable to assess justifications for new regulation and effects of existing regulation. We mainly worked with data from our laboratory region Brandenburg (BB) in order to estimate whether existing regulation managed to dampen price increases and how much upward pressure on prices was exerted by urban sprawl (Berlin) and the presence of investors’ activities. In the second funding period, prices will still be playing an important role in our research but we will broaden our perspective to (i) the interrelation of such drivers as sprawl, conservation or clean energy with prices, regulation and policy; (ii) other market outcomes and (iii) other regions. The new outcomes are at the heart of land market regulation in Germany (preserving a healthy local structure of farms) or reflect other important goals of society (sustainable development).

Our analysis will consist of three parts. First, we will quantify price impacts of new demand drivers, including energy and other policies, and aim at analysing the potential direct and indirect impact channels through the market microstructure. Second, we will investigate the effects of land price increases and land market regulation intensity on a broader set of market outcomes such as farming and land-use structure. We ask: (i) How have recent price increases, possibly spurred by the above mentioned drivers, led to changes in farm structure? (ii) What is the role of regulation therein, which is supposed to preserve a “healthy local farm structure” by moderating prices? Third, we target at broadening our regional perspective by contrasting price formation in North-Rhine Westphalia (NRW) and BB. This enables us to compare farmland markets with different farm and market structures both undergoing profound land use change: lower prices with large farm, mainly cropping, structure in BB versus higher prices with a largely heterogeneous farm structure in NRW. At the same time, both labs share urbanization pressure and lignite-mining areas as important drivers of industry sprawl. Lignite mining not only limits farmland, rather expands financial limits of farms through compensation and land re-supply from the re-cultivation beyond the market. We ask: How do urbanization, industry (lignite mining) (de-)sprawl and policy influence price formation?

Our project is accordingly organized in three work packages (WPs). We will start in WP 1 by quantifying price-impacts of policy-induced demand-drivers such as energy policy and their interrelation with urban and industry sprawl. Because of the role of land prices for the allocation and cost of land as a key input to farming, we will continue in WP 2 by investigating direct and indirect causal effects of land market regulation- (input from phase 1) and policy- (input from WP 1) induced prices on farm and land-use structure. With WP 3, we will broaden the regional perspective to NRW. We will investigate the melange of industry sprawl, investors’ demand likely triggered by urbanization, limits of land-use in lignite mining areas and energy policy. We focus on price formation and target at analysing the interrelation of these drivers, their impact on agents’ bargaining positions in the market and the market microstructure to evaluate their price-impact. These WPs are not only closely linked topically and share the use of transaction data enhanced by IACS and/or CORINE data for land use and farming structure, but also share methods of identifying causal effects. In phase 2, we target at broadening the methodological portfolio by structural equation modelling approaches to identify impact channels of drivers on market microstructure, prices and other market outcomes.

Key words: Farmland market regulation, Market microstructure, Causal impact evaluation

 

Subproject 5:

Understanding farmers’ land use behaviour under different institutional settings

Klaus Salhofer, Institute of Sustainable Economic Development, University of Natural Resources and Life Sciences, Vienna, Austria

The first phase of the project was centered around the impact of land ownership on farmers’ land use behavior. We now take a step backwards and explore how land ownership is transferred through inheritance and which consequences this transfer of land may have.

In Austria different traditions in regard to inheritance of agricultural holdings exist. In most regions impartial inheritance (“Anerbenrecht”) has been the common practice. However, some regions in Burgenland, Lower Austria and eastern Styria traditionally practiced partible or equal inheritance (“Realteilung”). The latter usually implies smaller plots, a more fragmented agricultural landscape, but also greater fragmentation of land ownership, more people migrating and more absentee landowners. The aim of this subproject is to investigate the impact of inheritance on land fragmentation, landowner fragmentation and absentee landowners and subsequently the effect of these implications on economic and environmental performance of farms.

To investigate these issues, we have access to two large-scale geospatial datasets:

  • the Integrated Accounting and Control System (IACS) which includes land use information at the plot-level such as crop choice and AES participation;
  • data from the Austrian cadaster, containing information on legal property items and their owners, including the owners’ place of residence.
  1. Inheritance, land fragmentation, landowner fragmentation, absentee landowners

Utilizing the two data sets and geospatial analysis, we can identify

  • the extent and spatial distribution of land fragmentation;
  • the extent and spatial distribution of landowner fragmentation;
  • gain insights into absentee ownership.

We can derive measures of land(owner) fragmentation for single farms and at the regional level. We can relate these measures to regions with different traditions of inheritance.

  1. Economic and environmental efficiency under land fragmentation

Agricultural land fragmentation can have different private and public costs and benefits including higher transportation costs, higher labor requirements, reduced production risk and increased crop diversity to name a few. Moreover, land fragmentation often goes hand in hand with landowner fragmentation. This may imply higher transaction costs due to the necessity of a famer to work with numerous landowners.

The aim here is twofold:

  • to analysis the effect of land fragmentation and landowner fragmentation on efficiency and productivity of farms;
  • to investigate if economic efficiency and environmental efficiency, in form of crop diversity, are substitutes or complements.

To do so we utilize Stochastic Frontier Analysis and/or Data Envelopment Analysis.

  1. The property relationship and farmers’ conservation behavior

In phase one of the project we found the relationship between landlord and tenant to be one of the major mechanisms that mediate the relation between a plot’s property status and farmers’ land use behavior. We therefore now investigate the landlord-tenant relationship in more detail and place a particular focus on absentee landowners. The objectives are

  • to investigate the relationship and power dynamics between landlords and tenants, placing a particular focus on absentee vs. residential landlords and
  • to investigate the effect of close vs. distant landlord-tenant relationships on farmers’ behavior and soil conservation practices.

To do so we utilize qualitative interviews and thematic content analysis. We extend the qualitative analysis in a quantitative manner. In particular, we identify plots held by residential and absentee owners and compare farming practices applied on these plots. To identify a potential treatment effect we apply cluster-specific (farm) fixed effects estimations.

Key words: Land Fragmentation, Landowner Fragmentation, Absentee Landowner, Efficiency

 

Subproject 6:

Impacts of strategic behavior on land market dynamics and regulation effects

Prof. Dr. Alfons Balmann, Dr. Franziska Appel, Dr. Marten Graubner, IAMO, Halle

Land market transactions are of strategic relevance for farms. First, land transactions directly affect or are interlinked with (other) future transactions. Second, they affect the farm’s ensuing opportunities on the land market because these depend on the farm’s existing land bank as well as on the financial obligations linked to previous land transactions. Third, the development of any farm is interdependent with the evolution of its neighboring farms as farms compete locally for land. Subsequently, land transactions of one farm may not just affect future growth, stagnation, shrinkage or exit of the farm itself but also that of the neighboring farms. We address these issues through a) the explicit modelling of strategic land market behavior in the spatial and dynamic agent-based model AgriPoliS, b) subsequent experiments on how this affects the performance of farms and structural change, and c) comparative assessments of the implications of land market settings and political framework conditions.

  1. Modelling strategic land market behavior

Although agent-based modelling of the agricultural sector has become widespread, land market interactions are usually either ignored or modelled in a simplified way based on ad hoc assumptions. For instance, within the agent-based model AgriPoliS, the farms derive land rental decisions from myopic calculations of shadow prices. Based on theoretical considerations concerning determinants of strategic interactions in land markets, we will develop a conceptual framework on the relevance of different strategic decisions (farm continuation, land rentals, investments) considering the available information of the respective farm and its local and global environment. Based on this framework, we apply deep neural networks (DNN) to model strategic behavior of farms in AgriPoliS. The DNN will replace the current myopic decision process on strategic issues of one, some or all agents in AgriPoliS. The DNN will be trained by repeated experiments with AgriPoliS for alternative settings in order to optimize long-term performance indicators such as the final value of the farm’s equity.

  1. Experimental analysis of strategic land market behavior

Experiments comparing the outcomes of myopically optimizing versus strategically acting agents within various initializations of AgriPoliS will be used to assess the implications of strategic actions on the individual farm as well as on the local/regional level. We expect a better understanding of potential effects of strategic actions on farm performance, structural change, and land market performance, including the potential exploitation of market power.

  1. Policy implications of strategic land market behavior

Assuming that land market regulation is motivated by the aim to reduce unwanted phenomena such as high concentration of land to few farms or the exploitation of market power, we will study to which extend the unwanted phenomena are driven by strategic behavior, how farms respond to regulations, and what are the consequences of the regulations on the performance of the agricultural sector to fulfil its societal functions. Specifically, we will assess the effects of regulation scenarios such as limitations on farm sizes and land prices for alternative case study regions in East and West Germany

Key words: Agricultural Economics, Land Markets, Agent-based Modelling, Deep Neural Networks

 

Subproject 7:

Quantifying the concentration of land ownership and trade-offs in agriculture

Prof. Dr. Tobia Lakes, Applied Geoinformation Science, Humboldt-Universität zu Berlin
PD Dr. Daniel Müller, Leibniz Institute of Agricultural Development in Transition Economies (IAMO) and Geography Department, Humboldt-Universität zu Berlin

In the previous funding period, subproject 7 relied on spatial statistics and machine learning to extract associations between land-use changes, land prices, and environmental outcomes using fine-scale, plot-level land-use and georeferenced land purchase data. In the second phase, we will expand this by quantifying and mapping farm-level profits from agriculture across space and time and associate these with environmental and societal functions of land use. Our overall aim is to reveal and quantify trade-offs and synergies between agricultural profits, biodiversity conservation, and societal functions for Brandenburg since 2005 using spatial optimization algorithms.

Our major research questions are:

  1. How do farm-level profits vary in time and space, and how are these variations related to changes in land prices?
  2. What are the key trade-offs and synergies between agricultural profits, biodiversity, and societal benefits?
  3. Which spatial configurations between agricultural profits, biodiversity, and societal benefits represent solutions along the production possibility frontier and how have these frontiers changed since 2005?
  4. Which policy and management measures can serve to attain pareto-efficient outcomes?
  5. How does agricultural land use respond to different multidimensional optimizations and different priority settings?

The suggested analysis has three key methodological innovations: First, instead of using crop yields to proxy agricultural success, we propose to quantify and map profits from agricultural production at farm level by combining geospatial data on land use and biophysical features with the main production alternatives from the online plant process and animal productivity calculator (KTBL in German). This will allow approximating profitability of agricultural production for every year since 2005 at farm level and to assess how the profitability changed over time. We will further examine to what extent the profits align with purchase prices for agricultural land, which will shed light on the hypothesis that more profitable farms may tend to pay higher prices for land compared to farms with lower profits. Second, we will assess the trade-offs between conflicting aims of agricultural land use with the data on agricultural profits,  combined with biodiversity proxies and variables that quantify the societal functions provided by agricultural land use. We will assess these trade-offs for every year since 2005 and for all agricultural land in Brandenburg, which will advance previous research on spatial trade-off analyses and spatial optimizations that relied on static data for a particular year. Third, we will develop spatial optimization routines using genetic algorithms for a set of indicators and for different alternative options of future agricultural land use. We will develop Pareto-optimal solutions that we will use to identify realistic priorities and manageable solutions in workshops with key stakeholders. The results will provide valuable spatially detailed insights into how production, conservation, and societal goals can be better aligned in Brandenburg.

Key words: Geography, Agronomy, Spatial analysis and optimization, Trade-off quantification, Pareto frontiers, Sustainable land development