Determination of the capitalized and market values of supplementary arable land in southern Finland, 1972—1986

Authors

• Matti Ylätalo Pellervo Economic Research Institute, Revontulentie 8 A, SF-02100 Espoo, Finland

DOI: https://doi.org/10.23986/afsci.72402

Abstract

Rapid technological change in agriculture has permitted the management of larger farms with an existing labour input. Following this the demand for supplementary arable land has grown considerbly, while the supply has remained low. This imbalance between demand and supply has been reflected in rising land prices. For that reason, the main aim of this study was to determine the capitalized and market value of supplementary arable land and the correlations between them. The determination of the capitalized value of supplementary arable land is based on the use of production function analysis. The marginal value product was estimated from a Cobb-Douglas function, using as independent variables, the production inputs, and a dummy variable for the quality of land. The present value of arable land was calculated by capitalizing the net marginal operating margin at interest rates of 3 %, 5 Vo, and 7 % for durations of return of 5, 10, and 15 years. The benefit obtained from supplementary arable land proved highest on cattle farms with a small arable area, while on grain farms the marginal value product and the differential return still remained high as the size of the farm increased. The real price of arable land in the annual purchases of land by the National Board of Agriculture rose very slightly, on an average of 1.7 % per year, during the period 1972—1986. The capitalized value on the cattle farms reached the prices paid for arable land by the National Board of Agriculture, when a duration of return of 15 years and a capitalization rate of 3 % was used. In contrast, the capitalized value of the grain farms did not reach, at any time during the study period, the price level of the National Board of Agriculture. Also, the market prices of arable land, according to the data collected by the National Board of Land Surveying, clearly exceeded the capitalized value of both cattle and grain farms, during the period 1982—1986.