September 4, 2013
Farm land prices throughout Europe have increased massively in the last two decades. The most dramatic increase has been in the UK where the price of a hectare of farmland has increased threefold in the last ten years. Critics of the EU’s agricultural and rural policies tend to argue that the cause of this is basically the profitability of farming, heavily underpinned by the European Union’s subsidy and trade protection system. They point to the frenetic escalation of land prices in central and eastern Europe as those regions came under the protective subsidy umbrella of the CAP in support of this argument. But how justified is the subsidy- land price link?
Classical economic theory has it that subsidising agricultural production automatically raises the price of the major production factor, the land. This in in turn raises the cost of production and leads to more demands for increased subsidies or prices to compensate. Subsidies become capitalised in the value of land.
The phenomenal rise in UK farmland prices from £5760to £17,856 a hectare in the last ten years, according to the UK land agents’ professional body RICS Rural Land Market Survey, is probably an aberration arising from the pressure of other factors. Most importantly, the UK is small and overpopulated, plus now having a government determined to allow house and factory building wherever anyone likes and the increasing desire of the increasingly prosperous to own a chunk of a very fixed supply. Such factors however do not explain the rise in price of farmland in the rolling hectares of central Europe.
An alternative approach to the issue is suggested by some agricultural economists. They suggest that it is not the land that carries the capitalisation of the subsidy, but the entitlement of the farmer to the subsidy which has become an asset in its own right. This leaves the land decoupled from the impact of the subsidy value.
Professor Alan Matthews of Trinity College, Dublin, for example, argues that “there is a market for entitlements [to subsidy] which is quite separate to the market for land. In the EU Single Payment Scheme a farmer must possess an entitlement in order to qualify for the payment. …These entitlements can be sold with and without land and they can also be leased out with land”. Other economists argue that generally the number of entitlements to subsidy exceed the number of hectares available to which they can be applied and this therefore increases the demand for land. This must increase its price.
Divorced from the factors which inflate land prices in the UK, as would be the case with most agricultural land in central and eastern Europe, it is probable that the payment of EU subsidies is a major factor inflating prices and thus raising the basic cost of agricultural production. In Romania prices have risen 1,800 per cent since 2002, in Poland by 800 per cent and in Hungary by close to 400 per cent in the same period. Removal of the subsidies would take time to have an effect and thus leave European farmers disadvantaged in the world market. This illustrates why once an agriculture industry becomes hooked on subsidies it takes a long and painful time to break the habit.<04/09/2013>