Farm Real Estate Pricing under Risk: An Empirical Investigation

The rapid increase in farm real estate prices during the last three decades has heightened interest among agricultural economists in explaining this phenomenon. Even prior to the 1950s, several researchers expressed concern that farm real estate prices were increasing at a faster rate than could be justified by farm income [29]. Technological change and government programs were evaluated for structural changes in price determination [6; 13]. Other important explanatory variables were farm enlargement and urbanization influences [34]. More recently, Harris and Nehring [11], Lee and Rask [18], Harris [10], and Boehlje and Griffin [3] explored the effects of such factors as farm size, inflation, and government price supports on farm real estate prices. While previous research contributed to understanding farm real estate price determination, several important questions remain unanswered. How is the farm real estate market linked to other capital markets? Heady and Tweeten [12] and later Reynolds and Timmons [30] used rate of return on common stock as an explanatory variable in their farm real estate price models. However, their approaches are based more on intuitive reasoning than on rigorous theoretical development. How does risk affect farm real estate prices? The fact that real estate is a risky investment generally was ignored in previous research [2, 441-4]. Recently, Harris [10] and Boehlje and Griffin [3] included risk information in their analyses of factors affecting bid prices for land. These studies use strong microfoundations that are not intended to directly reflect risk-related linkages with other markets or sectors. These issues can be addressed conceptually through capital market theory. The purpose of this paper is to explore farm real estate price determination in the context of capital market theory to determine the relationship between the farm real estate