Who Really Benefits from Agricultural Subsidies? Evidence from Field‐level Data

Abstract

The idea that agricultural subsidies are fully capitalized into farmland values forms the foundation of the argument that subsidies are entitlements and removing them would drastically reduce farmland asset values. Surprisingly little evidence substantiates this claim. Using field-level data and explicitly controlling for potentially confounding variables we find that landlords only capture between 14 -24 cents of the marginal subsidy dollar. The duration of the rental arrangement has a substantial effect on the incidence. Initially, landlords extract 44 cents of the marginal subsidy dollar, but the incidence falls by 1.5 cents with each additional year of the rental arrangement. This duration effect reveals that rental market frictions play an important role in the farmland rental market.

The capitalization of coupled and decoupled CAP payments into land rental rates

“…A number of approaches could be applied to overcome this expectation error bias. First, one could seek a variable that captures expectations directly (e.g., Kirwan and Roberts, ). Second, if one knows the extent of expectation bias from some other source, then an adjustment to the realised variable could be made.…”

“…In the context of the FAIR Act, Lence and Mishra () explore the impact of the PFC and Market Loss Assistance (MLA) payments, which are decoupled from production, finding that they are almost completely bid into land rents, while other payment types are not capitalized. However, a series of papers by Kirwan and colleagues (Kirwan, ; Kirwan and Roberts, ; Roberts et al., ) report considerably lower incidence, with between 34 and 41 cents per dollar of PFC support were bid into rents (Roberts et al., ). Similarly, Kirwan () finds that following the introduction of unanticipated MLA payments, 34 cents per dollar of support is bid into rents.…”

“…Similarly, Kirwan () finds that following the introduction of unanticipated MLA payments, 34 cents per dollar of support is bid into rents. Using field level data, Kirwan and Roberts () find that between 14 and 24 cents of the marginal subsidy dollar are bid into land rents.…”

Features Of Domestic State Support For Agriculture In The World Economy

“…An important role in agriculture development, as a strategically important sector of the national economy, is played by two groups of the main measures carried out by the WTO, in the form of state domestic support and export subsidies. Many countries different in terms of market maturity continue to apply measures that adversely affect the international trade in goods and services, despite the fact that all of the above measures are regulated by the WTO (Kirwan & Roberts, 2016). All this negatively affects reporting and evaluation processes.…”

Renters, landlords, and farmland stewardship

“…Several prior studies find that landlord–tenant relationships in agriculture are long‐lived. Kirwan and Roberts () report an average rental duration of 10.2 years, Allen and Lueck () report an average length of 11.5 years, and Sotomayor et al. () report an average duration of 14.4 years.…”