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Passive farming and land development : A real options approach

Di Corato, Luca and Brady, Mark V. LU (2019) In Land Use Policy 80. p.32-46
Abstract

The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can... (More)

The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can always be reached, but that the facility to use passive farming as an outside option allows landowners to extract policy rents, thereby undermining the potential for the Basic Payment Scheme to support tenant farmers’ incomes.

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Please use this url to cite or link to this publication:
author
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Bargaining, Capitalization, Common Agricultural Policy, Decoupled payments, Real options
in
Land Use Policy
volume
80
pages
15 pages
publisher
Elsevier
external identifiers
  • scopus:85054284610
ISSN
0264-8377
DOI
10.1016/j.landusepol.2018.09.029
language
English
LU publication?
yes
id
0bc72a3d-79fc-4154-9fc8-145138d3d8f3
date added to LUP
2018-10-26 13:19:34
date last changed
2018-10-26 13:19:34
@article{0bc72a3d-79fc-4154-9fc8-145138d3d8f3,
  abstract     = {<p>The EU's farmers are no longer required to produce commodities to receive direct payments as long as they keep their land in good condition. Some believe this is bad for development because it encourages passive farming. We evaluate, using a real options approach, the implications of decoupled payments for the desirability and optimal timing of agricultural land development when considering sunk investment costs and uncertain future returns. We find that decoupled payments accelerate development while passive farming increases, by adding managerial flexibility, the value associated with land. We then use the Nash bargaining solution to identify the rental share to be paid for leasing land. We show that a deal for the lease of land can always be reached, but that the facility to use passive farming as an outside option allows landowners to extract policy rents, thereby undermining the potential for the Basic Payment Scheme to support tenant farmers’ incomes.</p>},
  author       = {Di Corato, Luca and Brady, Mark V.},
  issn         = {0264-8377},
  keyword      = {Bargaining,Capitalization,Common Agricultural Policy,Decoupled payments,Real options},
  language     = {eng},
  pages        = {32--46},
  publisher    = {Elsevier},
  series       = {Land Use Policy},
  title        = {Passive farming and land development : A real options approach},
  url          = {http://dx.doi.org/10.1016/j.landusepol.2018.09.029},
  volume       = {80},
  year         = {2019},
}