PRACTITIONERS' CORNER: Testing a Present Value Model of Agricultural Land Values

AuthorTim Lloyd
Publication Date01 May 1994
Testing a Present Value Model of Agricultural Land
Tim Lloydt
In recent years the present value hypothesis of asset price determination has
become a popular means of modelling agricultural land prices in the United
States of America and the United Kingdom (see Burt, 1986; Lloyd, Rayner
and Orme, 1991; Falk, 1991, inter alia). While the inherent simplicity and
tractibility of present value methods are largely responsible for this popu-
larity, the appeal of the present value hypothesis also derives from its
embodiment of economic theory. The belief that certain variables should not
systematically diverge from each other, at least in the long run, is a common
one in economics. For the most part, this belief manifests itself in the equili-
bnum relationships posited by economic theory and the relationship between
the price of an asset and its returns is a case in point. Present value theory
suggests that there is a special relationship tying asset prices and returns
together, such that movements in returns are mirrored by prices in the long
run. However, the asset price-returns model is believed to be under-para-
meterized, since among other possible influences, it does not take account of
farmland in investment portfolios, (Lloyd and Rayner, 1990; Hallam et al.,
1992). This paper attempts to address this issue using the Johansen
Maximum Likelihood procedure for the estimation and testing of co-
integrated variables (see Johansen, 1988; Johansen and Juselius, 1990 and
Johansen, 1991).
The paper comprises five parts.. Section II discusses the motivation for
farmland purchase and reviews some results of previous research. In Section
III an inflation-augmented present value pricing model is developed in a form
that may be estimated with available data. The empirical analysis is presented
in Section V and Section VI provides a summary of findings.
f I am grateful to David Greenaway, George Peters, Tony Rayner, Clive Oranger, participants
at the Royal Economics Society 1993 Conference at the University of York and the Editors for
helpful comments on earlier drafts of this paper. The usual disclaimer applies. I would also like
to acknowledge the financial support provided by the Nuffield Foundation for this project
(Grant no. SOC/100(219)).
© Basil Blackwell Ltd. 1994. Published by Blackwell Publishers. 108 Cowley Road. Oxford 0X4 IJF,
UK & 238 Main Street. Cambridge, MA 02142, USA.

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