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An Empirical Investigation of the Impacts of Government Program Payments On Farmland Rental Rates

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The paper investigates the capitalizations of aggregate and disaggregate government subsidies into farmland rental rates using selection bias correction models. It investigates cash as well as share rental rates, which are largely used in US agriculture. The empirical results suggest that government subsidies have large significant effects on rental rates. More specifically, we find that landlords capture 37%-38% of the aggregate subsidies under cash leases, and 86%-88% under share contracts. Disaggregate farm programs are also found to have different impacts on rental rates according to the types of programs and leasing arrangements. We consider cash rental and sharecropping contracts. The literature has generally focused on cash leasing arrangements. However, other land tenure contracts are commonly used in the US. In 1999, about 59% of all leased farmland was under cash contracts. About 24% and 11% of leased land was, respectively, under share and hybrid contracts (USDA/NASS 2001). The latter type of contracts borrows elements of sharecropping and cash rental agreements such that the tenant pays part of the rent in cash and part as a share of crops or livestock. The benefit distribution of subsidies is complicated by the existence of different leasing arrangements. Legislation also involves restrictions and constraints on the distribution of program benefits. It requires in certain cases that payments be shared among producers and landlords subject to the contract on a fair and equitable basis. For example, under a cash rental arrangement, direct decoupled payments are required to be distributed entirely to the farm operator. Naturally, landlords may indirectly capture a share of those payments by raising the cash rental rates. Under a share contract, government payments are designed to be distributed to both the tenant and landlord according to the proportion that they share the output. Hence, a landlord may capture program benefits directly as well through the monetary terms of the leasing contract. Changes in tenure arrangements (e.g., from a share contract to a hybrid contract) may also reflect a redistribution of benefits between tenants and landlords (Qiu, Goodwin, and Gervais 2009). Goodwin, Mishra, and Ortalo-Magné (2009) provide empirical evidence that government subsidies significantly impact farmland rental rates and the capitalization rates vary according to cash rental and sharecropping contracts.

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