The Incidence of U.S. Agricultural Subsidies on Farmland Rental Rates

Abstract

This paper identifies the effect of agricultural subsidies on farmland rental rates in the United States. Rental agreements are primarily between farmers and non-farmer landlords, but no evidence exists concerning the incidence of subsidies on these two groups. By exploiting a unique policy change in 1996 and a nationally representative dataset of individual farms, I solve the endogeneity problem with fixed effects and instrumental variables techniques. I show that non-farmer landlords capture forty percent of the marginal subsidy dollar per acre. This finding is in sharp contrast to the basic assumptions in the literature that suggest full incidence on the landlords. I discuss possible characteristics of the farmland rental market that would result in less than perfect incidence.

Microeconomic aspects of government subsidies in the agricultural market

“…In the USA, "farmers who rent the land and cultivate it capture 75% of the subsidy, leaving just 25% for the landowners. This finding contradicts the prediction from the neoclassical models" (Kirwan 2009). …”

Is there a term structure in land lease rates?

“…Myriads of hedonic pricing studies have been conducted that reveal the impact of farmland characteristics, the location of environmental variables, and subsidies and regulatory measures on land leasing rates (e.g. Swinnen et al 2008, Kirwan 2009, Breustedt and Habermann 2011. One issue, however, remains relatively unexplored in the empirical literature, namely the role of the term, for example the length of the leasing contract.…”

Direct Payments and Land Rents: Evidence from New Member States

“…Using the same data, Kirwan (2005) finds in a related study that landowners capture on average between $0.20 and $0.40 of the marginal per acre subsidy dollar depending on the region and farm size.…”