CAPITALIZATION OF GOVERNMENT SUPPORT IN AGRICULTURAL LAND PRICES: WHAT DO WE KNOW?

The objective of this paper is to provide an overview of existing literature, both theoretically and empirically, on the extent to which agricultural subsidies do translate into higher land values and rents and finally benefit landowners instead of agricultural producers. Our review shows that agricultural support policy instruments contribute to increasing the rental price of farmland, and that the extent of this increase closely depends on the level of the supply price elasticity of farmland relative to those of other factors/inputs on the one hand, and on the range of the possibilities of factor/input substitution in agricultural production on the other hand. The empirical literature shows that land prices and rents have in general a significant positive and inelastic response to government support. Such inelastic response is thought to reflect the uncertain future of the farm programmes. And in general, studies have indicated that land prices are more responsive to government-based returns than to market-based returns.