Farmland Prices: Is This Time Different?

The historical behavior of farmland prices, rental rates, and rates of return are examined by treating farmland as an asset with an infinitely long life. It is found that high (low) farmland prices relative to rents have historically preceded extended periods of low (high) net rates of return, rather than greater (smaller) growth in rents. Our analysis shows that this attribute is shared with stocks and housing, and the financial literature provides ample evidence that other assets feature it as well. The long-run relationship linking farmland prices, rents, and rates of return is analyzed. Based on this relationship, we conclude that recent trends are unlikely to be sustainable. The study explores the expected paths that farmland prices and rates of return might follow if they were to eventually conform to the average values observed in the historical sample, and concludes with a discussion of the policy implications. Recommendations for policy makers include close monitoring of farmland lending practices and institutions to allow early identification of potential problems, and identifying in advance appropriate interventions in case recent farmland market trends were to suddenly change

The Opportunity Cost of the Conservation Reserve Program: A Kansas Land Example

The effects of the Conservation Reserve Program (CRP) on farmland values is investigated using a set of parcel-level data for land sales in Kansas over the period 1998 to 2014. The sales data are used to estimate a hedonic model of land values that allows for the opportunity cost of CRP enrollment to vary across space and time. Factors impacting the opportunity costs include the relative productivity of land, returns to farming, and the time remaining under the CRP contracts. We find that the discount associated with having land under CRP contract averages 7%

Optimal Hedging with a Subjective View: An Empirical Bayesian Approach

The standard optimal hedging model has been the preferred theoretical model of normative hedging behavior. In empirical applications, the model is often implemented with the parameter certainty equivalent (PCE) procedure. However, the PCE procedure completely ignores parameter estimation risk and subjective views. We develop an “empirical” Bayesian optimal hedging model that not only effectively accommodates parameter estimation risk, but also provides hedgers with a theoretically intuitive yet quantitatively rigorous framework to blend their subjective views and a “marketwide” or “firmwide” consensus in determining optimal hedging positions (ratios). Copyright 2005, Oxford University Press.