The evolution of farm programs and their contribution to agricultural land values

An extension of the capitalization model enabling the estimation of the proportion of agricultural land values generated by farm program payments and crop returns is presented. The triangular-structure simultaneous equation model enables the identification of each equation in the model while accounting for the counter-cyclical nature of farm program payments and crop returns. Empirical application of the model to 48 states in the United States for 1940-2002 indicates a positive and significant relationship for expected real crop receipts and farm program payments, while risk and real interest rates are negatively related to real agricultural land values. Estimates indicate that the share of agricultural land values generated by farm program payments increases up to as much as 30% to 40% of land values during the 1938-1980 period. Since 1980, the share of agricultural land values generated by farm program payments has declined to levels between 15% and 20%.