Testing Speculative Behavior in Farmland Demand

Nick Barton, Adesoji Adelaja and Saichon Seedang

No 19308, 2005 Annual meeting, July 24-27, Providence, RI from American Agricultural Economics Association (New Name 2008: Agricultural and Applied Economics Association)

Abstract: Substantial increases in farmland demand in sub-urbanization have had profound effects on agriculture and produced a surge in farmland values. With escalating land values, farmland can take on the characteristics of a speculative asset and farmland owners may be more responsive to the investment value of farmland than the productive value. Speculation has been shown to have a significant impact on the agricultural production decisions of farms, and may encourage farmers to curtail capital investments and prematurely idle productive farmland. This paper investigates the effects of farmland value appreciation on agriculture and isolates the speculative component of land use demand, using New Jersey as a case study. A conceptual model of land use and investment behavior is developed and estimated. Two empirical models are used in the analysis; one that accounts for speculation and one that does not. The former is found to be superior. An inverse relationship is estimated between the rate of appreciation and the demand for farmland, suggesting a direct relationship between appreciation and land supplied to development. The relationship, however, is found to be positive at rates of farmland value appreciation in excess of the risk free rate of return. This suggests an identifiable speculative demand component whereby farmland owners retain farmland at high rates of appreciation. Results also support the conjecture that when the rate of appreciation is lower than the risk free rate, the speculative behavior of farmland owners is to keep less land in agriculture.

Keywords: Land; Economics/Use (search for similar items in EconPapers)
Pages: 30
Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:ags:aaea05:19308

DOI: 10.22004/ag.econ.19308

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